Week 1 Flashcards
Bitcoin?
- first and most widely used cryptocurrency
- the community, network, software
- the currency itself
- the inspiration for blockchain-an underlying data structure that stores a permanent history of all transactions to ever occur in the history of bitcoin
who backs and builds bitcoin
1) not by any gov’t or bank
2) users build it
3) it came from cyberpunks and libertarians concerned by the centralization of money
Who created bitcoin
Satoshi Nakamoto-pseudonym of an individual or group
what did the creator envision
a decentralized currency that does not require trusting or knowing the identity of the user
how does bitcoin work
a decentralized network validates transactions and stores the entire transaction history. the network is a group of users communicating with each other as part of the bitcoin protocol. the network is a substitute for a central bank
problems with decentralized networks
1 inconsistent transaction records held by different network members
2 malicious pseudonymous actors who broadcast false messages and divide the network
3 double spending: asynchronous records held by different nodes
what is bitcoin’s solution to these problems
1) using blockchain and
2) proof of work consensus protocol
what do banks do
1) account and ID management-links personal info to bank account and verifies ownership
2) service - transfers money and redeems money
3) record management- updates and tracks account balance
4) trust- provides services by professionals under regulations by gov’t
How can bitcoin fullfill banks’ functions
1) account and ID mgt: gives users autonomously created and managed IDs
2) service: sends funds between peers directly (P2P)
3) record management: updates every node, which keeps its own ledger (blockchain)
4) trust: provides a trusted protocol that incentivizes actors to behave honestly
what are some benefits of the decentralized nature of bitcoin
- decentralized record keeping ensures the integrity of data
- prevents the risk of a single point of failure; if a few nodes are hacked, the rest of the nodes ensure the integrity of the transaction
how does trust work in bitcoin
instead of trusting a banker, you are trusting a protocol, ledger, math, and logic and don’t have to trust the user or seller
what’s the role of ID in context of currencies
1) authentication
- receiving money
- claiming/spending money
- blame: if someone tries to use your money, you want to be able to call them out
2) integrity-authentication methods that cannot be replicated by anyone else
what is public key or chest
it’s the alias or handle of the user in bitcoin; used for receiving
what is private key
it is the password that one uses to access and spend bitcoin; used for redeeming (never tell others the private key)
what makes a transaction valid
- proof of ownership, e.g. signing a check (proof of ownership)
- available and sufficient funds to spend (bank then checks to make sure there are enough funds for that check)
- a guarantee that no other transaction is using or has used the same funds (bank makes sure the check issuer did not already write a check for those same funds to another payee)