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Science: Where cryptocurrencies come from

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The ultimate goal of cryptographic currency is to minimize the need for trust in third parties.

Source: Ethereum enthusiast

Original title: "Science: The History of Cryptographic Currency"

科普：密码学货币的来历

- Cryptographic currencies exist to minimize trust. -

In learning cryptography money, the most important thing is to understand NBSP; Their purpose.

Password punk

Since the late 1980s, a growing group of liberal scientists, engineers, computer scientists and philosophers have been discussing cryptography to enhance privacy in a world increasingly dominated by computers and the Internet. They are called cypherpunks.

The cypherpunk community began as an E-mail list in the early '90s; In this E-mail group, they propose and debate which systems will achieve their goals. The goal has always been one: to use cryptography to create a secure environment in cyberspace where people can be protected from government and corporate surveillance.

As the discussion and proposals progressed, three themes emerged: privacy (the original goal); There is a need for a form of currency in this protected cyberspace; It also requires smart contracts that allow anonymous strangers to execute transactions between each other without having to trust a third party.

The desire base of all the efforts of cypherpunks can be summed up in the fundamental concept of trust minimization and avoidance of third parties in need of trust.

A pioneer of cryptographic currency

On the road to a currency that can be used in a purely Internet environment, several achievements have to be mentioned.

DigiCash

DigiCash was the first attempt at electronic money. It was born in 1989 and was designed around the privacy of transactions.

DigiCash was founded by Dabid Chaum, one of the pioneers of the crypto punk movement, whose idea was to use cryptography on the public web to protect the privacy of users' daily communications.

DigiCash was also promoted to join the bank at the time, but that effort ended with the end of the project in 1998.

DigiCash's main flaw is that it will be controlled by financial institutions because it relies on the anchor of compliant government currencies to maintain the value of digital currency units; Also, DigiCash protects privacy through a technology called Blind Signature, but it needs to run on a centrally controlled server, so managing that server becomes a trusted third party.

HashCash

HashCash was created by cyborg punk Adam Back in 1997 to prevent spam. It's not really a currency, and it's not about creating a currency in the Internet world.

But the underlying technology is to force computers to do a lot of work before they perform an action, in the form of computational Cycles. This technique, called workload proof, became the core of cryptographic currency as we know it today.

BitGold

Bit Gold was invented by Nick Szabo (also a cypherpunk); He invented the concept in 1998 and elaborated on its implications in 2005. Bit Gold, the first model of an independent cryptographic currency, combines two ideas: using a point-to-point network to maintain a distributed ledger; Workload proof based on computational challenges.

Nick Szabo provides the details of how this system works, and specifically mimics gold's production, scarcity and value in the real world to guide the workings of the currency. That's how it got its name.

Bit Gold includes a workload proof mechanism that allows participants to (at cost) prove the value of what they have created as pure digital currency. Also, it requires effort to form a distributed timestamp and maintain a set of books of accounts and Bit Gold balances using a network of nodes; The combination of the two forms a system of property rights that allows users to hold, track and move their money.

Another initiative of Bit Gold is to participate in the next wave of Bit Gold production using the results of the previous workload proof as a puzzle. This design allows the system to operate as a chain of solved puzzles, much like what we call a "blockchain" in cryptography currency today.

The chain is also the easiest way for participants to check whether the money they buy or receive is counterfeit.

Bit another important feature of Gold is, it is not only using the workload that as the basis of the value element, also use a "Bit Gold market" to form such inhomogenous certificate (irregular proofs) price, so, the value range that can match into common units (generic bundles), make the digital goods more standardized and interchangeable.

Like real-world gold ingots, a system of tokens was built based on these common units of collocation, and the asset became divisible, transferable and more suitable for use in a digital economy.

The consensus mechanism on peer-to-peer networks prevents colluded attacks and double spend, as long as no more than 33 percent of corrupt nodes are in the system to ensure security. In computer science this is called "Byzantine tolerance".

The Byzantine fault tolerance problem is that if 33 percent of the node operators agree to attack the network, for example by reorganizing the history of transactions together, they can do so because in a completely distributed, decentralized system, there is no way to stop and control such activities. (This is too crude an explanation.)

While Bit Gold was a very advanced proposal at the time, it had weaknesses. Without a third party in charge of management, the Bit Gold Market is very difficult to achieve; In addition, peer-to-peer networks cannot cope with 33 per cent of collusive attacks.

B-Money

Followed by Bit Gold, another Cyberpunk Wei Dai B-money was introduced late in 1998. Not only does the scheme have cryptographic currency, but it also incorporates some basic forms of smart contracts.

B-money also uses a network of nodes to maintain a distributed ledger that records accounts and balances; Participants also performed work on their own computers to demonstrate that they had invested significant computing resources in creating the currency.

The value of the currency is determined by the market price of the computational resource, and the node network rewards creators by adding balances to their accounts.

The second part of B-Money includes escrow agents, which guarantee transactions when network participants want to enter into smart contracts.

B-money may not have started at the time because of the lack of implementation details for different parts of the scheme, and because the node network that maintains the distributed ledger could not tolerate more than 33% Byzantine errors.

RPOW

RPOW is short for the "Reusable Workload of Work" and was born in 2004 by Hal Finney (another cypherpunk!). .

RPOW attempts to address the historic Byzantine fault-tolerance problem using a different approach: participants create workload certificates individually (just like Bit Gold), but they transfer these certificates directly to another user through a messaging system rather than using a peer-to-peer network of nodes to maintain a ledger.

At the heart of the system is a validation server, because participants move PROW to others, new transactions require new workload certifications, and the central server only needs to verify that these certifications are true.

Although this system enables users to directly transfer between value possible, and use this form to solve the problem of Byzantine fault tolerance, but its weakness is in the centralized authentication server, even if can use a set of independent validator to management, there is still a centralized risk, because the user must trust the validator.

The game-changing Bitcoin

All these pioneers, as you can see, had weaknesses of one kind or another. Either it relies on a centralized server that requires trust in a third party, or its book-building consensus mechanism fails to resist the collusion of a small group of participant nodes.

By the time Bitcoin burst onto the scene in 2009, Mr. Nakamoto had introduced a clever innovation that turned it into a revolutionary technology. It brings together all the solutions of the past and enables them to reinforce each other, resulting in great improvement and significant enhancement in solving the above problems. Today, we call these innovations the Nakamoto Consensus.

In the Nakamoto consensus, all nodes in the peer-to-peer network will forward new transactions to all other nodes. All nodes then take these transactions, plus information from the previous block and a timestamp, as a puzzle to prove the next workload; The solution of a puzzle has a minimum threshold of difficulty; Whenever any node finds a result that meets this threshold, it broadcasts the result to all the other nodes; After the nodes receive the workload proof, the algorithm based on the system and the workload proof chain they have mastered verify the validity of the workload proof received respectively; Once verified, all nodes add to the account of the guy who solved the problem first; The increase was also agreed upon in accordance with Bitcoin's monetary policy.

Bitcoin thus guarantees the value of token, not only because monetary policy creates scarcity, but also because of the amount of computing effort required to create new coins.

Workload is also the key to solving the 33 percent Byzantine conundrum of peer-to-peer networks. COINS algorithms require minimum threshold of difficulty, suggests that all nodes must spend (on average) ten minutes to solve a problem, when a node found and send the results, by the time it takes to it (longer or shorter than 10 minutes), to the others in the network to ensure the all other participants in the common solution to this problem. If someone stops working on one chain problem and goes to work on another chain problem, the chain problem is not going to be solved in 10 minutes. Proof of workload is proof of approval.)

However, if someone gains more than 50 percent of the computing power in the network, they can still outpace other nodes at this point in the manufacturing block, leaving the possibility of falsifying the books. This is commonly referred to as a "51% attack".

As a result, the Nakamoto consensus has increased its security threshold from 33 per cent to 50 per cent, so that any group of conspirators must now have more than 50 per cent of the system's computing power in order to falsify its books.

As a result, Bitcoin became the first successful, widely used, pure digital currency, like the gold of the digital world. The next step, however, is the intelligent contract, which is beyond its reach because of the limitations of its internal design.

Smart contracts on Ethereum

If Bitcoin is a pocket calculator, Ethereum is a computer.

Ethereum, proposed by Vitalik Buterin in 2015, uses the same foundations as Bitcoin, namely the Nakamoto Consensus, plus distributed ledger books and a token as a monetary unit; However, Ethereum added a virtual machine and a programming language to unlock the currency's programmability. (It is inaccurate to say that Ethereum uses the Nakamoto consensus; Ethereum's consensus algorithm is GHOST rule.)

Ethereum, in other words, supports smart contracts.

Ethereum works by using workload certificates to produce blocks that contain transactions. All nodes in the network verify blocks and transactions, but the ledger not only records account contracts, but also stores programs that start running decentrally as soon as they are connected.

These programs, like any piece of software, can establish rules and conditions under which transactions can be executed, allowing value to be transferred across a global network.

For example, a simple program on Ethereum might be:

If account X has a balance of Y

And if today is December 31, 2020

Then transfer 5 coins to account Z

If the conditions are not met, do nothing

The ability to integrate decentralized running programs makes it possible to decentralize applications (" dApp ") [34] that can run on such systems and have the same security functions as blockchain.

Interest in

Because cryptography currency is an open source public system, these systems can also be copied and modified to implement something completely different. What many companies and computer scientists have been trying to do is move cryptographic currencies away from workload proof as a core value and security system to a different basis.

One of the criticisms of the workload proof is that it consumes too much energy and is not environmentally friendly. But bitcoin mining has grown on a huge scale around the world, and about 77 percent of mining is done using renewable energy. In fact, as renewable energy becomes cheaper, bitcoin mining will accelerate the migration to renewable energy.

In addition, many of the newly launched networks incorporate many features and modifications from the bitcoin and Ethereum models, such as proof of Interest (PoS) as a consensus mechanism. They try to add other features include voting decision system (translator note: refers to the chain management, with a vote to decide the protocol in which direction to improve), can be used as investment revenue "Treasury" (translator note: refers to the agreement of the charge to the participants in the operation of the capital, to assign to a centralized institutions), and segmentation of books (people call it "the shard") to improve the performance.

Examples include Polkadot, Cardona, EOS, TRON, and Tezos. All of these systems are available at CoinMarketCaps.com.

Even Ethereum is moving to a proof of interest mechanism.

Proof of interest eliminates the need for computation and, therefore, energy expenditures and replaces them with security deposits for node operators. These security deposits, in the form of built-in currency in the system, are called "Stake."

All nodes with deposits have the right to collect transactions and publish them on the books. After the block is published, these verifiers join a lottery system that uses a lottery to determine who gets the current block's prize. Doing so also makes its currency model very similar to the PoW system.

While I don't think vINDICATION systems are that secure, there are trade-offs to scalability. The workload proves that the system is more secure, but less scalable (in terms of transaction throughput), and the equity proves otherwise.

This apparent complementarity is also a possibility that these technologies will eventually be integrated into a larger, more scalable, and more secure system.

What is not cryptographic currency?

The second important thing is to understand NBSP; What's not cryptographic currency.

Both workload proof and equity proof systems are classified as cryptographic currencies because their ultimate goal is to minimize the need for trust in third parties, regardless of the path they take.

The third party that needs to be trusted is the security hole, because they control people's money, wealth, personal data, manage everything in a centralized server, and they can be either hacked or directly involved in fraud. In other words, they cannot guarantee that title books, balances, transactions and smart contracts are untamable.

For this reason, by definition, currencies created and managed by central banks (such as CBDC) are not cryptographic currencies, even if they model all appearances.

In the same way, private money schemes are not cryptographic money. Examples include Facebook's "Diem" (formerly known as "Libra") and stable coins (like Tether, USD Coin, and DAI). Because they introduced financial institutions, central banks, government-backed fiat money and other risks into the system, they ran counter to the original vision of cypherpunks.