Blockchain Specialist Program

Zeeshan Hanif
Qasim Shabbir
Hammad Ahmed
Blockchain and Cryptocurrencies are
shaking the system
Is Blockchain Technology the New
Internet?
Blockchain is backbone of New type of
Internet: The Decentralised Era
1. The main frames with dumb terminals (1960s)
2. The Desktop (1980s)
3. The Internet, all desktops connected (1990s)
4. Walled Gardens, all powers with big companies (Facebook, Google, Apple
and Amazon)
5. The Blockchain Era, a decentralised internet (WEB 3.0)
 Web 1.0

Web 1.0 was just a set of static websites with a load of

information and no interactive content
 Web 2.0

The global sharing of information spawned the age of

‘Social Media’. Youtube, Wikipedia, Flickr and Facebook
gave voices to the voiceless and a means for like-minded
communities to thrive.
 Information is money

As large companies realized the value of personal

information they stockpiling the data in centralized server
and start selling browsing habits, searches and shopping
information to advertisers.
 Web 3.0

Rather than concentrating the power (and data) in the

hands of huge behemoths with questionable motives, it
would be returned the rightful owners.

Decentralization was the idea; blockchain was the means.

Industries that can be Disrupted by The
Blockchain
● Banking and Payments ● Government
● Supply Chain Management ● Health Care
● IOT ● Online Music
● Insurance ● Retail
● Private Transport and Ride Sharing ● Crowdfunding
● Online Data Storage
● Charity
● Voting
Problem with Traditional System

1. Centralized Control
2. Need to Trust
3. 3rd Party/Middleman
4. No Transparency
5. Mutable
It all started with Idea: A Digital Currency

1. David Chaum first proposed the concept of e-Cash in 1982

2. David Chanm then founded a company called DigiCash.
3. It uses cryptography security and anonymity
4. Idea had same problem as with traditional currency, it
requires central clearing house or single point of trust
5. DigiCash declared bankruptcy in 1998
6. Many other tried faced the same fate
Bitcoin

1. In 2008 a white paper was published: "Bitcoin: A Peer-to-Peer Electronic Cash

System." by Satoshi Nakamoto
2. In 2009 first-ever block of bitcoin, known as the Genesis Block, was mined
3. Bitcoin uses:
a. Secure digital signatures
b. Not requiring the use of a third party
c. Proof-of-work
d. Hashing the transactions together to form a chain
4. Satoshi Nakamoto is unknown person or group of people, wrote the Bitcoin paper
5. Satoshi Disappears in December 2010
Bitcoin Properties

1. Decentralised – peer to peer ledger of balances

2. Immutable – can never be changed, transactions are permanent.
3. Fungible – each btc is equal, maintains it value (not like a banana)
4. Permissionless and without borders – anyone can participate by downloading
software.
5. Divisible – down to 8 decimal places
6. Scarcity – 21 million coins ever
7. Transferrable – can send any amount in seconds, compare to gold.
What is Blockchain

“The blockchain is an incorruptible digital ledger of economic transactions that

can be programmed to record not just financial transactions but virtually
everything of value.” – Don & Alex Tapscott, authors Blockchain Revolution
(2016).
What is Blockchain
Many similar definitions

1. Blockchain is a distributed, decentralized, public ledger.

2. In Simplest of terms, Blockchain is a time-stamped series of immutable record of
data that is managed by cluster of computers not owned by any single entity. Each
of these blocks of data (i.e. block) are secured and bound to each other using
cryptographic principles (i.e. chain).
 Token

0x8aa1d85a79756bffd81e1811cff21c7dad8aee258dd1de60e116ff0fb8906738
The Core Principles of Blockchain

1. Distributed ledgers
2. Security,
3. Trustless
4. Decentralization
5. Group consensus
6. Immutability
7. Transparent
Blockchain Uses Old Technology

1. Accounting Ledger
2. Cryptography
3. Computer Network Technology/Peer-To-Peer network
Key Concepts that make blockchain secure
and immutable
1. Hashing
2. Cryptography
3. Mining
1) Hashing, one way encryption

1. A hash function takes some input data and creates some output data.
2. To expand on this concept, a hash function takes an input of any length and
creates an output of fixed length.
3. It takes an input string and created a string of random letters and numbers
“a0680c04c4eb53884be77b4e10677f2b”.
4. This is referred to as the message digest.
5. It is also known as the digital fingerprint. This is because there is no way this digest
can represent any other string. If I try and modify this the message digest will be
completely different.
One Way Street

1. Another property of hash functions are they are one way.

2. It is really easy to calculate a message digest but given the digest, it is near
impossible to figure out in the input.
3. Again, not impossible but it will take another billion years or so.
SHA-256 Hash Calculator

http://www.xorbin.com/tools/sha256-hash-calculator
https://passwordsgenerator.net/sha256-hash-generator
2) Cryptography -- Public-Key encryption
Demo
http://cobweb.cs.uga.edu/~dme/csci6300/Encryption/Cryp
to.html
3) Mining and Understand Block/
Blockchains
https://anders.com/blockchain/
 https://www.forbes.com/sites/investor/2019/04/16/bitcoin-is-the-new-gold/#7d19762f239a

https://www.forbes.com/sites/investor/2019/04/16/bitcoin-is-the-new-gold/#56a24c51239a
 What is Bitcoin?
1. A Collection of concepts and technologies.
2. It behaves like conventional currencies.
3. Can be purchased, sold, and exchanged for other currencies at
specialized currency exchanges.
4. They are completely virtual with no physical existence.

5. Fast, Secure and Borderless

 How it works
1. Unlike traditional currencies, bitcoin are entirely virtual
2. The coins are implied in transactions that transfer value
3. Users own keys that proves ownership of bitcoin in the bitcoin network
4. User sign transactions with keys to unlock the value and spend it by
transferring it to a new owner.
5. Keys are often stored in a digital wallet
6. Possession of the key is the only prerequisite to spending bitcoin, putting
the control entirely in the hands of each user.
How it works?
● Peer to Peer System
● Created through a process called “Mining”
● Every 10 minutes (on average)
○ Miner validate transactions
○ Rewarded with brand new bitcoin
What is Mining?

● Decentralizes currency-issuance and clearing function.

● Regulate by built-in algorithm
● Someone succeeds every 10 minutes
● Every 4 years halves the rate of new bitcoin generation.
● Ensures 21 million bitcoin generates by year 2140.
 Combination of 4 key innovations
● A decentralized peer-to-peer network (the bitcoin
protocol)

● A public transaction ledger (the blockchain)

● A set of rules for independent transaction validation

and currency issuance (consensus rules)

● A mechanism for reaching global decentralized

consensus on the valid blockchain (Proof-of-Work
algorithm)
Why digital money never succeed before?

1. Can I trust that the money is authentic and not counterfeit?

2. Can I trust that the digital money can only be spent once (known as the
“double-spend” problem)?

3. Can I be sure that no one else can claim this money belongs to them and
not me?
Double Spending Problem

● In digital cash schemes, a single

digital token, being just a file that
can be duplicated, can be spent
twice.
● A centralized trusted party has
always been required to prevent
double spending.
History of Bitcoin
● 2008 Satoshi Nakamoto publish white paper

“Bitcoin: A Peer to Peer Electronic Cash System” https://bitcoin.org/bitcoin.pdf

● 2009 Bitcoin network started

● 2010 Handed the responsibility to group of volunteers.
● April 2011 Satoshi Nakamoto withdrew from public. Owns 1M bitcoins.
● August 2017, hard-forked named Bitcoin Cash
● November 2017, another hard-forked named Bitcoin-Gold
Byzantine General Problem - BGP
The fundamental
question of the BGP
is how to establish
trust between
otherwise unrelated
parties over an
untrusted network
like the internet.
Bitcoin Client Software
Let’s play with and

1. Goto bitcoin.org and

download Wallet
2. Install the wallet on your PC
3. You will get through a Install
Wizard
Get your private key

1. Generate the mnemonic / seed

to generate your private key.
2. Write down your mnemonic.
Because if you lost it you lost
your wallet.
3. After this it will asked to setup
a password
 Ready to send and receive

● The important part of

this screen is your
bitcoin address. Next to
it your QR-Code.
● Bitcoin addresses start
with the digit “1” or “3”.
Bitcoin Address
1. Bitcoin address generated by wallet is NOT known to bitcoin network nor
it is registered with any bitcoin system
2. Bitcoin address is simply a number that corresponds to a key that you can
use to control access to the funds
3. Until the moment this address is referenced as the recipient of value in a
transaction posted on the bitcoin ledger, the bitcoin address is simply
part of the vast number of possible addresses that are valid in bitcoin
4. Once address has been associated with a transaction, it become part of
the known addresses in the network.
How to get your first Bitcoin?
1. The first and often most difficult task for new users is to acquire some
bitcoin. Unlike other foreign currencies, you cannot yet buy bitcoin at a
bank or foreign exchange booths.
2. Bitcoin transactions are irreversible and therefore the buyers normally
requires to undergo identity verification and other checks. Which some
takes several days.
3. In pakistan of course you can’t buy any bitcoin with PKR. But still you can
have them like many others have it.
How to get your first Bitcoin?
1. Buy from Friends?
2. Use classified type service https://localbitcoins.com/
3. Earn bitcoin by selling product or services.
4. Use a bitcoin ATM in your city. A bitcoin ATM is a machine that
accepts cash and sends bitcoin to your smartphone bitcoin wallet.
5. Use a bitcoin currency exchange services like BitcoinAverage, or
CoinCap often show a list of bitcoin exchanges for each currency.
 Send and Receive Bitcoin
1. Joe has entered the correct amount, Alice
address and Fees and send transactions
2. Joe’s wallet constructs a transaction. Signing
the transaction with Joe’s private keys.
3. In less than a second, most of the
well-connected nodes in the network receive
the transaction.
4. Meanwhile, Alice’s wallet is constantly
"listening" for transactions on the bitcoin
network, looking for any that match the
addresses in her wallets.
5. A few seconds after Joe’s wallet transmits the
transaction, Alice’s wallet will indicate that it
is receiving 0.10 BTC.
Steps for Transaction Confirmation
1. Transaction shows as
Unconfirmed.
2. Transaction waiting to
include in a block and
added to blockchain.
3. In traditional terms its
known as Clearing.
4. Once transaction is
confirmed you’ll got your
bitcoin.
 How Bitcoin Works
Transactions, Blocks, Mining, and the Blockchain
 How Bitcoin Works - Bitcoin Overview
● bitcoin system consists of users with wallets
containing keys.
● transactions that are propagated across the
network, and miners who produce (through
competitive computation)

• miners who produce (through

competitive computation) the
consensus blockchain, which is
the authoritative ledger of all
transactions
Illustration - Buying a Cup of Coffee
1. Alice will make her first retail transaction, buying a cup of coffee at Bob’s
coffee shop in Palo Alto, California.
2. The prices at Bob’s Cafe are listed in the local currency (US dollars), but at
the register, customers have the option of paying in either dollars or
bitcoin.
3. The point-of-sale system will convert the total price from US dollars to
bitcoin at the prevailing market rate and display the prices in both
currencies, as well as show a QR code containing a payment request for
this transaction.
 Illustration - Buying a Cup of Coffee
1 Cost of coffee:
$1.50 USD
0.015 BTC
2
Bob’s point-of-sale system will also
automatically create a special QR code
containing a payment request
3 The QR code encodes the following URL
bitcoin:1GdK9UzpHBzqzX2A9JFP3Di4weBwqgmoQA?
amount=0.015& label=Bob%27s%20Cafe&
message= Purchase%20at%20Bob%27s%20Cafe
Components of the URL
4
A bitcoin address:
"1GdK9UzpHBzqzX2A9JFP3Di4weBwqgmoQA"
The payment amount: "0.015"
A label for the recipient address: "Bob's Cafe“
A description for the payment: "Purchase at Bob's Cafe"
Illustration - Buying a Cup of Coffee
1. Alice uses her smartphone to scan the barcode on display. Her
smartphone shows a payment of 0.0150 BTC to Bob’s Cafe and she
selects Send to authorize the payment.
2. Unlike a QR code that simply contains a destination bitcoin address, a
payment request is a QR-encoded URL that contains
a. a destination address,
b. a payment amount, and
c. a generic description such as “Bob’s Cafe.”
3. This allows a bitcoin wallet application to prefill the information used to
send the payment while showing a human-readable description to the
user.
Mycelium interface
after scanning QR
Code
Bitcoin Transactions
Transaction Inputs and Outputs
1. Transaction tells the network that the owner of a number of bitcoin has
authorized the transfer of some of those bitcoins to another owner.
2. The new owner can now spend these bitcoins by creating another
transaction that authorizes transfer to another owner, and so on, in a
chain of ownership.
3. Transactions are like lines in a double-entry bookkeeping ledger. In simple
terms, each transaction contains one or more “inputs,(like Debits)
4. On the other side of the transaction, there are one or more
“outputs,”(like Credits)
Transaction Inputs and Outputs
1. The inputs and outputs (debits and credits) do not necessarily add up to
the same amount.
2. Instead, outputs add up to slightly less than inputs and the difference
represents an implied “transaction fee, a small payment collected by the
miner who includes the transaction in the ledger.
3. Transaction also contains proof of ownership for each amount of bitcoin
(inputs) whose value is transferred, in the form of a digital signature from
the owner, which can be independently validated by anyone.
Transaction Inputs and Outputs
Transaction Chains
1. Transactions move value from transaction inputs to transaction outputs.
2. An input is where the coin value is coming from, usually a previous
transaction’s output.
3. Outputs from one transaction can be used as inputs in a new transaction,
thus creating a chain of ownership as the value is moved from address to
address
Making Change
1. Bitcoin transactions can include outputs that reference both an address
of the new owner and an address of the current owner, called the change
address.
2. As transaction inputs, like currency notes, cannot be divided
3. If you purchase a $5 US dollar item in a store but use a $20 US dollar bill
to pay for the item, you expect to receive $15 US dollars in change
4. The same concept applies with bitcoin transaction inputs
5. If you purchased an item that costs 5 bitcoin but only had a 20 bitcoin
input to use, you would send one output of 5 bitcoin to the store owner
and one output of 15 bitcoin back to yourself as change
Making Change
1. Importantly, the change address does not have to be the same address as
that of the input and for privacy reasons is often a new address from the
owner’s wallet
2. Different wallets may use different strategies when aggregating inputs to
make a payment requested by the user
Common Transaction Forms
1) The most common
form of transaction is a
simple payment from
one address to another,
which often includes
some “change” returned
to the original owner.
Common Transaction Forms
2) Another common form
of transaction is one that
aggregates several inputs
into a single output. This
represents the real-world
equivalent of exchanging
a pile of coins and
currency notes for a
single larger note.
Common Transaction Forms
3) Third form of transaction
is that distributes one input to
multiple outputs representing
multiple recipients. This type
of transaction is sometimes
used by commercial entities
to distribute funds, such as
when processing payroll
payments to multiple
employees.
Constructing a Transaction
1. Wallet application contains all the logic for selecting appropriate inputs
and outputs to build a transaction to Spender’s specification.
2. Spender only needs to specify a destination and an amount and the rest
happens in the wallet application without user seeing the details.
3. Wallet application can construct transactions even if it is completely
offline. Like writing a check at home and later sending it to the bank in an
envelope
4. The transaction does not need to be constructed and signed while
connected to the bitcoin network. It only has to be sent to the network
eventually for it to be executed.
Constructing a Transaction
Getting the Right Inputs
1. Wallet application will first have to find inputs that can pay for the
amount user wants to spend.
2. Most wallets keep track of all the available outputs belonging to
addresses in the wallet
3. Wallet application that runs as a full-node client actually contains a copy
of every unspent output from every transaction in the blockchain
4. Full-node client takes up a lot of disk space so most user wallets run
“lightweight” clients that track only the user’s own unspent outputs.
5. Lightweight wallet application query the bitcoin network to retrieve
information using a variety of APIs available by different providers or by
asking a full-index node.
Constructing a Transaction
Creating the Outputs
1. A transaction output is created in the form of a script that creates an
encumbrance on the value and can only be redeemed by the introduction
of a solution to the script
2. In simpler terms, transaction output will contain a script that says
something like, “This output is payable to whoever can present a
signature from the key corresponding to Bob’s public address.”
3. User has the wallet with the keys corresponding to address, therefore
only that particular user’s wallet can present such a signature to redeem
this output.
4.
Constructing a Transaction
Creating the Outputs
1. If you purchased an item that costs 5 bitcoin but only had a 20 bitcoin
input to use, you would send one output of 5 bitcoin to the store owner
and one output of 15 bitcoin back to yourself as change
2. That means wallet will break funds into two payments
3. Wallet application will also add a small fee
Private Keys
1. Bitcoin can be thought of as an open messaging system secured
by public key cryptography.

2. In contrast to other systems protected by username and password

logins, Bitcoin is secured through digital message signatures
created with a unique private key.

3. This single point of access places a very high value on the secure
generation, use, and storage of private keys.
Bitcoin: A Secure messaging system
Instead of relaying emails, texts, or web pages, the Bitcoin
network processes value-transfer messages called
transactions.

Private keys help authenticate these messages and identify

each other.
Problem: Private key solve
Imagine that Alice wants to pay Bob using an electronic coin with a face value of ฿1. To do
so, she must create a transaction identifying Bob as the payee. Then Alice needs to publish
the transaction to the Bitcoin network.

To use this system, Alice must solve two fundamental problems:

1. Alice needs a way to identify both herself and Bob in the transaction. She can’t
employ a trusted authority such as a government registry or email provider because
that would create a central point of failure — the very thing Bitcoin was created to
eliminate.
2. Alice needs a way to prevent others from changing her transaction and forging
transactions in her name.
Problem: Private key solve
1. Bitcoin solves both problems through a system called public key cryptography.
This system uses two pieces of information to authenticate messages.

2. A public key identifies a sender or recipient, and can be distributed to

others.

3. A private key creates an unforgeable message signature.

4. Public and private keys are mathematically linked through a signature

algorithm, a mathematical procedure for creating identities, signing
messages, and validating signatures.
 2: Public key sends to 4: Sends signed
BOB 4
message and signature
to to Bob

5: Bob passes
Signature, Message, &
Public Key.

1: Public and Private

key generated 3: Message Signing
with private key.
Returns Signature
Six things about private keys to keep in mind
1. A Private Key is Just a Number
2. Transactions are Messages Signed with a Private Key
3. Anyone Who Knows Your Private Key Can Steal Your Funds
4. A Private Key Generates a Public Key Which Generates an
Address
5. Security Depends on Choosing a Good Private Key
6. Private Keys are (Somewhat) Portable
1 - A Private key is just a Number
A Bitcoin private key is simply an integer between
one and about 1077.

Counting one trillion private keys / second

Will takes more than one million times the age of

the universe.

Even worse, just enumerating these keys would

consume more than the total energy output of
the sun for 32 years.
What is this?
5KJvsngHeMpm884wtkJNzQGaCErckhHJBGFsvd3VyK5qMZXj3hS

It's an uncompressed WIF (Wallet Import Format) Private Key.

This format begins with the number “5” and contains a sequence of
letters and numbers.

Given the importance of keeping private keys secret, they are

sometimes encrypted. A popular method produces strings of text that
look like WIF encoding, but starting with the number “6.” Decrypting a
private key encoded in this way requires the password that was set
when the private key was encrypted.
2. Transactions are Messages Signed with
a Private Key
To prevent forgery, Bitcoin requires that each transaction bear a digital

signature. This signature, like a private key, is just a number selected

from a very large range. Wallet software generates a signature by

mathematically processing a transaction together with the correct private

key.

Anyone with a signature and public key can easily authenticate a

message. However, the only way to produce a valid message signature

is to use the private key matching the published public key. In other

words, digital signatures are practically impossible to forge.

3. Private Key is an ownership of your
funds
Many avenues are open to thieves who steal private keys. Two of the most
popular are storage media and communications channels.

Wallets often place this file in a standard, well-known directory, making it an

ideal target bitcoin-specific malware. Wallets offer an option to encrypt the
wallet file.
Although wallet backups are a good idea, they can potentially leak private
keys.
Encryption can reduce, but not eliminate the risk. Preventing the accidental
release of private keys is the main purpose of “cold storage.”
4. A Private Key Generates a Public Key
Which Generates an Address
A public key is obtained by subjecting a private key to a
set of mathematical operations defined in a set of
standards known as Elliptic Curve Cryptography (ECC).
Whereas a private key is an integer, a public key is a 2D
coordinate composed of two integers. To make a public
key easier to process, it can be transformed into a single
value. One approach appends the y-coordinate to the
x-coordinate. This technique produces an
“uncompressed” public key. A “compressed” public key
uses only the x-coordinate with a symmetry flag.
Private Key to Address. A private key, which is just a number such as 42, can
be transformed mathematically into a public key. A public key is then
transformed into an address. Each step is irreversible. This unidirectionality
underpins Bitcoin’s security model.

A multi-step transformation can shortened Public Key same as Private Key.

No network is needed at any point in the generation of a private key or the

corresponding address. Every computer on the Bitcoin network knows about
the mathematical relationship between public and private keys.
5. Security Depends on Choosing a Good
Private Key
Careless selection of a private key can lead to theft just as easily as its
accidental release.
5. Security Depends on Choosing a Good
Private Key
Bitcoin private keys are different in that they serve the dual role of;

1. user identification (via address generation) and

2. authentication (via digital signatures).

Secure private keys are generated with a high degree of unpredictability so they can’t be guessed

before or after the fact.

6. Private Keys are Portable
Many software wallets support sweeping. A sweep
creates a new transaction paying one of the software
wallet’s existing addresses. This procedure may or may
not empty the address associated with the private key.
For more information on the dangers of manipulating
bare private keys, see Five Ways to Lose Money with
Bitcoin Change Addresses.
Multiple Address = Multiple Private Keys?

1. From a private key, you can easily derive the corresponding public key:
Together they form an ECDSA key pair on the secp256k1 curve. You
cannot easily derive the private key from the public key.
2. The address is then derived from the public key: First you hash the
public key with SHA-256, then you hash the result with RIPEMD-160.
The result is then formatted in Base 58 including a checksum.
Hierarchical deterministic wallet

You create one "master key" from which you can

recreate all following keys deterministically.

This is safe, because even when providing a

signature, your private key is never revealed, or
even when you reveal one out of your chain of
private keys, your derivation rule is still unknown.
Merkle Tree: Efficient Verification
A Merkle Tree allows computers on a network to verify
1 individual records without having to review and
compare versions of the entire database.
They do so by using cryptography that reveals an
2 individual record while also guaranteeing that all the
other records in the database haven’t been changed.
First patented in 1979 by Ralph Merkle, Merkle trees
3 have been an important key to database verification
throughout the history of computers.
Because of the distributed nature of
the blockchain, we need a secure and
4 fast way to make sure everyone on the
network has the same ledger.
It allows you to prove that two
versions of a ledger are consistent with
5
minimal computing power and
network bandwidth.
 Merkle Tree: How Works?
1 Transactions: A, B, C, D

2 Hashed: H(A), H(B), H(C), H(D)

A Merkle tree solves that problem of too much data by

pairing transactions up and hashing them together.

3 H(A) + H(B) = H(AB) and

H(C)+H(D) = H(CD)

4 H(AB) + H(CD) = H(ABCD).

Merkle Tree: Verifying Transactions
Each Bitcoin block has the Merkle
root contained in the block header.

To verify block content and

consistency of multiple ledger. One
has to compare the Merkle Tree of
both the block.

Even a tiny inconsistency would lead

to vastly different Merkle roots
because of the properties of a hash.
Merkle Tree: Verifying Transactions

To confirm Transaction D,
one only needs to traverse
H(AB), H(C), H(D), and
H(EFGH).
Proof of work enables trustless consensus

The main innovation that Satoshi Nakamoto introduced in his White Paper is
using so-called proof of work (POW) to create distributed trustless consensus
and solve the double-spend problem. POW is not a new idea, but the way
Satoshi combined this and other existing concepts — cryptographic signatures,
merkle chains, and P2P networks — into a viable distributed consensus
system, of which cryptocurrency is the first and basic application, was quite
innovative.
 What is consensus on Money?
I will accept some token or process in payment for valuable goods or services
if:

1. it comes from a scarce supply using one of the accepted means of value
exchange and creation.

2. I expect that everyone else will accept this token as money of comparable
value.

I, additionally, believe that

3. everyone else adheres to (1), (2) and (3)

The requirement that money supply be scarce is crucially important.

Difficulty to make process distributed
The distributed system must ensure consistency, that is when a transfer is
made using the information supplied by one of the nodes it must be correctly
reflected in all other nodes.

We either make things slow, by waiting for the information to propagate

across the network (known as strict consistency), or slightly unreliable by
confirming the transaction immediately but reserving the right to cancel it if
it encounters a conflict elsewhere on the network (eventual consistency).
Turstless - In Centralized System (Banks)

1. Trust of Safety - Doesn’t subtracting randomly from your account

2. Trust of Issuance - Out of nowhere, keep printing more and more

3. Trust of Correctness - Maintain consistency

Trustless - Achieve in Distributed

1. Trust of Safety - Cryptography

2. Trust of Issuance - Mining - POW

3. Trust of Correctness - Consensus what is Good and Bad?

Trust of Safety
Cryptography answers the needs of trust of safety,
because we can require transactions to have cryptographic
signatures. If everyone in the systems is able to verify
cryptographic signatures and refuses to accept payment
without one — the trust of safety is achieved, for it makes
it impossible for anyone to transact on your funds.
 Trust of Issuance
In order for our digital monetary system to work, the recipient of a transaction
must be able to confirm that:

1. The originator of the transaction is in possession of the funds being

transferred.
2. The originator of the transaction has obtained the funds by one of
the means commonly recognized as valid.
3. As an outcome of the transaction the recipient will now be recognized
by everyone as being in possession of the funds being transferred.
4. As an outcome of the transaction the sender would not be able to present
itself as being in possession of the funds any more.
Trust of Issuance
How the limited money supply comes into existence in the first place — how
the currency is issued.

Bitcoin protocol assigns a preset amount of newly issued currency for every
block to the miner who first assembled it with the correct proof of work. This,
along with transaction fees, incentivizes miners to perform the work that is
required to create consensus for the entire network. This is why mining is so
called — because it can be paralleled to the process of “digging” for new
bitcoins.
Trust of Correctness
The difference between a good state and a bad state is that of consensus only, that is if
we can all agree on which one is good and simply ignore the other one, we will have
solved the problem.

Mining is a process of generating proof of work.

Based on the cryptographic features of the hash function used in this process, finding
such a rare number is hard, but verifying its validity when it is found is easy.

For the ledger to be considered self-consistent we require that every block contain such
rare number whose hardness we control based on the size of the participating network
(a value expressed as a hash-rate).
POW - Conclusion
POW is only useful when trustless consensus is required, otherwise it is an expensive
and needless waste of resources.

There now exist solutions which do not use POW, but still strive to achieve distributed
trustless consensus.

Private Blockchain do not need POW to facilitate decentralized cryptofinance to

facilitate transactions between mainstream financial entities. Since they don’t have to
function in a trustless fashion.
Block Confirmation - Longest chain rule
Whenever there’s a disagreement,
network participants can “fork” off the
current chain. Thereby starting a new
chain of blocks. Participants who agree
with this new chain can now start
applying their “blocks” to the new chain
as well. Eventually, if the new chain
extends the old chain – the Longest Chain
Rule will kick in and will be declared the
winning chain.
 Consensus Algorithms: The Root Of The
Blockchain Technology
1. Coming to an Agreement: Mechanism to get majority on Agreement
2. Collaboration: Agreed on Interests as whole
3. Co-operation: Work as team, aside own interests.
4. Equal Rights: Everyone in group has equal voting power.
5. Participation: Everyone in group need to vote.
6. Activity: All are equally active.