Let's go over what we talked about in lecture. First, we talked about the concept of identity
on the Bitcoin network. In Bitcoin, each node’s identity is represented
by their public key. However, ultimately the public keys are controlled
by the owner of private keys. Only the private key can be used to spend
money. Another thing to note about identity is that
users can generate as many private/public key pairs as they want. How does it work again? Remember that there are 2 to the 160 total
possible private keys. It is extremely unlikely that someone might
happen to generate the same private key as yours. Nor is it at all likely that someone can guess
your private key to spend money on your behalf. Bitcoin doesn’t have the account balance
model that banks have. Instead, users spend outputs from previous
transactions. These specific outputs are called “Unspent
Transaction Outputs” or UTXO. The total value of bitcoins you have is the
sum of all of UTXOs you own. These UTXOs are uniquely identifiable and
make tracking payments at the protocol level much more straightforward: The UTXO record
system makes it easy for nodes to see how funds change hands between users and UTXOs.
The UTXO model might not be the most intuitive
model for us to understand, but it works well for bitcoin from an architectural standpoint. As we mentioned earlier, the blockchain is
the key data structure for recording Bitcoin activity. New transactions are recorded within new blocks
added to the existing, established chain. Once a transaction is recorded, it is close
to impossible to undo without changing every single version of this database in the universe.
The way that the network reaches consensus
is through Proof-of-Work. How does it work again? Proof-of-Work requires that voters expense
a considerable amount of computational power in order to validate transactions. But why do we need Proof-of-Work? Because, again, there is no central authority
to make sure that one person only vote once, and there is no limitation on how many identities
one person can generate, Bitcoin uses computational power as a resource constraint to limit the
voting power of malicious entities. Proof-of-Work hence aims to make votes expensive
for everyone, so that the voting power one has is based on how much computational power
one has, instead of based on the number of identities. Given all this information, you can now justify
many of the common buzzwords associated with Bitcoin which you may have heard. The most common descriptors of Bitcoin are
“pseudonymous,” “decentralized”, “iImmutable”, and “trustless”. Pseudonymity is a combination of the words
“pseudo,” meaning fake, and “anonymous,” meaning unknown. Bitcoin attempts to be anonymous through having
every user represent themselves with a random number, the public key. However, because it is not impossible to trace
back these virtual identities to real world identities, bitcoinit is not complete anonymousity
— it is only mimicking anonymity.
In Bitcoin, addresses and pseudonyms are synonyms
— it’s a fake name, but it can still be used to trace back to youassociated with you
with enough effort. In addition, decentralization refers to taking
an activity that is typically performed by one central entity and repeating the storage
of information and computation among more than one party. Bitcoin achieves decentralization by having
every single participant in the Bitcoin network store the full history of transactions, as
we’ve seen.
This way, every user possesses a copy of the
transaction history and does not have to ask anyone else for that information. Immutability, referring to the inability to
change information, is another property of Bitcoin achieved through decentralization. Once all users in the Bitcoin network decide
on the validity of some transaction, it is extremely difficult for anyone, including
themselves, to undo their decision. This feature helps foster trust among nodes
on the network. If one wanted to alter the history of transactions,
they would have to change every single user’s local history simultaneously, which in the
present day is close to ten thousand different users.
As a result of these three properties of pseudonymity,
decentralization, and immutability, we achieve in Bitcoin a trustless network. Because every user is by default a stranger
to everyone else, one may ask, “How do we trust others in the network? If we do not trust a majority of Bitcoin users,
how do we trust Bitcoin?” The Bitcoin protocol ensures that one does
not need to trust their peers in order to be certain that any transaction they make
will be accurately recorded by the rest of the Bitcoin network.
First, the ledger is publicly verifiable. Anyone can see any and all information about
the history of transactions in Bitcoin. You can go to the blockchain and check if
your transaction has gone through. In addition, the Bitcoin network is secured
through the Proof-of-Work consensus protocol designed by Satoshi Nakamoto which changed
the way everyone thinks about cryptocurrencies. These are the four essential unique properties
of Bitcoin: pseudonymous, decentralized, immutable, and trustless..
