Introduction to Lisk (LSK) Part 3

Cryptography overview.

 

In cryptography, a set of data will always return the same hash but it is impossible to reengineer the data if all you have if the hash. This, in combination with the idea of difficulty, is what makes proof-of-work blockchain networks such as Bitcoin so secure.

The fact that a set of data can have one and only one hash under one cryptography algorithm means that if all that miners were doing was creating hashes for the data about transactions, then all miners would be getting the same hash and there would be no “work.”

In this case, an attacker could create several new transactions that spend money in a way that the attacker wants, quickly generate a hash for the block with these transactions and present this block as a valid, legitimate block of the blockchain. In this case, the members of the network simply wouldn’t know which transactions are legitimate and which are not.

The real problem that the Bitcoin network has solved was not the problem of sending money between parties. It was the problem of trust, which is why the blockchain technology is being applied in all kinds of industries and for all kinds of purposes, from real estate to identity management and medical records.

A blockchain network such as the Bitcoin broadcasts transactions to the entire network in real time, as users are sending the funds. You can see these transactions as they appear on the Bitcoin network in real time here: https://blockchain.info/unconfirmed-transactions

On the Bitcoin network the transactions contain data about sending money to each other, but on a different blockchain network the data could be about something else entirely.

For example, on a medical records network the data could be about a doctor seeing a patient. On a cargo logistics network, the data could be about containers leaving destinations and arriving at ports. On a real estate network, a blockchain could contain profiles of parcels of land and each new record about a parcel of land could be getting a note on a blockchain. What matters here is that all the records on a blockchain network have timestamps, become immutable, and can be shared in real time.

To protect the data, on proof-of-work networks miners add a number to the data set about transactions. This number is known as nonce, which is an abbreviation for “number used once.” In cryptography, hashes for data sets that look very similar are very different. This is one of the properties of the cryptography hashes. Practically speaking, this means that the hash for a data set with an added nonce is going to be very different from the hash for just the data set, without the nonce. Once a miner obtains the hash, he or she checks if the hash meets the difficulty requirement of the network. If it does, the miner wins the right to create a block of the blockchain and gets a reward from the network for doing so.

When Satoshi Nakamoto launched the Bitcoin network in 2009, proof-of-work became the first algorithm that essentially allowed to convert value that exists in the real world – electrical power and use of hardware – into value on a digital network. Nakamoto has also built the Bitcoin network in such a way that as more people are joining the network, the difficulty parameter increases. This means that it becomes harder and harder to guess the winning hash, but this also means that the network is becoming more and more secure.

As the popularity of a network grows, so does the price of the network’s token, which is exactly what has been happening with Bitcoin.

This is also the reason why miners on the Bitcoin network keep creating the blocks of the network: doing so is still profitable because they get multiple Bitcoins for creating blocks of the Bitcoin blockchain and each Bitcoin is worth thousands of dollars.

For the first 200,000 blocks of the Bitcoin blockchain, the reward for creating a block on the network has been fifty bitcoins. After that, the reward divided in half and became twenty five bitcoins. As of the writing of this article, the reward is 12.5 coins. You can see how many bitcoins the network has left to mine, when the next division of the reward will occur, and other interesting stats by visiting http://www.bitcoinblockhalf.com/