An account model is a method to communicate blockchain state based on users of the network not transactions. Each user represents an account as the blockchain tracks changes in these accounts. Four data are tracked: The nonce, or a scalar number of actions made by an account. The balance, or a scalar number equal to the amount of native asset (Ether in Ethereum case) in the account. The storageRoot, or the root hash of a Merkle Patricia tree that encodes the storage content. It is a mapping between integer values. Finally the codeHash, the hash of the code executed if the address receives an external message call.
A colored coin is created by adding metadata to regular bitcoin transactions. This metadata specifies properties of a colored coin that represent ownership of real-world assets on the blockchain. Colored coins are bitcoins that use a specified number of input and output transactions when transferred. This identity gave them a unique UTXO fingerprint that represents external metadata.
For example, if a company wanted to issue stock on the Bitcoin blockchain, it could create a colored coin that represents a company share. The company could distribute these colored coins to investors, who could hold and trade them on the blockchain like regular bitcoins.
A consensus mechanism is a game theory scenario where good behavior that contributes to transaction confirmation is incentivized while damaging behavior is penalized heavily. Penalties are enforced by inflicting great economic costs tethered to assets external to the system. It often utilizes advanced cryptography and decentralized selection to achieve this. Common examples include Proof-of-Work (PoW) and Proof-of-Stake (PoS).
The cypherpunks were a community of activists interested in cryptography as a way to protect privacy and promote individual liberty. Through activism, entrepreneurship, and software development, cypherpunk principles evolved into the values that now guide crypto. The following is a summary of the core cypherpunk values described first in principle, and then in relation to blockchain technology.
In a decentralized system, power should be distributed across a majority of different individual stakeholders rather than centralized and under the control of one – or a select few.
Decentralized infrastructure is maintained by networks of miners or validators that share responsibility for keeping the network running. This design makes it very difficult for any one individual or group to seize control and eliminates the risk of a single point of failure.
In a system with trustless security, individuals should not need to rely on third parties or intermediaries to facilitate transactions or interactions. Individuals should have full responsibility for the security of their information and transactions, and have the autonomy to decide how it is used, shared, or accessed.
Cryptocurrencies are often considered to be trustless because they allow for secure, direct, peer-to-peer transactions without the need for a trusted third-party.
Any system used by individuals with civil liberties should preserve the user’s right to privacy. Online, the use of strong encryption is the best way to protect this right at a technical level.
Cryptocurrencies by their nature, offer a high level of privacy, as transactions are often pseudonymous and can be made without revealing the identity of the counterparties involved.
Systems should be safe, freely available and accessible to the public. Individuals acting in good-faith should not be required to be granted permission to use it by any external actor.
Cryptocurrencies by their nature, are inclusive, transparent and enable the free flow of information and value. There is no administrator to assign database permissions in a decentralized system.
In a censorship resistant system, individuals should be able to communicate and share information without fear of interference or censorship by external actors – no matter their power or influence.
Cryptocurrencies are often considered to be censorship-resistant because they allow users to transact economic value across the globe without any central authority being able to prevent it.
In any self-custodial system, individuals should retain full control of their assets and information, without needing to trust a third-party intermediary.
Cryptocurrencies enable self-sovereignty by allowing individuals to hold and control their private keys, giving them full control over their assets.
DAO (Decentralized Autonomous Organization)
A decentralized autonomous organization (DAO) is a sovereign community organized by a unified mission that aligns participants through consensus driven rules enforced by blockchain technology. Decisions are made through governance where a group of individuals collaborates to achieve a shared goal. Power distribution within governance is hotly debated but is often given to intrinsic capital holders (token holders), powerful contributors, and active members of a community.
DOUBLE-SPEND PROBLEM (AKA Byzantine Generals Problem)
The double spend problem illustrates the well-known problem that unreliable or malicious actors introduce into open systems where distributed actors try to reach consensus. The analogy is: a group of generals are encamped around an enemy city, and need to agree on a plan of attack. However, some of the generals may be traitors who want to sabotage the attack. In the context of Bitcoin, the Byzantine Generals Problem refers to the challenge of preventing the same Bitcoin from being spent more than once.
A full node is a completely connected participant of the network. They have different requirements depending on the network but usually include storing a complete copy of UTXO history or account state. Nodes cannot be censored and contribute to the decentralization and trustless security of a network.
A hard fork is a radical change to the protocol of a blockchain network that requires all nodes to update their software creating two separate blockchains. Nodes that update use the software and rules of the new chain, and those that don’t, continue on the original chain.
PoW is measured by a metric that measures how many hashes a miner is guessing per second to validate Bitcoin blocks called the hashrate. The hashrate represents the approximate amount of computing power that a miner (or mining pool, a group of coordinated miners) is able to contribute to the network. The higher a miner's hashrate, the more likely they are to solve the next block and receive the mining reward.
Starting a new block requires a key value, called a nonce, that is produced randomly by the previous block, enforcing the correct sequence. This block ordering mechanism prevents double spending since trying to maliciously reorder blocks creates mathematical error.
A Merkle Proof, also known as a hash tree, is a data structure that allows for the efficient and secure verification of large amounts of data.
Merkle, a computer scientist and electrical engineer, studied at the University of California, Berkeley, before earning his PhD in computer science from Stanford University in 1979. During his time there Merkle worked with Hellman and Diffie on research related to secure communication and the use of public key cryptography.
By storing hashes of the data at various levels of the tree, any change to the data will result in a change to the corresponding hash. This allows for the detection of any unauthorized changes to the data and is particularly useful in distributed ledgers, such as blockchains, where each node must verify the integrity of the data before adding it to the ledger.
PROOF OF STAKE (PoS)
PoS is a type of consensus mechanism. First introduced on a BitcoinTalk Forum in 2011, User QuantumMechanic suggested that perhaps Bitcoin could benefit from a Proof of Stake system. Instead of bringing computing resources (hash power) to the network, the number of BTC you own allows you to “vote” on the accepted transaction history. Some benefits of this system could be reduced transaction fees, quicker consensus, removal of physical failure points, and allocating stakeholders more voting ability.
In proof-of-stake (PoS) systems, the validating nodes are chosen based on their stake, or how many coins they hold, rather than their ability to solve mathematical problems. This stake can be lost through a mechanism called “slashing” if the validator is dishonest. Instead of proposing fraudulent blocks and wasting electricity, validators lose their stake.
PoW is a type of consensus mechanism. In proof-of-work (PoW) systems, mining consumes a lot of energy and resources, which helps secure the network and prevent attacks. The introduction of a neutral variable, like energy, was the common ground that allowed honest competition to flourish with no opportunity to cheat. With no cheating physically possible, the need for trust was eliminated.
In PoW, a group of nodes who collect and propose to add new transactions to the blockchain (called miners) compete (or ‘work’) to solve a difficult computational problem. Running computers to solve these problems requires absorbing the expense of the immense amounts of electricity required to run the hardware that processes the calculations. The first miner to solve the problem gets to create the next block on the blockchain, and receives a monetary reward for their work as instructed by the blockchain protocol.
Turing completeness is when a computer can perform any algorithmically described computation. This is a binary test to measure a computer's ability to solve a problem dictated by a given algorithm. Can it execute most algorithms or not? This does not mean intelligence per say but the versatility to respond to a variety of problems.
Smart Contracts are self-executing pieces of code used to automate the enforcement of a contract or agreement. They were first proposed by computer scientist and legal scholar Nick Szabo in 1994 as a way to enable the secure and automatic execution of digital contracts. He imagined a world where programmatic code is implemented in commerce and financial markets with the stipulation that no current system implemented or proposed sufficient resistance against trusted intermediaries and malicious actors.
A hosted wallet allows a custodian to take the responsibility of holding crypto assets customers. This includes Exchange-hosted wallets provided by cryptocurrency exchange, the most popular type of hosted wallet. These are convenient because they enable users to store their cryptocurrencies on the same platform where they trade, but they also have some drawbacks. They are vulnerable to hacks and other security breaches. Additionally, users do not have full control over their private keys.
A hot wallet is a digital app or web browser extension. They are ‘hot’ because the private keys are stored on an internet connected device. This makes them convenient for making transactions and interacting with the blockchain but more vulnerable to security risks, such as hacks and malware.
A cold wallet is a hardware device that stores a wallet's private key physically separated from the internet. Transactions are made by signing a transaction on the hardware device that is connected to a software or browser-based extension. Cold wallets are often used for storing large amounts of cryptocurrency due to their added security.
A multisignature wallet (often shortened to "multisig") is a type of smart contract technology that exists exclusively on blockchains. Multisig wallets require multiple private keys to sign a transaction, using hot or cold wallets. Since it requires the cooperation of multiple people to access the funds, multisigs are difficult to steal or corrupt. .
SOCIAL RECOVERY WALLET
A social recovery wall is an advanced wallet concept that is currently in development. It is a combination of a personal wallet with multi-sig functionality where funds are accessed through a social system. The user selects a group of trusted accounts, called "guardians," who can help change this signing key if they lose access to it. These guardians are usually 3 or more people, like family members, friends, or trusted organizations, whose majority consent to changing their signing key if one of the users becomes compromised. This gives users full control over their funds with added protection against loss of keys and theft.
This social recovery approach aims to make it easy for people to understand and use wallets, without sacrificing security. This closely resembles traditional checking accounts rather than web3 wallets, such as MetaMask. This may enable mainstream adoption since usability and security finally merge.
Dapps can now implement social recovery within applications to ensure their users greater protection. DAO communities can use this feature within their treasury to guard against attacks. Enterprise users start with heightened multisig security and gain the recovery guarantees which can benefit asset custody, fund management, and compliance for large-scale organizations.
256-bit encryption is one of many algorithms that allow users to encrypt information. To put the strength of 256-bit encryption into perspective, it is estimated that it would take billions of years for a supercomputer to crack a 256-bit key by trying every possible combination. This means that, for all practical purposes, a 256-bit key is effectively unbreakable.
One way to think about the strength of 256-bit encryption is to consider the number of possible keys that can be generated using this level of encryption. With 256-bit encryption, there are 2^256 possible keys, which is a very large number. To put this into perspective, to crack a single key is the equivalent of finding 1 unique grain of sand in all of Earth (oceans included) in not 1 but 2 Earths. This means that the odds of an attacker guessing the correct key through a brute force attack are extremely low.
Zk cryptography is known as zero-knowledge cryptography. It is a field of cryptography where proofs are created a verified where one party has no knowledge of its contents but can cryptographically verify its truth.
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