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Thursday, May 24, 2018

Understanding Blockchain Technology

Feature Article
Understanding Blockchain Technology:
Consensus Protocols, Part 1
by Van K. Tharp, Ph.D.



I personally think that the blockchain, and some cryptocurrencies, represent the opportunity of a lifetime. Consequently, I plan to do monthly updates on the cryptocurrency world. These will include some education so you can begin to take advantage of this opportunity as well as an overview of what is happening in the cryptocurrency world for the last month. We are also developing special programs for those in the Super Trader program to take advantage of this unique opportunity and we are encouraging each Super Trader to have some stake in the world of cryptocurrencies. Why? Because the opportunities are staggering and cryptocurrencies are not highly correlated with other types of investments. These updates will come out the 3rd Wednesday of each month and will cover developments over the prior month. And the format, of course, will evolve over time. The update went out last week on the 16th.

This week I’m following up with fairly extensive information on my continuing series on Blockchain Technology. This week is Part One of a two part instruction on Consensus Protocols.

During the 2007-2009 Global Financial Crisis, we saw the dangers of lots of power in big banks and in central governments. Big banks had invented products that were insane and sold them to unwary parties. The result was a market collapse and a major change of the world’s wealth. Big government and big banks had to work together to salvage everything and those institutions that didn’t play the game well were allowed to fail — think Lehman Brothers and Bear Sterns. The crash really pointed out the dangers of everything being centralized. Furthermore, the Internet once held great promise of decentralization but it had just furthered the centralization. A few companies started to dominate the Internet and they became the dominant force for concentrated power online. Here I’m referring to names like Apple, Amazon, Google — all of which now have artificial intelligence devices (i.e., Siri, Alexa, and Hey Google, respectively).

As the dangers of centralized money and power became more obvious, someone named Satoshi Nakamoto (who has never been identified and was possibly a number of people) released a whitepaper about a concept for decentralized money, namely Bitcoin. The idea was open sourced and soon the first Bitcoin (BTC) appeared. Rather than concentrate money in one power such as a central bank, the idea behind Bitcoin was to make it everywhere by anonymous individuals and useable by everyone.

In the first of these articles, we covered blockchain technology as a decentralized ledger and its advantages. We also made the following statements:
  • We talked about Internet protocols (which are very few) versus blockchain protocols which are many. 
  • We talked about the blockchain as a decentralized (distributed) ledger. 
  • We also talked about how blockchain technology makes it expensive to cheat and profitable to cooperate and how it might eliminate the major concerns of the Internet today — hacking and stolen secrets. A website can be hacked. A cryptocurrency exchange can be hacked, but a cryptoasset’s blockchain is very, very difficult to hack. 
  • We described what blocks of transactions were and how they are chained together — hence the blockchain. 
In this two part article, I’m going to explain the glue that holds cryptoassets together – the block consensus protocols or the verification process. There are several verification processes and these make the differences between certain classes of tokens or cryptoassets.

Consensus Mechanisms: How Decisions Are Made in the Blockchain

We have explored how the blockchain is a decentralized peer-to-peer system with no central authority figure. That means there is no corruption from a single source but it also creates problems in how decisions are made and how anything gets accomplished. 

In the types of organizations we are accustomed to, decisions are made by the leader (CEO, President, etc.) or by a group of leaders (i.e., the board of directors). But without a leader, organizations must make decisions by some sort of consensus mechanism. Consensus is a dynamic way of making an agreement that could benefit the entire group as a whole. The method whereby this is achieved is called the consensus mechanism.

According to Wikipedia, some of the objectives of consensus include:
  • Agreement seeking: it should bring about as much agreement as possible. 
  • Collaborative: All the participants should work together to achieve the results that put the best interest of the group first. 
  • Cooperative: Participants should work as a team, not putting their own interests first. 
  • Egalitarian: Each vote should have an equal weight. 
  • Inclusive: As many people as possible should be involved in the process. People normally don’t vote because they feel their vote doesn’t have enough weight to matter and this must be avoided. 
  • Participatory: The consensus mechanism should be such that everyone should actively participate in the overall process. 
Before Bitcoin, many decentralized currency systems failed because they faced what’s called The Byzantine Generals Problem and they couldn’t solve it.

Imagine a group of generals who must attack a city. The generals are scattered so a central authority is impossible. If they all attack together, victory is assured. But if some attack and others don’t, then defeat is probably likely. So the solution might be to send a messenger to the other generals to co-ordinate the attack. But all sorts of things could go wrong: 

1) who sends the messenger and decides and what if each group each sends a messenger with different instructions; 

2) what if the messenger comes and says attack on Wednesday and the next general says “No, we aren’t ready until Thursday.” 

3) What if the messenger gets killed or captured? What’s missing is a consensus mechanism.

Imagine how this would apply to a blockchain. Say you want to send 30 NEO from your wallet to another address. How do you know someone isn’t going to mess with the transaction and send 3 to your requested address and 27 to another address? Again, what’s needed is a consensus mechanism.

Proof of Work Consensus: Satoshi Nakamoto, Bitcoin’s inventor, solved the problem by inventing the proof of work consensus protocol. It works in the following manner:

Bitcoin miners must solve a complex crytpographic puzzle in order to “mine” a block of transactions and add them to Bitcoin’s blockchain. These problems are difficult, taxing on the system, and require an immense amount of energy and computational usage. 

When a miner solves the problem, the miner presents it to the network for verification. It requires about 30 verifications to pass and the verification process is very simple.

So Proof of Work was one method of consensus — but with some serious drawbacks. First, POW eats up a lot of power, a huge amount of electricity. Second, people with faster and more powerful computers have a better chance of mining blocks than others. Right now about five Bitcoin mining pools account for 65% of the hashrate (i.e., the speed at which a compute is completed in the Bitcoin code). Ethereum currently relies on a proof of work process but is planning a move to proof of stake in 2018. Let’s look at that method next.

Proof of Work Consensus is the first method invented. However now there are eight other consensuses emerging, each with their own strengths and weaknesses.

Next week we’ll pick up this topic and go into detail on the other methods we should all understand to better navigate the securities in place for crypto assest investments.

About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp www.vantharp.com.

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  4. Blockchain Technologies (blockchaintechnologies.com)
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    ReplyDelete
  5. Blockchain Technologies (blockchaintechnologies.com)
    Blockchain Technologies is a huge static content website that covers practically every single question you might have about blockchain. Additionally, the site also has a news section where stories from the largest cryptocurrency news blogs are gathered.
    I added this site to this list of the 27 best cryptocurrency blogs for three main reasons. The first is that the content is absolutely amazing. It is very obvious that the writer spent A LOT of time researching about cryptocurrencies. Secondly, the UI of the website is astonishing. The colors are very well picked, the site charges in the blink of an eye and it is completely responsive. And finally, although the Blockchain Technologies blog has a couple Ads, it is very clear that the main objective of the site is to inform, and not to just make money with visitors.

    ReplyDelete