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In the process of learning cryptography currency, the most important thing is to understand they are designed [1].
Since the end of the 1980s, an ever-expanding group of liberal scientists, engineers, computer scientists, and philosophers has been discussing how to use cryptography to improve privacy in a world increasingly dominated by computers and the Internet. They are called “Cypherpunk (Cypherpunk)” [2].
The cypherpunk group began to form in the early 1990s, and it was just an email list[3]; in this email group, they proposed and argued about which systems could achieve their goals. There is only one goal from beginning to end: the use of cryptography to create a secure environment in the cyberspace that protects people from government and corporate surveillance.
As the discussions and proposals progressed, three major themes emerged: privacy protection (the original goal) [4]; a form of currency is needed in this protected cyberspace [5]; smart contracts are also needed [6] ], so that anonymous strangers can perform transactions between each other without trusting a third party.
The aspiration basis of all cypherpunk efforts can be attributed to such a fundamental concept: minimizing trust and avoiding third parties that need to be trusted [7] [8].
In the pursuit of a currency that can be used in a purely Internet environment, there are several achievements that have to be mentioned.
DigiCash [9] is the earliest attempt at electronic money. It was born in 1989 and was designed around transaction privacy.
The founder of DigiCash is Dabid Chaum [10], one of the pioneers of the cypherpunk movement. His philosophy is to use cryptography in the public network to protect the privacy of users’ daily communication.
DigiCash was also elected to join the bank at the time, but with the end of the project in 1998, this effort was also terminated.
The main flaw of DigiCash is that it will be controlled by financial institutions, because it relies on the anchoring of compliant government currencies to maintain the value of digital currency units; moreover, DigiCash protects privacy through a technology called blind signature [11] , But it needs to run on a centralized control server, so managing this server becomes a third party that needs to be trusted.
HashCash [12] was created in 1997 by Adam Back [13], the cypherpunk, with the intention of preventing spam. It is not actually a currency, nor does it want to create a currency in the Internet world.
However, the underlying technology is to force the computer to do a lot of work before performing an action, in the form of computational cycles. This technique called “Proof of Work” [14] later became the core of cryptocurrency as we know it today.
Bit Gold [15] was invented by Nick Szabo [16] (also a cypherpunk); he invented the concept in 1998 and elaborated its meaning in 2005. Bit Gold is the first model of an independent cryptographic currency, which combines two concepts: using a peer-to-peer network to maintain a distributed ledger [17]; and proof of work based on computational problems.
Nick Szabo provided the details of the operation of this system, and also specifically imitated gold, using the production, scarcity and value of gold in the real world to guide the operation of this currency. This is the origin of its name.
Bit Gold includes a proof-of-work mechanism that allows participants to prove (at cost) that what they have created and used purely as currency in digital form is valuable. Moreover, it also needs proof of work to form a distributed time stamp, and uses a network of nodes to maintain a set of accounts and Bit Gold balance books; the combination of the two forms a set of property rights system [18], allowing users Can hold, track and transfer their currency.
Another initiative of Bit Gold is to use the result of the previous proof of work as a puzzle to participate in the next wave of Bit Gold production. This design allows the operation of the system to eventually form a chain of solved puzzles, which is very similar to the “blockchain” we call today in the cryptocurrency industry.
This chain is also the easiest way for participants to check whether the currency they bought and received is *****.
Another important feature of Bit Gold is that it not only uses proof of work as the basic element of value, but also uses a “Bit Gold market” to form the price of such uneven proofs (irregular proofs). Therefore, the value varies. Proofs can be combined into generic bundles, making this digital commodity more standardized and interchangeable.
Just like gold ingots in the real world, based on these common units, a token system is established, and this asset becomes divisible, transferable, and more suitable for use in a digital economy.
The consensus mechanism of the peer-to-peer network prevents collusion attacks and double spend. As long as the number of corrupted nodes in the system does not exceed 33%, security can be guaranteed. This is called “Byzantine fault tolerance” in computer science [19].
The Byzantine fault tolerance problem is that if 33% of node operators agree to attack the network, such as reorganizing the transaction history together, they can do so, because in a fully distributed and decentralized system, there is no way to prevent and Control such activities. (Translator’s Note: The explanation here is too rough.)
Although Bit Gold was a very advanced proposal at the time, it also had weaknesses. Without a third party responsible for management, the Bit Gold market is very difficult to achieve; in addition, peer-to-peer networks cannot cope with 33% of conspiracy attacks.
Following Bit Gold, another cyberpunk Wei Dai [21] proposed B-money [20] later in 1998. This solution not only has cryptocurrency, but also adds some basic forms of smart contracts.
B-Money also uses a network of nodes to maintain a distributed ledger, which records accounts and balances; participants also perform work on their computers to prove that they have invested a lot of computing resources to create this currency.
The value of this currency will be determined based on the market price of the computing resource market, and the node network will reward creators by adding a balance to their accounts.
The second part of B-Money is to add an escrow agent, so that when network participants want to conclude smart contracts, transactions can be secured.
B-Money may not have been launched at that time because of the lack of implementation details for different parts of the plan, and also because the node network that maintains the distributed ledger cannot tolerate more than 33% of Byzantine errors.
RPOW [22] is the abbreviation of “Reusable Proofs of Work”, which was born in 2004 and was proposed by Hal Finney [23] (another cypherpunk!). RPOW uses a different method to try to solve the historical Byzantine fault tolerance problem: participants create proof of work (just like Bit Gold), but they will transfer these proofs directly to another user through a messaging system, and A peer-to-peer network of nodes will not be used to maintain a ledger.
The core of this system is a verification server, because participants will transfer PROW to others, new transactions require new proof of work, and the central server only needs to verify that these proofs are true.
Although this system makes it possible to transfer value directly between users and solves the Byzantine fault tolerance problem in this form, its weakness lies in the centralized verification server, even if it can be managed by a set of independent validators. , There is still a risk of centralization, because users must trust these validators.
As you can see, all these pioneers have weaknesses of this kind. Either it relies on a centralized server, requires trust in a third party, or the consensus mechanism of its ledger cannot resist the collusion of small groups of participant nodes.
When Bitcoin [24] turned out in 2009, Satoshi Nakamoto [25] introduced a smart innovation for it, making it a revolutionary technology. It brings together all the solutions in the past, and makes them mutually reinforce each other, and it has achieved great improvement and significant improvement in solving the above problems. Today, we call these innovations “Nakamoto Consensus” [26].
In the Satoshi Nakamoto consensus, all nodes in the peer-to-peer network forward new transactions to all other nodes; then, all nodes use these transactions, plus the information of the previous block and a timestamp, as The next proof-of-work puzzle; the solution of the puzzle has the lowest difficulty threshold; as long as any node finds a result that meets this threshold, he will broadcast the result to all other nodes; after the node receives the proof of work, it is based on The algorithm of the system and the proof-of-work chain they have mastered each verify the validity of the proof-of-work received; after passing the verification, all nodes will increase the balance of the account of the guy who solves the problem first; the increased amount , Which is also agreed in advance according to Bitcoin’s monetary policy [27].
In this way, Bitcoin guarantees the value of the token, not only because of the scarcity created by monetary policy, but also because, in order to create new coins, a lot of computational work must be paid.
The workload is also the key to solving the 33% Byzantine problem in the peer-to-peer network. The minimum difficulty threshold required by the Bitcoin algorithm implies that all nodes must (on average) spend 10 minutes to solve a problem. When a node discovers and issues a result, the time it takes (longer or shorter than 10 minutes) , It assures other people in the network that all other participants are also solving this problem together [28]. (Translator’s Note: If someone no longer participates in solving the problem of this chain, but solves the problem of another chain, then the problem of this chain cannot be solved within 10 minutes. The proof of work is agreed prove.)
However, if someone obtains more than 50% of the computing power in the network, they can still surpass other nodes at the point of making blocks, and there is still the possibility of forging the ledger. This is commonly referred to as a “51% attack.”
Therefore, the improvement of the Satoshi Nakamoto consensus is to increase the security threshold of the consensus from 33% to 50%. Now, no matter which conspiracy node group wants to forge the ledger, it must own more than 50% of the entire system. Computing power.
In this way, Bitcoin became the first successful [29] and widely used pure digital currency, just like gold in the digital world. However, the next step, smart contract, is beyond its reach, because its internal design also has limitations [30].
If Bitcoin is a pocket calculator, Ethereum is a computer.
Ethereum [31] was proposed by Vitalik Buterin [32] in 2015, using the same foundation as Bitcoin, which is the Satoshi Nakamoto consensus, plus a distributed ledger, and there is a token as a currency unit; but , Ethereum added a virtual machine [33] and a programming language to open the programmability of this currency. (Translator’s Note: It is inaccurate to say that Ethereum uses the Nakamoto consensus. Ethereum’s consensus algorithm is the GHOST rule.)
In other words, Ethereum supports smart contracts.
The working principle of Ethereum is that it uses proof of work to produce blocks that contain transactions, and all nodes in the network verify the blocks and transactions, but the ledger not only records the account contract, but also stores it once it is on the chain. Centralized running program.
These programs, like any software, can establish rules and conditions for executing transactions, so that value can be transferred in a globalized network.
For example, a simple program on Ethereum can have:
The ability to integrate decentralized running programs provides the possibility for decentralized applications (“dApps”)[34], which can run on such systems and have the same security features as blockchains.
Because cryptocurrency is an open source public system, these systems can also be copied and changed to realize a completely different system. What many companies and computer scientists have always wanted to do is to make cryptocurrency move to another foundation instead of taking proof of work as its core value and security system.
One of the criticisms of proof of work is that it consumes too much energy [35] and is not environmentally friendly. However, Bitcoin mining has formed a huge scale on a global scale [36], and about 77% of mining activities use renewable energy [37]. In fact, as renewable energy sources become cheaper, Bitcoin mining activities will accelerate the migration to the use of renewable energy sources [38].
In addition, many newly launched networks start from the models of Bitcoin and Ethereum, adding many functions and modifications, such as Proof of Stake (PoS) [39] as a consensus mechanism. Other features they tried to add include a voting decision system (Translator’s Note: refers to on-chain governance, using voting to determine which direction the protocol should improve), and a “national treasury” that can be used as an investment source Funds are collected from participants and distributed by centralized institutions), and the division of the ledger (people call it “sharding”) to improve performance.
Examples of this are: Polkadot, Cardona, EOS, TRON and Tezos. All these systems can be found on CoinMarketCaps.com [40].
Even Ethereum is migrating to the proof-of-stake mechanism [41].
Proof of equity eliminates the need for computing work, and therefore also eliminates energy expenditures, and replaces them with security deposits for node operators. These security deposits in the form of built-in currency of the system are called “stakes”.
All nodes that have deposited a deposit have the right to collect transactions and publish them on the ledger. After the block is released, these validators join a lottery system and use a lottery to determine who can get the reward for the current block. This also makes its currency model very similar to the PoW system.
Although I think that the proof-of-stake system is not that secure [42] [43], there is also a “scalability” trade-off. The proof-of-work system is more secure, but (in terms of transaction throughput) is less scalable, and the opposite is true for proof of equity.
This obvious complementarity is also a possibility: eventually these technologies will be integrated into a larger, more scalable and safer system [44].
The second important thing is to understand what is not cryptography currency.
Both proof-of-work and proof-of-stake systems are classified as cryptocurrencies because their ultimate goal is to minimize the need for trust in third parties, no matter what path they take.
The third parties that need to be trusted are security loopholes, because they control people’s currency, wealth, and personal data, and manage everything in a centralized server. They may be hacked or directly involved in fraud [45]. In other words, they cannot guarantee the immutability of property ledgers, balances, transactions and smart contracts [46].
For the above reasons, according to the definition, those currencies created and managed by the central bank (such as CBDC [47]) are not cryptographic currencies, even if they model all appearances.
In the same way, those private currency schemes are not cryptographic currencies. For example, Facebook’s “Diem” (previously known as “Libra” [48]) and stable coins [49] (such as Tether, USD Coin, and DAI). Because they introduce risks such as financial institutions, central banks, and government-backed fiat currencies into the system, which runs counter to the initial vision of cypherpunk.
[1] The Crypto Anarchist Manifesto – by Tim C. May: ()
[2] Cypherpunk – by Wikipedia:
[3] Crypto Rebels – by Steven Levi – Wired Magazine:
[4] A Cypherpunk’s Manifesto – by Eric Hughes:
[5] Shelling Out: The Origins of Money – by Nick Szabo: ()
[6] Smart Contracts – by Nick Szabo:
[7] Trusted Third Parties are Security Holes – by Nick Szabo: ()
[8] Satoshi Nakamoto Mentioned Trust Minimization 14 Times in the Bitcoin White Paper – by Donald McIntyre:
[9] DigiCash – by Wikipedia:
[10] David Chaum – by Wikipedia:
[11] Blind signature – by Wikipedia:
[12] HashCash – by Wikipedia:
[13] Adam Back – by Wikipedia:
[14] Proof of work – by Bitcoin.it:
[15] Bit Gold – by Nick Szabo:
[16] Nick Szabo – by Wikipedia:
[17] Distributed ledger – by Wikipedia:
[18] Secure Property Titles with Owner Authority – by Nick Szabo:
[19] Byzantine fault – by Wikipedia:
[20] B-money – by Wei Dai:
[21] Wei Dai – by Wikipedia:
[22] RPOW – Reusable Proofs of Work – by Hal Finney:
[23] Hal Finney – by Wikipedia: (
[24] Bitcoin – by Satoshi Nakamoto:
[25] Satoshi Nakamoto – by Wikipedia:
[26] Why Proof of Work Based Nakamoto Consensus is Secure and Complete – by Donald McIntyre:
[27] Bitcoin controlled supply – by Bitcoin.it:
[28] Cryptography Mailing List – Bitcoin P2P e-cash paper – by Satoshi Nakamoto:
“The proof-of-work chain is a solution to the Byzantine Generals’ Problem. I’ll try to rephrase it in that context.”
Source full text:
[29] Money, Blockchains, and Social Scalability – by Nick Szabo: ()
[30] The dawn of trustworthy computing – by Nick Szabo: ()
[31] Ethereum – by Wikipedia:
[32] Vitalik Buterin – by Wikipedia:
[33] What is Ethereum in Layman’s Terms? – by Donald McIntyre:
[34] Decentralized application – Dapp – by Wikipedia:
[35] A proof of stake design philosophy – by Vitalik Buterin: ()
[36] Bitcoin nodes map – by Bitnodes:
[37] The Bitcoin Mining Network – Trends, Composition, Marginal Creation Cost, Electricity Consumption & Sources – by Christopher Bendiksen, Samuel Gibbons, and Eugene Lim:
[38] Canadian Province Offers Low-Cost Energy Incentives To Bitcoin Miners – by Jessie Willms – Bitcoin Magazine, April 2019:
[39] Proof of stake – by Wikipedia:
[40] CoinMarketCaps:
[41] Ethereum Classic vs Ethereum 2.0, What is the Difference? – by Donald McIntyre:
[42] Proof of Work has Division of Power, Proof of Stake Does Not – by Donald McIntyre:
[43] Why Proof of Stake is Less Secure Than Proof of Work – by Donald McIntyre:
[44] Model for an Ethereum and Ethereum Classic Collaboration – by Donald McIntyre:
[45] 10 Blockchain Principles for Blockchain Governance – by Donald McIntyre:
[46] The Meaning of Blockchain Immutability – by Donald McIntyre:
[47] Central Bank Digital Currencies (CBDC) – by Investopedia:
[48] Diem (originally, Facebook’s Libra) – white paper:
[49] Stablecoins – by Wikipedia:
[50] From Gold to Fiat to Bit Gold to Bitcoin – by Donald McIntyre:
Original link:
Author: Donald McIntyre
Translation: Ah Jian
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