This next essay in the Digital Currency Course Series is the first one I wrote for the second lecture taught in the University of Nicosia’s Bitcoin MOOC. This chapter is about the Byzantine Generals Problem and the theoretical underpinnings of Bitcoin.
Prompt: Describe in your own words, why ‘proof of work’ is important to a decentralized blockchain-based system like Bitcoin.
For any ledger to be trusted, the users must be assured that the transactions comprising the ledger are valid, authorized, and represent actual transactions that have occurred. In the case of a centralized ledger, all the transactions are entered by a single, trusted authority, such as a bank or a company’s accounting department. In many cases, this trusted authority will also hire a disinterested third party, such as an auditor or public accountant, to review the ledger and the transactions that comprise it and attest to the veracity of the data.
In the decentralized ledger model, the trusted authority is done away with, and instead, many disbursed entities may submit transactions to be recorded to the ledger. Therefore, in order to assure participants that the ledger can be trusted, a decentralized system must have rules which govern the posting of items to the ledger. Bitcoin and other alternative cryptocurrencies have chosen ‘proof of work’ as the governing rules for posting transactions to the blockchain ledger (as an aside, some people have proposed other systems, such as proof of stake, as an alternative set of rules to govern transaction posting). Proof of work requires a user’s computer to expend effort and resources as the price for posting transactions to the blockchain. The bitcoin protocol demands that a computer discover a nonce, a string of garbage data, which when combined with the transaction details and run through a cryptographic hash function, produces an output value which meets certain difficulty criteria. The bitcoin software adjusts these criteria accordingly as the pool of computing power dedicated to searching for a solution waxes or wanes. Users are allowed to post transactions to the blockchain only after exerting the time, effort, and resources to find a correct solution, and because the effort level required is kept consistently high, the probability of discovering a solution is fairly low relative to the resources that must be invested. Consequently, any person wanting to examine the blockchain can be assured that transactions are not frivolously posted and that there is some degree of network security. Combined with rules governing what constitutes a valid transaction, the proof of work system gives bitcoin a level of security and reliability on which trust can be built and users can be assured about the accuracy of the blockchain.
References
1. Bitcoin Wiki, Protocol rules
BlakeChain 