Mechanism of Bitcoin, Cryptocurrency, and Blockchain

Know the mechanism of Bitcoin

In 2008, Satoshi Nakamoto proposed a peer-to-peer cash payment system that allows direct transactions between individuals without the intervention of financial institutions. Since then, many people have been talking and writing about the new digital currency Bitcoin. The purpose of this article is to introduce you to the terminology associated with this technology, the computer networks that enable payment systems.

There are generally two models of computer networks: client/server and peer-to-peer (P2P). These two models differ in the roles and functions of the computers (commonly called nodes) participating in the network.

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Client and Server

In the client/server model, it is split into two objects: server and client. It is a centralized environment where applications, files, and other resources are stored on a central computer (server). The server acts like a central administrator providing services to other nodes on the network. Servers share information and resources with clients. All clients connect to a central server. This model makes the server a single point of failure, making it vulnerable to security breaches, hacks, and breakdowns. If a server fails, the entire network can go down.

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Peer-to-Peer (P2P)

On the other hand, peer-to-peer networks are decentralized models, with no central administrators or servers. Instead, each node acts as both a server and a client, all nodes being equal. BitTorrent is one of the most popular peer-to-peer networks for file sharing. Although peers are vulnerable to security attacks (the Bitcoin network is addressed through protocols), the advantage is that it is easy to scale. Just connect your new computer to the network, and once it’s synced, you’ll be up and ready to join.

As the network expands, so does its computing power. Also, having a failed computer does not compromise network integrity. All computers are connected and communicate with each other, so messages are delivered without interruption. The fact that it is such a fault-tolerant network is probably the biggest advantage of P2P.

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Distributed system

The Bitcoin network follows a decentralized application model in which work is distributed among participating nodes. When you delve into computer networks, you come across the Byzantine Generals Problem, which deals with the problem of consensus. Consensus must be reached between participating computers to maintain network reliability. Of course, 100% consensus is ideal, but not always possible.

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The Byzantine General’s Dilemma

Several generals besieged the enemy’s castle. They must attack or retreat at the commander’s orders. For an operation to be successful, there must be an agreement among the generals. Commanders and other generals communicate through messengers that may be caught in the middle. Moreover, some generals, including the commander, may betray him. If the commander is loyal and the number of treacherous generals does not exceed 1/3 of the total, an agreement to attack or retreat can be reached at the same time.

Simply put, if t is the number of betrayed generals, there should be a total of 3t + 1 general.

General 1 will receive mixed information from the commander and the betraying general 2. It is impossible to reach consensus (more than 50%) in this situation.

The Bitcoin system has a similar problem with the Byzantine Generals Dilemma. To avoid this problem, Satoshi Nakamoto introduced the concept of proof-of-work. When you send a message, the message is hashed and a nonce is sent to all nodes to verify the proof-of-work. Since all messages (e.g. blocks) are chained, tampering is almost impossible.

Bitcoin follows a decentralized, peer-to-peer network and decentralized model. For the smooth operation of the network, consensus among nodes is required. Even if there are many “bad” nodes, the blockchain cannot be changed due to proof-of-work.

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