Blockchain - Revealing the Myth

1. 00:00In our openHPI course "Blockchain: Revealing the Myth", we now consider the second
2. 00:07component of the bitcoin system - the blocks and the chain of blocks.
3. 00:13Let's shortly review that we already discussed that there is a majority decision
4. 00:19by the longest chain of
5. 00:25the history of the transactions.
6. 00:28We have no central authority, there is no trusted third party,
7. 00:33all transactions are publicly announced, users are pseudonymous,
8. 00:39and we have a system for participants to agree on a single history
9. 00:44of the order in which transactions were received and the majority decision is represented
10. 00:51by the longest chain in which the greatest proof of a work effort is invested.
11. 00:58In order to prevent fraud in order to prevent double spending
12. 01:02a peer to peer distributed timestamping is used that generates a computational proof
13. 01:09of the chronological order of the transactions and the transactions
14. 01:14that are computationally impractical to reverse protect sellers from fraud.
15. 01:23The system now we have, but if we would implemented and uses in practice
16. 01:28it would be much too slow. If you think for each transaction this
17. 01:34proof of work need to be done too inter-connected,
18. 01:38so we cannot do this every time a new transaction arrives.
19. 01:44So the users have to solve a computational complex task
20. 01:50and to cryptographically link by generating hashes all the
21. 01:55transactions individually with each other.
22. 01:59And exactly to make this process more efficient,
23. 02:03each user first collects a number of received transactions
24. 02:09into a so-called block.
25. 02:11A block of a specified size.
26. 02:16And then work on finding a difficult proof of work for this new block
27. 02:22is done and this proof together with a hash of the previous block
28. 02:27are added to the new block.
29. 02:29So we have here exactly behave in the same way like we explained
30. 02:37on the level of transactions. Now to make the system more efficient,
31. 02:41we do this on the level of blocks and blocks are a collection of a transactions
32. 02:48received with the users.
33. 02:52Now let's have a closer look to this computational task that demands
34. 02:59a huge CPU effort work.
35. 03:02Like previously we mentioned this work proves
36. 03:08that the block chain is in the right order and makes it difficult to manipulate.
37. 03:16How this computation tax looks like? And this computational task
38. 03:22consists of simply trying out a number of hash values
39. 03:27to find a value that corresponds to a given target.
40. 03:32You remember, hash functions are one-way functions, so one can
41. 03:36do something and computes a hash value than can manipulate
42. 03:40and then the next hash value is computed. Here we insist that the resulting hash value
43. 03:48is below a given target.
44. 03:53To do this, the user needs something to change
45. 03:59the block, to change the block for providing a new hash
46. 04:04and of course this could not be as a transactions and other important information,
47. 04:09so there is a nonce edit.
48. 04:13So an arbitrary number which is called a nonce and this is used together
49. 04:19with the information inside the block to compute the hash.
50. 04:25And this nonce can be changed to come up with
51. 04:30a new hash value which is hopefully below of the target.
52. 04:37So this nonce, this is typically combination of symbols
53. 04:43that is only used once in the respective context in this context is
54. 04:49to provide the possibility to vary
55. 04:53in the hash values of a block without touching the transactions inside the block.
56. 05:01So if result at hash isn't below of the target
57. 05:07the user keeps trying to incrementing the nonce in the block
58. 05:12until a value is found that gives the block a hash
59. 05:16that is below of the target and this can be seen that it starts with the required
60. 05:24zero bits. The smaller the number of the more
61. 05:28zeroes we have. So here this is the idea
62. 05:33and incrementing the announce does not mean that the hash value is incremented
63. 05:39because the hash value does not content depend from the content
64. 05:46of the value. So in this way we have a block
65. 05:51and we add this nonce, we compute the hash,
66. 05:56the hash its here if we look to hexadecimal numbers we have a target,
67. 06:04a target, this is where we have to find a nonce that our hash
68. 06:10is below of the target.
69. 06:12You see here is the number of zeros,
70. 06:16this gives the size of the target and we have to find a nonce
71. 06:25set the hash value of the block
72. 06:29with all the credentials with all the transactions plus a nonce
73. 06:33is smaller sends the target and if not we have to redo.
74. 06:40So if this proof of work would be too easy to solve,
75. 06:46we would get a large number of forks, because many people come
76. 06:50up with the result eventually working with other
77. 06:54with other collections of transactions inside the block, so
78. 06:59this needs to be prevented. So there should be a gap
79. 07:03between the different block creations
80. 07:07in the bitcoin system, ten minutes are considered as a good gap
81. 07:13to save for stability of the network and not get too much forks.
82. 07:22so the computational task need so difficult that it needs
83. 07:29around ten minutes to find the solution that needs a huge amount of
84. 07:36CPU power, it needs a huge amount of energy to provide this.
85. 07:43So the solution implemented in bitcoin system is to vary
86. 07:48the proof of work difficulty, that means to adjust the target
87. 07:53according to the change in the hash rate of the network.
88. 07:58So it is ruled in the bitcoin that the target
89. 08:03adjust every two thousand and sixteen blocks.
90. 08:07This is roughly produced in two weeks
91. 08:10such that ten minutes are required to create the new block,
92. 08:15so that the target could be made more difficult to reach, can be
93. 08:20changed every two thousand and sixteen blocks to hold this gap,
94. 08:24stable this gap of ten minutes between the production of new
95. 08:30blocks remained stable.
96. 08:34If the computing power of the entire network increases,
97. 08:38or eventually decreases and the two thousand and sixty blocks
98. 08:41are found in less or more than two weeks, then the level of difficulty is raised
99. 08:48or lowered accordingly. So in this way as
100. 08:53a stable increase on the chain of the blocks can be guaranteed.
101. 09:00Now the question is what is the incentive
102. 09:04for the users to stay honest?
103. 09:08To encourage them to stay honest, to expend a lot of CPU power, to expend electricity
104. 09:18by forming such blocks.
105. 09:21Such valid blocks. It's a huge work it's a huge amount of energy
106. 09:27and it's needed, otherwise we could not run our peer to peer network
107. 09:33in a safe way.
108. 09:36It would be definitely wrong to assume that all users act rationally
109. 09:41and follow the set rules strictly
110. 09:44only to have the option of a cash system without a third party
111. 09:50and using the peer to peer electronic cash system also for similar values.
112. 09:57So what is necessary? We have to have a closer look
113. 10:03to the network to discuss and understand what could be the incentives
114. 10:08for the users to stay healthy or to invest this proof of work in running
115. 10:16the bitcoin network in a correct stable way.
116. 10:22To summarize what we have had up to this moment,
117. 10:27to make the process of cryptographic linking more efficient all users first
118. 10:33collect transactions received a into a block.
119. 10:38So they do not this proof of work with every new transaction
120. 10:43they collect transaction into a block and then they do this work.
121. 10:49So the need to generate the hash of the block
122. 10:54and work on finding a difficult proof of work
123. 10:57forces a new block and this proof together with the hash of the previous block
124. 11:03are added to the new block.
125. 11:06So in the new block with adding the hash as as a proof of work
126. 11:12gives the other users information that this user who produced this block
127. 11:19has really invested this proof of work.
128. 11:27The proof of work is represented by a nonce, by an
129. 11:33additional value, which in combination with a block
130. 11:38after hash function gives a value that's below the current
131. 11:42target as a current target and here with announce one can play
132. 11:47and can look to find such a nonce said the hash of the block
133. 11:53and the nonce is below of the target and this target is adapted
134. 11:59from time to time in such a way that this proof of work
135. 12:05needs around ten minutes.

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