chapter twelve

12 Crypto as in cryptocurrency?

 

This chapter covers:

  • What cryptocurrencies are and how they were made possible thanks to consensus algorithms.
  • The different types of cryptocurrencies that exist.
  • How the Bitcoin and Diem cryptocurrencies work in practice.

Can cryptography be the basis for a new financial system? This is what cryptocurrencies have been trying to answer since at least 2008, when Bitcoin was proposed by Satoshi Nakamoto (who to this day has yet to reveal their identity). Before that, the term "crypto" had always been used in reference to the field of cryptography. But since the creation of Bitcoin, I have seen its meaning quickly changing and being used to refer to cryptocurrencies. Cryptocurrency enthusiasts, in turn, seem to get more and more interested to learn about cryptography. Which makes sense, as cryptography is at the core of cryptocurrencies.

But first, what’s a cryptocurrency? It is two things:

12.1 A gentle introduction to Byzantine fault-tolerant consensus algorithms

12.1.1 A problem of resilience - distributed protocols to the rescue

12.1.2 A problem of trust - decentralization helps

12.1.3 A problem of scale - permissionless and censorship-resistant networks

12.2 How does Bitcoin work?

12.2.1 How Bitcoin handles user balances and transactions

12.2.2 Mining bitcoins in the digital age of gold

12.2.3 Forking hell! Solving conflicts in mining

12.2.4 Reducing a block’s size by using Merkle trees

12.3 A tour of cryptocurrencies

12.4 DiemBFT: a byzantine fault-tolerant consensus protocol

12.4.1 Safety and liveness, the two properties of a BFT consensus protocol

12.4.2 A round in the DiemBFT protocol

12.4.3 How much dishonesty can the protocol tolerate

12.4.4 The DiemBFT rules of voting

12.4.5 When are transactions considered finalized?

12.4.6 The intuitions behind the safety of DiemBFT

12.5 Summary