By Jess Worsley
This article can also be found in the print Edition 2 of VARSITY Newspaper.
Over the last few years you’re most likely to have heard of the enigmatic internet entity that is cryptocurrency. Whether it’s never escaped the back of your mind or whether you’re an active Bitcoin trader, you’ll know that its advantages lie in it being a secure and decentralised form of currency.
The system is similar to a public ledger to which any user can add entries. Each user has a digital signature with which they can approve transactions, which depends on the specific transaction as well as the user’s own secret key. To prevent people from copying the same message, each transaction also has its own unique code. Verifying the validity of a transaction is then just a case of ensuring that the secret key used to generate the signature corresponds to the user’s public key, which anyone can access.
These layers of security make it almost impossible to add fraudulent transactions. You’d have to guess someone’s digital signature by brute force – and there are 2^256 possibilities. That’s a stupidly big number, larger than the number of atoms in our galaxy, so you’d be guessing for quite a while.
In order to maintain a decentralised system, each user broadcasts their transactions for miners to solve. Miners listen out for pending transactions and race to compute the next ledger – referred to as a block – which they then broadcast to the network. Bitcoin miners solve a block every 10 minutes, but newer currencies like Ethereum solves blocks every 15 seconds. When a miner solves a block, they receive a block reward as well as a transaction fee, incentivising their solving.
Knowing which broadcast to trust relies on something called ‘proof of work’. This is the amount of computational work required to find a specific input that gives a low-probability output. In other words, it proves that the computer ‘broke the code’. The function that converts the input is called a cryptographic hash function and what makes it cryptographic is that it cannot just be reversed to find the original output. This means I can only crack the code by guessing the input and applying computational work. As more blocks are added, these blocks form a chain. If anyone tries to change anything in the blockchain, they’ll change all the blocks down the line and have to redo all the computational work. This is pretty much foolproof because one fraudster will always be outnumbered by the rest of the users on the network, who will contribute to the blockchain at a much faster rate. Democracy wins.
As a general rule, the longer the chain, the more trustworthy the transactions and this vast network helps to keep cryptocurrency secure. This summary barely scratches the surface of cryptocurrency and there are many other resources you can check out if you’re interested, including Satoshi Nakamoto’s original Bitcoin paper. It’s a young and fast-growing field and while we may be watching it cautiously – Bitcoin is dropping ominously at the moment – it is undeniably a hotbed of innovation that has the capacity to change the world economy as we know it.