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Cryptocurrencies 101

by Dan Robles on July 4, 2015

aliceTo describe how Cryptocurrencies would be applied by Professional Engineers, we need to start with a brief discussion on cryptocurrencies and blockchains.

Cryptocurrencies 101

It all starts with something called a hash. Basically, a computer program generates a large random number.  Then a key generation program fashions the random number into keys that are mathematically related to each other – so the keys recognize each other.

One key becomes the public key, and the other becomes the private key.  As the names suggest, the Public Key is made available to everyone via a publicly accessible repository or directory while the private key remains in the possession of the owner.

For example, if Bob wants to send sensitive data to Alice, and wants to be sure that only Alice may be able to read it, he will encrypt the data with Alice’s Public Key. Only Alice has access to her corresponding Private Key and therefore is the only person who can decrypt the encrypted data back into its original form. Even if someone else gains access to the encrypted data, it will remain confidential as they should not have access to Alice’s Private Key.

There are many ways to arrange cryptographic keys in a relationship, or even among additional operations with Boolean logic such that: If A and Not B, then C.  Such logic statement are the basis of a new form of production delivery called “Smart Contracts”.

Blockchain 101

However, cryptographic key sets are only part of the solution.  In order for a contract to be valid it needs to be recorded or institutionalized to some type of ledger or accounting statement which is equally secure, protected, maintained, and most importantly, it must be consensus from the users that the ledger is valid.

A Blockchain is sort of like a metronome that marks time.  Once a block of time passes, a new block starts.  The motion is caused by what are called “miners”. Miners are computers tasked with solving a difficult puzzle.  When the puzzle is solved, a new block is formed and the solver gets a prize – often called a coin.  Once a block is closed, it can never be reopened – the contents can be viewed by the users (to maintain consensus), but they cannot be changed.  They are cryptographically Sealed for all eternity.

These coins are often mistaken for money because they have some of the characteristics of money such as like creating an incentive to perform work.  Unfortunately, they do not have all of the characteristics of money such as possessing an intrinsic “earthbound” value.  Neither is the value trivial – the etherial value of the coin is proportional to all the things you can do with cryptocurrency that you cannot do without cryptocurrency.

The Blockchain protocol moves along opening and closing blocks that form a long chain that records every transaction that ever occurred since the so-called “Genesis” block.  Users interface now being developed for various blockchains incorporate features such as personal wallets and exchanges.  The current problem with most cryptocurrencies, despite their utility, is the limited number of people who are willing to part with their dollars in preference for the coin.  This is called the “liquidity crisis” and remains a problem yet to be solved.

In short, the blockchain protocol solves the broker/handshake dilemma with cryptography and incentives.  Social behaviors are still adjusting.

 

 

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