Decentralisation & The Peer-to-Peer (P2P) Network
The core principle of decentralisation is the removal of a central, controlling body, whether that be an entity in the form of a financial institution (i.e. a bank), a “trusted third party” in the form of a payment provider, or an individual middle-man between the sender and the receiver of a transaction.
One type of decentralised system like this has existed for many decades.
Known as peer-to-peer – P2P for short – this network consists of, in its most simplified definition, two or more computers connected to one another and sharing all types of data.
Torrent file-sharing, which is widespread and allows users to download music, movies, documents and other types of files, is based on a P2P network.
P2P technology has a long history.
As a fault-tolerant network, P2P was initially designed for the purpose of transmitting military messages without any vulnerability to human fatality, natural phenomena or technical malfunction.
Its primary feature is its autonomy – in other words, its inherent decentralised nature.
A P2P network has no centralised authority or regulatory entity that monitors, facilitates or controls any of the data that is shared between the two peers.
Who has created ‘Cryptocurrency’?
Emerging from the world of cryptography in the mid-2000s, the mysterious Satoshi Nakamoto is credited as the mastermind creator behind bitcoin the currency, and Bitcoin the network.
Is that his real name? Is he Japanese? American? Is he or she, in fact, a lot of people merged under one pseudonym? To this day, no one knows.
As a direct response to the financial crisis of 2008, Satoshi Nakamoto envisioned a new and decentralised digital currency system he called bitcoin.
In October 2008, Nakamoto published a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” which detailed a payment system based on chains of data blocks (later to become known as blockchain) and the removal of third parties between transactions.
It came at a perfect time, of course, because a lot of people had lost trust in traditional financial institutions due to the crisis.
Nakamoto’s proposal detailed how the new system would function without financial institutions, how a peer-to-peer network would resolve the issue of double spending and what this new system would mean for transactional privacy.
A few years after his proposal, Satoshi Nakamoto stopped being involved in the development of bitcoin and completely disappeared from all public forums.
Is Cryptocurrency a safe asset?
You’ve heard the term “trusted third party” before, right?
Traditionally speaking, this third party is the mediator between any customer and any merchant.
Banks and financial institutions or online payment processors are conventional third parties that help facilitate transactions.
Naturally, any transactions that involve people’s money must be built on trust.
After the 2008 financial crisis, this core principle was shaken as the concepts of fraud and disputes became more prominent.
Traditional trust constitutes good faith towards the middle man; should any disputes or claims of fraud arise, it is up to this intermediary to settle them.
The system works relatively well, but merchants end up incurring costs, customers are asked for more information, and transactional fees increase.
Coupled with the fact that the traditional trust system took a hit after 2008, Satoshi Nakamoto came up with the Bitcoin Network as a new kind of trust system, based on the P2P network.
Integral to the mechanics of Bitcoin, proof-of-work (or POW) is Satoshi Nakamoto’s ingenious workaround for confirming the blocks of transactions.
The trust that is traditionally extended to financial institutions is transferred to the decentralised nodes (or computers) on the P2P Bitcoin network.
These nodes validate and group transactions into blocks.
In order to include the block in the ledger (blockchain), these nodes need to solve a “cryptographic puzzle”.
This is done by hashing the information in the block to satisfy specific conditions.
For example, one such condition is that the resulting cryptographic hash has to be less than a specified number.
Since this type of proof-of-work involves a lot of trial and error, the approach is called bruteforce – meaning all possible solutions are exhausted until the correct one is found.
The idea behind POW first emerged in the early 90s.
By 1999, the first appearance of the official term was documented, and while appearing in various forms, it became increasingly popular when Satoshi Nakamoto integrated it into Bitcoin, amending it to include the decentralised node verification system.
Cryptocurrency – Distributed System
In computer networks there are mainly two architectures: client server and peer-to-peer.
We have already covered P2P, which is the main foundation for Nakamoto’s Bitcoin network – and it was clear from the start that Bitcoin will not be based on a clientserver protocol, as that is a centralised environment where the applications, files and other resources are stored on a central computer, the server.
So, what did Nakamoto do to replace the second main architect model?
He came up with a relatively innovative alternative: the distributed system.
The Bitcoin network follows this distributed application model, wherein the work load is spread among the participated nodes (or computers) – without a central server.
In order to maintain reliability in the network, a consensus must be reached among the participating computers.
Although 100% consensus is ideal, it is not feasible every time.
When “digging” into computer networks, one will come across the Byzantine Generals Problem.