2022 Crypto Industry Panorama Outlook: Ledger Bitcoin vs. Blockchain

2022: Crypto industry panorama

Where it comes from, what it all means, and why it still matters.


One: ledger, Bitcoin, blockchain

a. Life in the database

What if you don’t like it?

c. Digital cash

Two: What does this mean?

a. Store of Value

b. Distributed Computers

c. Slow database

d. Web3

e. Non-auditable ledger

f. Digital scarcity

Three: the crypto financial system

a. Your keys, your coins, your hard drive in the dump

b. CeFi

c. Stablecoins

d. Decentralized Finance

e. Reinvention 2008

Four: trust, money, community

a. Trust

b. Money

c. Community

d. Finance

Not so long ago, I was thinking, “What if I misunderstand the whole thing about cryptocurrency?” “I’m a constant skeptical person, and to be honest, I don’t always understand this parallel universe that has permeated and expanded for over a decade. If you are a believer, this new space is the future. If you’re a skeptic, this upside-down world is just a modern-day Ponzi scheme that will end badly – and the recent “crypto winter” is proof that it’s long overdue to end. But crypto has gotten deep into finance, technology, and our minds. If cryptocurrency hasn’t disappeared, we’d better try to understand it. That’s why we asked the best financial writer, Matt Levine of Bloomberg Viewpoint, to write an entire issue for Bloomberg Businessweek, which only one author has done once in the magazine’s 93-year history (“What is Code?”). “,Paul Ford)。 What follows is his brilliant explanation of what this maddening, often absurd, and always fascinating technology means and where it might lead. —Joel Weber, editor of Bloomberg Businessweek


Ledger, Bitcoin, blockchain

Life in the database

Modern life includes most of the entries in the database.

If you have money, what you have is an entry in the bank’s database that states how much money you have. If you hold stocks, then what you do have is usually an entry on a list – kept by the company or, more likely, some central intermediary1 – who owns the stock.

Note 1:

These intermediaries include Depository Trust & Clearing Corp., which owns the majority of most U.S. companies on behalf of other owners. If you own shares, what you own is an entry on the DTCC list that entitles you to some of the shares held by the DTCC and an entry on the company’s list of how many shares it owns.

If you own a house, the situation will be slightly different. Your ownership of that house may be recorded in a database; In the U.S., this usually means that in a filing cabinet in the basement of a county clerk’s office, there’s a record of your purchase of a house — your title. (It’s not a great database.) In many ways, the most important thing here is the house: you have the key to the front door; Your stuff is there; Your neighbors won’t be surprised to see you leave the house in the morning, and they won’t be surprised to see other people come back. But in many other ways, what matters is the entry in the database. Banks will want to make sure you have ownership before giving you a mortgage; Before paying you for the home, the buyer will want to follow the proper procedures for that record. Just having the keys is not enough.

There are also examples of many other things. Much of modern life happens online. The theory that “your social life, your career, and your reputation are contained in Meta and in Google and Microsoft’s databases” isn’t entirely true, but it’s not entirely wrong either.

Some of them are related to computers. It is much more convenient to put money into a computer entry than bags of gold or even paper money. However, some of them have deeper meanings than that. What does it mean to own a house? One possibility is the state of nature: owning a house means 1) you’re in the house, and 2) if someone else tries to move in, you’re bigger than them, so you can kick them out. But if they’re bigger than you, now they own a house.

Another possibility is what you might think of as a village. Owning a house means you live there, your neighbors know you live there, and if someone else tries to move in, then you and your neighbors combined are bigger than they are. Homeownership is socially mediated by a network of highly trusted peers.


Photos of the suburbs. In this kind of community, everyone knows your name.

The third possibility is what you might think of as government. Owning a house means that the government thinks you own the house, and if other people try to move in, then the government will kick them out. 2 Home ownership is socially mediated by the government. The database is a way for governments to keep track. You don’t have to trust any particular person; You have to believe in the rule of law.

Note 2:

You don’t need to live there, because the knowledge of the government is enough. You can rent out the house: others can move in with your permission. If you revoke the permission, you can go to the government and it will – according to the landlord-tenant law, etc. – evict the person.

Money is also a bit like this form. A bag of gold is a fairly simple form, but they are heavy. A system where your trusted banker keeps your sacks for you, writes you letters of credit, and you can utilize these letters at bank branches run by your banker’s cousin – and that’s good, although it depends on trust between you and the banker, and the banker and the banker’s cousin. A non-personal banking system in which the teller is a stranger and you may use an ATM anyway requires trust in the system that the bank will function properly because it is subject to government regulation or limited by reputation or market forces.

To say that modern people live in databases means, above all, that modern life involves a lot of trust.

We trust the maintainers of the database.

Sometimes it’s because we know them and think they are trustworthy. More often than not, this means that we have an abstract sense of trust in broader systems, legal and database systems, and trust itself. We assume that we can trust the systems we use because it is easier to live by doing so than not trusting them, and this assumption is mostly doable. This is a great and underrated achievement for our most trusted database administrators, and they are mostly trustworthy.


Mark Zuckerberg, Sundar Pichai, Christina Lagarde, Cathy Wood


Bernie Madoff

What if you don’t like it?

i. Distrust

But we don’t always trust them, and they don’t always trust.

Sometimes they are not. You can’t trust some banks to keep your money for you, and there are places where you can’t trust the rule of law to regulate them. Some governments will confiscate your money from banks, or falsify election results, or change property registries and take your house. Some social media companies freeze your account arbitrarily, and you can’t trust it. Most of the time, most people in the United States live in a high-trust world where it’s easy and reasonable to trust that the middleman running the database that affects our lives will perform well. But not everyone everywhere lives like this.

Even in the United States, trust is fragile. The 2008 financial crisis caused enormous and lasting damage to the trust that many people had in the banking system. People believed that banks would do something good, safe, and good for society, and it turned out that they were doing crazy and risky things, which led to an economic crisis. After that, it became increasingly difficult for many people to trust banks to hold their savings.

Also, despite this, you may have philosophical objections to trust. Even if your bank has an absolutely perfect track record of tracking your money, it may not be good enough for you. Your bank is a black box for you. “How do I know you’re going to give me my money back?” You can ask the bank. Banks will say things like “This is our audited financial statements” and “We are regulated by the Federal Reserve and insured by the Federal Deposit Insurance Corporation.” “We never don’t refund anyone’s money.” You say, “Yes, yes, that’s okay, but how do I know?” “You don’t know. Trust is built in the system, which is a prerequisite. You may need proof. 3

Note 3:

This could be modern desires, or at least modern desires that are stronger and easier to satisfy. In a world without the Internet, without Wikipedia, without links, without open source software, etc., you have to believe a million facts every day; What are you going to do and check them all?

ii. Composability

Even if you usually trust the maintainers of modern databases, you may have more technical objections. These databases are not always good. A lot of banking systems are written in Cobol, a very old computer language. In the United States, people still often pay by writing paper checks and putting them in the mail – electronic transfers between electronic money databases. U.S. stock trading takes two business days to settle: if I buy shares from you on Monday, you deliver the shares on Wednesday (which I pay you). This is not because your broker has to put stocks in a bag and take them to my broker’s office, and my broker puts dollar bills in a bag and brings them to your broker’s office, but because the actual process is even more backward than that. It’s slow and manual, sometimes screwing up; Many stock exchanges “fail”.

Don’t let me start talking about property registration. If you buy a house, you have to attend a ceremony — a “closing ceremony” — where a group of people working like “title company lawyers” murmur a mantra to get you to own a house. This can take several hours.

If your model of how your database should work comes from modern computers, the time of the spell seems crazy. “There should be an API,” you might think: there should be an application programming interface that allows each of these databases to interact with the others. If your bank is considering offering you a mortgage, it should be able to automatically consult the property database and find out if you own your home, rather than sending a lawyer to the county clerk’s office. It should be able to automatically inquire the Motor Vehicle Registry and obtain your driver’s license for identification, as well as automatically inquire your brokerage account and check your assets.


What if we used modern software engineering principles to rewrite all databases from scratch in a modern computer language, with the goal of making them interact seamlessly with each other?

If you do, it’s almost like having a database, a living database: I can give you money in exchange for your house, or you can give me social reputation in exchange for me taking online courses, or whatever, all in the same computer system.

It will be convenient and powerful, but it will also be terrible. This puts more pressure on trust. In a sense, whoever runs that database will run the whole world. Who can you trust to do this?

What if there was a database and everyone ran it?

Digital cash

In 2008, Satoshi Nakamoto invented “cryptocurrency” by releasing a way to make databases accessible to anyone.

Well, I’m not sure what Satoshi Nakamoto thinks he’s doing. He most directly invented Bitcoin: the peer-to-peer electronic cash system, which was the title of his famous white paper.

Bitcoin: Peer-to-Peer Electronic Cash System: Satoshi Nakamoto White Paper


Satoshi Nakamoto’s white paper.

Satoshi Nakamoto said he invented a form of cash for internet transactions, “an electronic payment system based on cryptographic proofs rather than trust, allowing any two voluntary parties to transact directly with each other without the need for a trusted third party.” “If I want to buy something from you with digital cash — bitcoin — I just send bitcoin to you, you send it to me; There are no “trusted third parties” such as banks involved.

When I say this, it sounds as if Satoshi Nakamoto invented a system where I can send you bitcoins without anyone else participating. What he actually invented was a system that involved a lot of other people.

i. Digression: What the hell are you reading? Why are you reading it? Why am I writing about it?

Hello! I’m Matt. I am a former lawyer and investment banker. Now I’m a columnist for Bloomberg Opinion. In my day job, I write about finance. I love finance. It’s fun to write. It’s a unique way of looking at the world, a series of puzzles, a set of structures that people impose on economic reality. Often, these structures are mysterious and offensive, and it is satisfying to understand what they are doing. Everything in finance is built on many other things in finance. Everything is strange and counterintuitive, and you often need to know financial history and market practices to understand why someone would do whatever they were doing.

The most polarizing thing in the financial world over the past few years has been cryptocurrencies. Crypto is a collection of ideas, products, and technologies derived from the Bitcoin white paper. However, let’s be clear, a set of lines on the chart is also rising. When Satoshi Nakamoto invented Bitcoin, one Bitcoin had zero value: it was just an idea he made up. At its peak last November, one Bitcoin was worth more than $67,000, with the total value of all cryptocurrencies in circulation being around $3 trillion. Many of the early people who entered cryptocurrency quickly became very wealthy and very annoyed by it. They bought Lamborghini and the island. They are happy with themselves: they see cryptocurrencies as the future, they are building the future, and they are getting appropriate and adequate returns for it. They say things like “enjoy poverty” and “NGMI” (“will not succeed”) to people who do not own cryptocurrencies. They are right and rich, hope you know.

Many others don’t like cryptocurrencies. They get the impression, which is not entirely unreasonable, that it is mainly used for crime or Ponzi schemes. They asked questions like, “What is this for?” ” and so on. Or “Where did this money come from?” Or “If you’re building the future, what’s the actual work you’re doing?” Or “If you’re building the future, why does it look so grim and scary?” Crypto people often reply: I hope you have a good time in poverty.”

Then, this year, those lines on the chart fell. The price of one Bitcoin falls below $20,000; The total value of cryptocurrencies dropped from $3 trillion to $1 trillion; Some of the big cryptocurrency companies crashed. If you are a cryptocurrency skeptic, this is very satisfying, not only to gloat, but also because maybe now everyone will shut up about cryptocurrencies, and you can go back to not paying attention to it. For crypto enthusiasts, this is just a reason to go the extra mile: this crash will shake up ordinary fans and allow true believers to build the future together.

In a sense, it’s a silly moment to talk about cryptocurrencies now because those lines have fallen. But now is actually a good time to talk about cryptocurrencies. There is a pause; There are some breaks. What is left in cryptocurrencies is more than speculation and get-rich-quick schemes. We can think about what encryption means – nothing to do with anything else, little by little, starting with the rising line.

Either way, I don’t have a strong feeling about the value of cryptocurrencies. I love finance. I think it’s funny. If you like finance – if you like to understand the structures that people build to organize economic reality – cryptocurrencies are amazing. This is a laboratory of financial intuition. Over the past 14 years, crypto has built a complete financial system from scratch. Cryptocurrencies are constantly reshaping or rediscovering what the financial industry has been doing for centuries. Sometimes it finds new and better ways of doing things.


Matt Damon in front of the blackboard in Mind Catcher

It often finds worse ways to go down a dead end that traditional finance tried decades ago, with hilarious results.


Matt Damon

It usually finds more or less the same solution that traditional finance comes up with, but with a new name and a new interpretation. You can look at some cryptocurrencies and find out what traditional financial things it replicates. If you do, you can learn a little about the crypto financial system — for example, you can make an informed guess about the problems that might arise with cryptocurrencies — but you can also learn a little about the traditional financial system: crypto replicas will give you a new perspective on financial originality.

Also, I have to say that as a person who writes about finance, I have a soft spot for stories of fraud and market manipulation, and smart people praise slightly less intelligent people. The stories are often funny, instructive, and especially interesting. The crypto industry has a lot of such stories.

So, now, I’ve written a lot about encryption. Including a lot right here.

I need to give you some warnings. First of all, I will not write as a deep encryption expert. I am not a true believer. Before I started writing this, I didn’t have any cryptocurrency; Now I own about $100 in cryptocurrency. I wrote about encryption as a person who enjoys human ingenuity and human stupidity, and found a lot of both in encryption.

Instead, I didn’t sit down and write 40,000 words to tell you that cryptocurrencies are stupid and worthless and will disappear without a trace. That would be a strange way to use time. My goal is not to convince you that crypto is building the future, and if you don’t join, you’ll always be poor. My goal is to convince you that crypto is fun, that it discovers something new about some old questions, and even if those things are wrong, it’s instructive that they’re wrong.

Also, I’m a finance guy. In my opinion, 14 years have passed, cryptocurrencies have a fairly developed financial system, I will talk a little about it, because it is quite developed, and I like finance.


Crowd at a Bitcoin conference in Miami in April 2022

The financial system is a series of databases. This is a way to shuffle claims for tangible items; It is an accessory to the real world. If a financial system makes it easier for farmers to grow food, makes it easier for families to own homes and businesses to make great computer games, if it helps create and distribute wealth in real life. If a financial system trades abstract claims to enrich traders but not anyone else, then it is bad.

Over the past 14 years, a prominent question in the crypto space is: what is it for? If you ask examples of businesses that actually use cryptocurrencies, the answer you’ll get is mostly financial operations: “Well, we’ve built a really great exchange for trading cryptocurrencies.” “Cool, okay. Sometimes, these answers seem to be about creating or distributing wealth: “Cryptocurrencies allow immigrants to send money cheaply and quickly.” “That’s good. They are usually about effective gambling. Gambling is addictive, but a financial system that is purely related to gambling can be limited.

Meanwhile, the most ardent proponents of cryptocurrencies say that cryptocurrencies are about building something real and useful. Encryption will redefine social relationships, gaming, and computers. It will build the Metaverse. Encryption is an important part of the next leap of the internet; The crypto industry will build “web3” to replace our current “web2.” Maybe? If you ask an example of a business that actually uses crypto, you get tons of real, profitable financial operations, followed by some vague theoretical thinking like “Okay, maybe we can build a social media network on web3?” ”

It’s still early. Maybe someone will build a really good social media network on web3. Perhaps in 10 years, crypto, blockchain, and tokens will be at the heart of everything done on the internet, and the internet will be (even more than now) at the heart of everything done in human life, while the early adopters of crypto will all remain right and rich, and the rest of us will enjoy staying poor, and schoolchildren will say, “I can’t believe anyone ever doubted the importance of Dogecoin.” ”

I don’t want to belittle that possibility, I do want to speculate a little and maybe sketch out what that might mean. I’m not going to give you a roadmap of how we got there. I’m not a techie, nor am I a true believer. But it’s worth trying to understand what encryption means for the future of the internet, because the meaning is sometimes utopian, sometimes dystopian, and sometimes just a moderately more effective base layer of what you do. Plus finance is cool, and it’s cool now.

ii. Digression: Names and people

Before we continue, let me say something about some names. First, “cryptocurrency”. I’m writing about this here: it doesn’t have a good name. The standard name I would use a lot is crypto, which I guess is an abbreviation for “cryptocurrency”. That’s not a good name because 1) it emphasizes money, and a lot of crypto isn’t particularly about money, and 2) it emphasizes cryptography, and while cryptography is about cryptography in a deep sense, most people don’t do that in the crypto industry with a lot of cryptography. You can be a crypto expert, crypto billionaire, or a leader in cryptography, but don’t know much about cryptography, and people who are cryptography experts sometimes feel a little bad about cryptocurrency people stealing their prefixes.

There are other names for various topics in cryptocurrencies-


“Blockchain” “DeFi” “web3” “Token” “Metaverse”

They are sometimes widely used to refer to a lot of things that happen in cryptocurrencies, but they are also not very good. Therefore, I will mainly stick to “encryption” as a generic term.

Second, “Satoshi Nakamoto”. It was a pseudonym, and since then, whoever wrote his white paper has done a pretty good job of keeping himself, herself, or their own pseudonym. (There is a lot of speculation about who the author might be.) Some of the more interesting suggestions include Elon Musk and a random computer engineer named , uh, Satoshi Nakamoto. I will call Satoshi Nakamoto “Satoshi” and use his/his pronouns because most people do. )

A related point. Except (maybe?) Satoshi Nakamoto, basically everyone involved in cryptocurrency is a very interesting character. To be sure, if you read an article about encryption, it will contain very “wild” characters. (A Bloomberg Businessweek report last year mentioned “sending billions of dollars to Bahamian banks of Inspector Gadget co-founders in exchange for digital tokens summoned by the guy Mighty Ducks and run by executives targeted by U.S. criminal investigations.”) Except for this! There won’t be a single exciting person in the whole story. My goal here is to explain encryption so that when you read about a duck doing encryption, you can understand what he’s doing.

iii. Digression: “Cryptography” in Encryption

Cryptography is the study of secret information, encoding and decoding. Most of what I’m talking about in this article is not about cryptography. It’s going to be about, you know, a Ponzi scheme. But the underlying layer of encryption is really about cryptography, so understanding it will help.

The basic thing that happens in cryptography is that you have an input (a number, a word, a text string) and then you run some function on it and it produces a different number or word or whatever else as output. The function could be the Caesar cipher (which moves each letter of a word one or more positions in the alphabet so “Caesar” becomes “Dbftbs”) or pig Latin (moves the first consonant of a word to the end and adds “-ay, so “Caesar” becomes “Aesar-say”), or something more complex.

A useful feature of cryptographic functions is that they are “unidirectional”. 4 This means that it is easy to convert the input string to the output string, but it is difficult to do it in reverse; Calculating functions in one direction is easy, but impossible in the other. (The classic example is that multiplying two large prime numbers is very simple; Decomposing a large number into two large primes is difficult. Caesar ciphers are easy to apply and easy to reverse, but some forms of coding are easy to apply, and many are harder to reverse. This makes them more suitable for passwords.

Note 4:

This makes more technical sense than what I’m using here. The one-way functions I am talking about in the article are, more strictly, unidirectional functions that we want to base on current understandings of computer technology, mathematics, and cryptography.

An example of this is the “hash” function, which takes some input text and converts it into a long number of fixed size. So I can run a hash function in this post — a popular one called SHA-256, which was invented by the NSA5 — and generate a long, incomprehensible number from it. (To make it more difficult to understand, it is customary to write this number in hexadecimal so that its numbers can go from 0 to 9, and “a” to “f.”) I can send you this number and say, “I wrote an article and ran it through the SHA-256 hashing algorithm, and it turned out to be this number.” “You have the number, but you can’t tell whether it’s heads or tails. In particular, you cannot put it into a computer program and decode it, thus transferring the hash value back to this article.

Note 5:

If you want to try it yourself, there are various SHA-256 calculators online; One in Xorbin.com. Or, if you want to program it yourself, or do some hashing with pencil and paper, there is a US government publication (FIPS PUB 180-4) that details the algorithm. (Or maybe it’s on Wikipedia.) )

The hash function is unidirectional; Even if you know the hash function, the hash will not tell you anything about the article. The hash function is basically a scramble of the data in the article: it takes each letter of the article, denotes it as a binary number (a series of bits, 0 and 1), and then scuffles around 0 and 1 many times, mixing them together until they are all messed up and unrecognizable. Hash functions provide clear step-by-step instructions on how to mix bits together, but they don’t work the other way around. 6 It’s like whipping cream into coffee: easy to do, hard to undo.

Note 6:

A simple example: one method of blending data together is called an XOR function and is used for “XOR”. If you apply XOR to two bits (1 or 0), return 1 if one of the bits is 1, or 0 if both are 1. Suppose you run XOR on the numbers 1100 and 0101, applying it first to the number in the first position of each number (1 and 0), then to the number in the second position (1 and 1), and so on. It returns 1001. Knowing the input, it is easy to calculate the output. But if you know that the output is 1001, you don’t know the input: they could be 1100 and 0101, or 0011 and 1010, or 1001 and 0000, or 1111 and 0110, and so on. If you take half of this post and XOR with the other half, you will encounter some confusion that is difficult to get back into the article. If you do this dozens of times, you have cryptography.

Applying the SHA-256 algorithm will create a 64-bit number for data of any size you can imagine. Here’s a hash of the full text of James Joyce’s 730-page novel Ulysses:


It is associated with “Hey! I’m Matt” takes up the same space:


But what if I write “Hi, I’m Matt” with a comma? And then:


“Hey!” There is no obvious relationship between the numbers. I’m Matt” and “Hi, I’m Matt”. The two raw inputs are almost identical; The hash output is completely different. This is a key part of the one-way hash function: if similar inputs map to similar outputs, it is too easy to reverse the function and decipher the message. But for practical purposes, each input maps to a random output. 7

Note 7:

Because hashes output a fixed number of numbers, two different inputs may map to the same hash. This is called a collision. But a 64-bit hexadecimal number allows for a lot of different hashes — 16^64, or about 10^77, or billions of times the number of atoms on Earth.

What is the point of a password that cannot be decoded? On the one hand, it’s a way of verification. If I send you a hash of this article, it won’t give you the information you need to recreate the article. 8 But if I then send you this article, you can put it into a computer program (SHA-256 algorithm) and generate a hash. The hash value you generate will exactly match the number I sent you. You say, “Aha, yes, you hashed that article.” “It’s impossible for you to decode the hash, but you can easily check if I’ve encoded it correctly.

Note 8:

Exercise for readers: I included some hashes of some text in this article, and I have talked about hashes for this article, but I did not include the hash of this article in the article. Why not? (Trust me, I want to do this.) )

This is stupid for the article, but the principle is useful. A simple everyday password is a password. If I have a computer system and you have the password to log in to the system, I need to be able to check if your password is correct. One way to do this is to have my system store your password and check what you enter against what I store: I have a small text file with all your passwords and “Password123” written next to your username, and you type “Password123” on the login screen, my system checks that what you enter matches the file and then logs you in. But it’s a dangerous system: if someone steals a file, they’ll have everyone’s password. I’m better off hashing the password. You enter “Password123” as your password when setting up your account, I run it via a hash function and return


I store it on my list. When you try to log in, enter your password and I hash it again, and if it matches the hash in my list, I let you in. If someone steals the list, they can’t decode your password from the hash, so they can’t log in to the system. 9

Note 9:

This is beyond the scope of here, but there are more cryptographic pleasures – “rainbow tables”, “salts”, etc. – that involve defeating or strengthening this security.

Hashing has many more cryptographic uses. One is a timestamp. Let’s say you predict some future event, and you want to gain trust when it happens. But you don’t want to tweet right now, “I predict the Jets will win the Super Bowl in 2024,” to avoid embarrassment or spoil the result or anything else. One thing you can do is write “The Jets will win the Super Bowl in 2024” on a piece of paper, put it in an envelope, seal the envelope, and ask me to keep it until Super Bowl 2024, after which you and I will tell me to either open the envelope or burn it. But that requires you and others to trust me.

Another trustless thing you can do is type “Jets will win the Super Bowl in 2024” into a cryptographic hash generator and it will output:


Then you can tweet,


Matt Levine’s tweet “This is the SHA-256 hash of the prediction I’m making: 64b70b0494580b278d7f1f551d482a3fb952a4b018b43090ffeb87b662d34847. ”

This is not a real tweet! But you can follow me on Twitter@matt_levine.

Everyone will say, “Well, aren’t you annoying,” but they can’t decipher your predictions. After a while, when the Jets win the Super Bowl, you can say, “Look, I said that a long time ago!” “You forward plain text of hashed tweets and predictions. If someone wants, they can go to the hash calculator to check if the hash really matches your prediction. Then all glory will be yours.

In addition to hashing, another important one-way function is public key cryptography. I have two numbers, called “public key” and “private key”. The numbers are long and seem random, but they are related to each other: using publicly available algorithms, one number can be used to lock a message, and the other can unlock it. The dual-key system solves a classic password problem: if the key I use to encrypt a message is the same one you need to decode it, then at some point I have to send you that key. Anyone who steals the keys in transit can read our information.

With public key cryptography, no one needs to share a key. The public key is public: I can send it to everyone, post it on my Twitter feed, and so on. The private key is private and I don’t give it to anyone. You want to send me a secret message. You write the message and run it through an encryption algorithm that uses 1) the message and 2) my public key (which you own) to generate the encrypted message you send me. I then run the message through a decryptor that uses 1) encrypted messages and 2) my private key (which only I own) to generate the original message that I can read. You can encrypt a message with my public key, but no one can decrypt it with the public key. Only I can decrypt it with my private key. (In your case, the feature is one-way, but I can reverse it with my private key.) )

A related idea is “digital signatures”. Similarly, I have a public key and a private key. My public key is published on my Twitter resume. I want to send you a message, I want you to know what I wrote. I run the message through an encryption program that uses 1) the message and 2) my private key. Then I send you 1) the original message and 2) the encrypted message.

The decryptor you used used 1) he encrypted the message and 2) my public key to decrypt the message. The decrypted message matches the original message. This proves to you that I encrypted the message. So you know I wrote it. I could have sent you a Twitter message directly, but this is more encrypted.

Imagine a simple banking system where bank accounts are public: there is a public list of accounts, each with a (public) balance and a public key. I say to you, “I control account number 00123456789 with $250 in it, and I’m going to send you $50.” “I sent you a digitally signed message that said ‘This is $50’ and then you decoded that message using the account’s public key, and then you know that I do control the account and everything is checked out. This is the basic idea of Bitcoin Core, although there are more complex ones.

iv. How Bitcoin works

The simple form of Bitcoin goes like this. There is a large list of public addresses, each with a unique label that looks like random numbers and letters, with some Bitcoin balance. One address may have the label “1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa”10 with a balance of 68.6 Bitcoin. The address acts as a public key. 11 If I “own” these bitcoins, it means that I have the private key corresponding to that address, which is a valid password to access the account.

Note 10:

This is famous in crypto lore, which is the address that received the first bitcoins. Presumably, it belongs to Satoshi Nakamoto.

Note 11:

The address is actually a hash of the public key. But “in reality, calling a public key hash a public key itself is a perfectly legitimate cryptographic term,” Vitalik Buterin, the creator of another major blockchain, Ethereum, wrote in a 2014 white paper explaining the project. Good enough for Vitalik, good enough for me.

Because I have the private key, I can send you bitcoins by signing a message to you with my private key. You can check the signature against my public key and the public list of addresses and bitcoin balances. This information is enough for you to confirm that I am in control of the bitcoins I send you, but not enough for you to find out my private key and steal my remaining bitcoins.

This means that I can send you bitcoins if you don’t trust me, I don’t trust you, or any of us trust the bank to verify that I have money. “We define an electronic coin as a digital signature chain,” Nakamoto wrote. The combination of a public address and private key is enough to define a coin. Cryptocurrency is called cryptocurrency because it is a currency derived from cryptography.


Satoshi Nakamoto said that Bitcoin is essentially a chain of signatures.

You’ll notice that all we’re doing here is exchanging a message and somehow calling its result currency. The traditional financial system is not much different: banks don’t move around bags of gold or even a lot of paper money. They are the guardians of the database. Roughly speaking, when I pay you $100, my bank sends a message to your bank telling it to update its ledger.

Similarly, in Bitcoin, messages change the (public) ledger of who holds what. But who maintains it? The rough answer is that the Bitcoin network — the thousands of people who use bitcoin and run its software on their computers — keeps the ledger in a collaborative and redundant way. There are thousands of ledgers; Each node on the network has its own list of how many bitcoins are in each address.

Then, when we make a transaction – when I send you Bitcoin – we don’t just do it privately; We broadcast it to the entire network so that everyone can update their list. If I send you a Bitcoin from my address and my signature on the transaction is valid, then everyone updates their ledger, adds a Bitcoin to your address and subtracts one from mine.

A ledger is really more than just a list of addresses and their balances; It is actually a record of every transaction. 12 The ledger is maintained by everyone on the network, tracking every transaction for themselves. 13

Note 12:

Actually that’s it, not a list of addresses and their balances at all. For the sake of convenience, I describe it this way in the body, you can reconstruct the list of addresses and balances from the record of all transactions, and people will do the same, but technically this is not the ledger of Bitcoin.

Note 13:

There is a section in the Bitcoin white paper called “Reclaiming Disk Space” about how the network can effectively compress some of the data it holds about old transactions using Merkle trees, all of which are beyond the scope of this article, but people often say “Merkle trees” in cryptocurrency.

That’s nice! But now, instead of trusting banks to keep your money ledger, you trust thousands of anonymous strangers.

What have we achieved?

Well, it’s not that bad. Every transaction can be proven to be correct: if I send bitcoin from my address to yours and sign it with my private key, the network will include the transaction; If I try to send Bitcoin from someone else’s address to yours, but don’t have the private key, everyone on the network can see that it’s fake and won’t contain the transaction. Everyone runs open-source software to update the ledger of verifiable transactions. Everyone keeps the ledger, but you can prove that every transaction in the ledger is valid, so you don’t have to trust them too much.

By the way, I’m saying that “everyone” keeps the ledger, which may have been roughly true in the early days of Bitcoin, but no longer so. There are thousands of people running “full nodes” who download, maintain, and verify the entire Bitcoin ledger on their own using the open-source, official Bitcoin software. But there are millions of people who don’t do this, just own some Bitcoin and trust that others will properly maintain the system. However, the foundation on which they build this trust is slightly different from what you trust with the bank. In principle, they can verify that everyone who verifies transactions is validating them correctly.

Also note that there is a financial incentive for everyone to be honest: if everyone is honest, then this is an effective payment system that can be valuable. If a lot of people are dishonest and put fake transactions in their ledgers, then no one will trust Bitcoin and it will be worthless. If Bitcoin has zero value, what’s the point of stealing Bitcoin?

This is the standard approach to cryptocurrencies: cryptocurrency systems try to use economic incentives to make people act honestly, rather than believing that they will act honestly.

That’s the bulk of the story, but it leaves some minor problems. Where do all the bitcoins come from? Suffice it to say, everyone on the network keeps a ledger for every Bitcoin transaction that ever happened, and your Bitcoin can be traced back through a series of previous transactions. But back to what? How do you start a ledger?

Another problem is that the order of transactions is important: if I have a bitcoin in my account, and then I send it to you, and then I send it to someone else, who actually owns the bitcoin? It may seem almost trivial, but it’s tricky. Bitcoin is a decentralized network that works by broadcasting transactions to thousands of nodes and there is no guarantee that they will arrive in the same order everywhere. If everyone can’t agree on an order, then bad things — “Double spending,” or people sending the same bitcoin to two different places — will happen. “Transactions must be publicly announced,” Nakamoto wrote, “and we need a system for participants to agree on a single history of transactions received.” ”

That system is blockchain.

v. Oh, blockchain

Every Bitcoin transaction is broadcast to the network. Some computers on the network — known as “miners” — compile transactions into groups called “blocks” as they arrive. At some point, a block version is like official: the list of transactions in that block, in the order in which they are listed, becomes canonical, becoming part of the official Bitcoin record. We say that the block has been “mined”. 14 In Bitcoin, a new block is mined approximately every 10 minutes. 15

Note 14:

In fact, when a block has “five confirmations”, it becomes very canonical: when it has been mined, then another block referencing it, then another block referencing that block, and so on, five times, so that the chain has lasted five blocks after the block in question.

Note 15:

You can view completed blocks online on any Block Explorer website. For example, the block 755965 mined on September 27 is basically a list of 2,466 transactions between different addresses. An address starting with bc1qns sent 0.0052 bitcoins to an address starting with 16qZC7; 39VgGL splits 0.012 Bitcoin between 14NrDK and 37o1E3; Wait a minute.

The miners then start compiling a new block, which will eventually also be mined and become official. This is where hashing becomes important. The new block will reference the block before it by containing the hash of the block – this confirms that the block before it 1) is correct and accepted by the network, and 2) arrives at the block before it in time. Each block will refer to the previous block in the chain – oh yes, a blockchain. Blockchain creates a formal record of which transactions the network has agreed to and in what order. The hash is the timestamp; They create an agreed sequence of transactions.

You can imagine a simple system to do this. Miners come up with a list of transactions every 10 minutes, and all computers on the Bitcoin network vote on them. If it gains a majority, it will become official and enter the blockchain.

Unfortunately, this is a bit too simple. There are no rules about who can join the Bitcoin network: anyone connected to a computer and running open-source Bitcoin software can join. You don’t have to prove that you’re a good person, or even a person. You can hook up a thousand computers if you want.


What is the mining industry like in Nadvoitsy, Russia.

This creates the risk of what is sometimes referred to as a “witch attack,” which is named not after an ancient Greek prophetess, but after a 1973 book about a woman who claims to possess multiple personalities. The idea of the Sybil attack is that in a system where the ledger is maintained by groups, anyone can join a group without permission, and you can spin up a bunch of computer nodes that make you look like thousands. Then you validate bad trades to yourself, and everyone says, “Ah, well, look at all these people validating transactions,” and they accept your trade as a majority consensus, either you managed to steal some money, or you’re at least throwing the whole system into chaos.

The solution to this problem is to make verifying transactions expensive.

In order to mine a block, Bitcoin miners do a ridiculous and expensive thing. Again, it involves hashing. Each miner gets a summary of the list of transactions in the block, as well as the hash of the previous block. The miner then places another arbitrary number—called “nonce”—at the end of the list. The miner runs the whole thing through the SHA-256 hashing algorithm (list plus random number). This produces a 64-bit hexadecimal number. If the number is small enough, the miner has mined the block. If not, the miner tries again with a different random number.

The meaning of “small enough” is set by the Bitcoin software and can be adjusted to make mining blocks easier or harder. (The goal is to average one block every 10 minutes; The more miners there are, the faster their computers and the harder it gets. Now, “small enough” means that the hash must start with 19 zeros. The most recent successful one looks like this:


It’s like a game with 20 questions where you keep guessing a viable number. Unless you don’t have any clues, and it’s many, many times more than 20 guesses. Any particular input – any list of transactions plus a random number – is very, very unlikely to hash to a number that starts with 19 zeros. The odds are around 16^19 to 1. So miners run the hashing algorithm over and over again, trillions of times, guessing a different random number each time until they get a hash with the correct number of zeros. The total hashrate of the 16 Bitcoin network exceeds 200 million terahashes per second – that is, 200 quintillion hashes per second, which is 1) a lot but 2) much less than 16^19. At a rate of 200 quintillion hashes per second, it takes an average of 600 seconds to guess the correct nonce and mine a block.

Note 16:

Vitalik again: “Because SHA256 is designed to be a completely unpredictable pseudorandom function, the only way to create a valid block is to experiment and see if the new hash matches,” Vitalik adds. ”

It’s a game. Only one miner can mine a block, and that miner will be rewarded with Bitcoin. Mining a block is also “mining” new coins – after a lot of computational work, they are plucked out of the system, like picking up a piece of gold in a rock. So there is the metaphor.


An old-fashioned prospector, circa 1860.

When miners find the correct number of zeros, they post the block and its hash to the Bitcoin network. Everyone else reviews the block and decides if it works. (“Valid” means that all transactions in the list are valid, the hash is correct, it has the correct number of zeros, and so on.) If they do, then they start working on the next block: they take the hash block of the previous block, plus the transactions that have come in since then, plus a new nonech, and try to find a new hash. Each block builds on the previous block.

6. Mining

All of this is very expensive: miners need special hardware to do all these hashing operations over and over again, and these days run huge always-on computer farms. Mining Bitcoin consumes as much electricity as any medium-sized country. This is bad for the environment. The most famous description of Bitcoin attributed to Twitter posters may be:

“Imagine if letting your car idle 24/7 solved a Sudoku problem, and you could use the answer to buy something.”

In a sense, this is pure waste. People sometimes say that Bitcoin miners are solving difficult mathematical problems to mine, but in reality this is not the case. They brute-force guess billions of numbers every second in an attempt to get the correct hash. No mathematical problems are solved, and nothing is added to the world’s knowledge by these guesses.

But miners are solving an important problem for Bitcoin, which is keeping its network and transaction ledger secure. The cost of confirming Bitcoin transactions is obviously high, making it difficult to forge and run Sybil attacks. That’s why Satoshi Nakamoto and everyone else refer to this method of confirming transactions as “proof-of-work.” If you produce the correct hash for a block, it proves that you did a lot of expensive computer work. You won’t do it easily.

Proof-of-work mining is a mechanism for building consensus among people who have a financial interest in the system without knowing any additional information about them. If you don’t want Bitcoin to be valuable, you’ll never mine Bitcoin. If you were a Bitcoin miner, you would invest in Bitcoin in some way; You’ve bought a computer and paid for electricity, and you’ve made expensive and exhausting bets on Bitcoin. You’ve proven that you care, so you have a say in verifying the Bitcoin ledger. You get paid. You get Bitcoin, which allows you to get more shares in the system.

These bitcoins are everywhere; They are generated by this mining, core Bitcoin software. In fact, all bitcoins are generated through mining; Bitcoin was never initially allocated to Satoshi Nakamoto or early investors or anyone else. That’s the answer to where bitcoins come from: they’re all mined.

The mining reward originally set by the software was 50 bitcoins per block; It is currently 6.25 Bitcoin. An important point about these mining rewards is that they cost Bitcoin users money. Each block (approximately every 10 minutes) generates 6.25 new bitcoins out of thin air and pays them to miners to provide network security. This equates to more than $6 billion per year. 17 This cost is indirect: it is a form of inflation, and as the supply of bitcoin grows,18 other things being equal, theoretically the value of each coin decreases. Currently, the Bitcoin network pays miners about 1.5% of its value every year.

Note 17:

That’s 6.25 bitcoins every 10 minutes, or 37.5 per hour, or 900 per day, multiplied by 365 (days in a year), and multiplied by the price of Bitcoin.

Note 18:

However, as we all know, there will always be only 21 million bitcoins. It is written into the code. So what happens when this limit is reached? What incentives do miners have to keep the Bitcoin network running? Transaction fees. Bitcoin Code also allows miners to collect a portion of each transaction, which will be the only way to reward them after the last coin is mined. (This is currently estimated to not happen until 2140.) )

This is lower than the inflation rate of the US dollar. It’s worth noting, though. Every year, miners who maintain the security of Bitcoin account for a small but significant portion of Bitcoin’s total value. Bitcoin users get something out of that $6 billion: 19

If you can make a lot of money by mining Bitcoin, then many people will want to mine Bitcoin. This will make it more difficult for one to accumulate most of the mining power in Bitcoin. If a person or group gets most of the mining rights, they may do bad things: they may mine a bad block – Double Spending, reverse recent transactions, etc. (this is known as a “51% attack”). There are billions of dollars for miners to compete for, and people will invest a lot of money in mining, and it will be expensive to compete with them. If you invest billions of dollars to accumulate most of Bitcoin’s mining power, you may be very concerned about the value of Bitcoin, so you are unlikely to use your power for evil.

Note 19:

In 2021, Vitalik wrote a post about this, which began: “The Bitcoin and Ethereum blockchain ecosystems spend far more on cybersecurity (the goal of proof-of-work mining) than all other aspects combined. Since the beginning of the year, the Bitcoin blockchain has paid miners an average of about $38 million per day in block rewards, plus about $5 million per day in transaction fees. The Ethereum blockchain came in second with a $19.5 million per day block reward plus $18 million per day in transaction fees. “

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/2022-crypto-industry-panorama-outlook-ledger-bitcoin-vs-blockchain/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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