Blockchain Fundamentals: Transaction History

A node is either examining a block created by its peers or trying to create a new block itself, without a centralized clock to coordinate these activities.
Arrival of blocks depends on the network, which may lead to nodes not having the same information at their disposal.
Distributed consensus is used to identify the correct version of the transaction history among several versions without a central solution.
Conditions for distributed consensus:
- The group operates in an identical environment.
- A collective decision-making problem exists.
- Individuals independently strive to achieve an identical goal.
- Individual actions leave visible marks in the environment that help decide the collective decision-making problem.
- Individuals use identical criteria for evaluating the decision-making problem based on the alteration of their environment.

Criteria for selecting the highest computational effort:
- Longest chain criterion: the chain with the most blocks represents the highest computational effort (assuming each block has the same difficulty).
- Heaviest chain criterion: when each block has a different difficulty level, the longest chain does not necessarily represent the highest computational effort.
The choice of criteria depends on whether the difficulty level is the same or not for different blocks.

Orphan blocks: blocks that are rejected out of the authoritative chain and are abandoned.
Reclaimed reward: reward for orphan blocks and all subsequent blocks are withdrawn from the node that initially received it.
Clarifying ownership: only transactions part of the authoritative chain are considered to have happened and are used to clarify ownership-related requests.
Reprocessing of transactions: data that was part of orphan blocks are given another chance to become part of the transaction history.
A growing common trunk: the criteria for selecting transaction history do not always yield unambiguous results, but the common trunk is often less ambiguous.

In case of ambiguous results of the authoritative chain, the decision is random in terms of which trunk the new block wants to extend.
The deeper down the authoritative chain a block is located:
- The further in the past it was added.
- The more time has passed since its inclusion in the blockchain data structure.
- The more common effort has been spent on adding subsequent blocks.
- The less it is affected by random changes of the blocks that belong to the longest chain.
- The less likely it will be abandoned.
- The more accepted it is by the nodes of the system.
- The more anchored it is in the common history of the nodes.
Eventual consistency: the fact that certainty concerning the inclusion of blocks in the authoritative chain increases with time and as more blocks are added.

A majority of computational power of the whole system is needed to establish and maintain the authoritative chain.
Honest nodes owning the majority of computational resources of the whole system ensure that the path maintained by them will grow fastest and outpace any competing paths.
Threats to the voting schema:
- Turning the actual authoritative chain into orphan blocks and building a new one.
- Economically trying to change ownership rights by altering transaction data.
- Gaining a majority of voting power to manipulate the collective decision-making process.

The hash puzzle makes submitting a voting ballot costly and deters dishonest nodes from taking part in the vote.
The blockchain binds voting power to computational power – to gather voting power, one must gain a majority of the accumulated computational power of the whole blockchain system.

Rewards are based on transaction fees and proof of work.
The choice of instrument of payment needs to consider:
- Impact on the integrity of the system.
- Impact on the openness of the system.
- Impact on the distributed nature of the system.
- Impact on the philosophy of the system.
Desirable properties of an instrument of payment:
- Available in digital form to be included in the blockchain.
- Accepted as an instrument of payment in the real world.
- Accepted as payment in all countries around the world.
- Not subject to restrictions on capital movement.
- Stable value.
- Trustworthy.
- Not controlled by one single central organization.

A cryptocurrency is an independent digital currency whose ownership is managed by a blockchain that uses it as an instrument of payment for compensating its peers for maintaining integrity of the system.
Definition of cryptocurrency: a digital currency whose ownership is managed by a blockchain that uses it as an instrument of payment for compensating its peers for maintaining integrity of the system.

Non-functional aspects:
- Highly available: 24x7.
- Censorship proof: no central power to control content.
- Reliable: fulfills its purpose consistently and with good quality.
- Open: does not exclude users or computers.
- Pseudo anonymous: identifies owners uniquely but neither maintains nor reveals their real-world identity.
Security:
- Individual transactions ensure ownership is kept exclusive to the disposal of the lawful owner only.
- Protects ownership from everyone from manipulation, forgery, counterfeiting, double spending, and unauthorized access.
Resilient: able! to clarify and transfer ownership even in difficult conditions (attacks).
Eventually consistent: the chance of getting consistent results will increase over time and will eventually reach full consistency throughout the whole system.
Keeping integrity: behavior is free of logical errors.

Ownership logic is comprised of:
- Storage logic: maintains the whole history of transaction data.
- Consensus logic: ensures consistency.
- Transaction processing logic: ensures only valid transaction data are added.
- Transaction security: ensures only the lawful owner can transfer his property to another account.
Transaction security depends on principles such as identification, authentication, and authorization, which rely on digital signatures (using cryptographic hash values) and asymmetric cryptography.