PayCrypto Analtcoin Minting Application as Interest to Cryptocurrencies

1.1 Blockchain

Blockchain is a distributed ledger. It stores transaction data in the form of a linked list combined with encryption algorithms (currently SHA-256) to enhance the security and integrity of the data in each of the blocks. Each block consists of a set of transactions (A Merkle tree and the root is kept in the block), a pointer to the previous block, and hash of the previous block.

The use of digital signatures implements the message authentication requirement of the security requirements. Only one person can sign but anyone can cross-check and the signature should be associated with a particular file i.e.., signature should not be copy pasted from one document to another.

While the proof-of-work takes care of such concerns, proof-of-stake implements all these security requirements without the strength of the security of a blockchain being dependent on the energy consumption (Mining).

1.2 Incentive Mechanisms

Incentive mechanisms make sure users participate in mining. This is done due to the dependency on the number of miners and the strength of the blockchain. The more people who can verify a transaction, the more honest a specific blockchain is. The incentive mechanisms currently in place are the block rewards and the transaction fees.

The participant that generates each block then includes a transaction in that block and that transaction is a coin generation transaction and the node can choose a recipient address of the transaction. This block reward is for any block proposed honest or otherwise.

Other than the block rewards, transaction fee can be imposed by the transaction initiator as a reward to mining his/her block. Generator of the transaction can select to create the output of the coin with output less than the input value. The difference is a transaction fee called gas fee is given to the block generator. This is purely optional.

1.3 Proof-of-Work

The PoW mechanism helps choose the block creator. To approximate choosing a random participant, choose a participant to a resource that no one can take control over. PoW chose the resource as computational power. PoS chose the resource as the amount of coins owned.

In PoW nodes compete against each other to solve a cryptographic hash puzzle. This hash function involves finding a nonce in a target space. Thus increasing the difficulty of computing the hash puzzle.

1.4 Consensus Mechanism

According to the consensus algorithm new transactions are broadcasted to all participants. Each participant compiles new transactions into a block. In each iteration a random participant gets to circulate the block. Other participant is agreeing to the block only if every transaction is authentic (unspent, valid signatures). Participants communicate their approval of the block by incorporating its hash in the next block they generate.

2.1 Bitcoin: A Peer-to-Peer Electronic Cash System

This paper coined the term blockchain in 2008. It introduces the concept of transferring digital currency directly from sender to receiver without the involvement of a third- party thus replacing the current trust-based system (Nakamoto S., 2008).

It talks about the PoW model that will help implement the said trustless system and how bitcoin demonstrates this PoW model.