[Education] Cryptocurrency

[Husna QA]

I adapted the following article from several references; hopefully, it can help add insight.
For a more detailed explanation, please refer to the source.

Indonesian translation: Mata Uang Kripto - Husna QA

Table of contents:
1. Basics of Cryptography
   a. Asymmetric Cryptography
   b. Digital Signature
   c. Hash Function
2. History of Cryptocurrencies
   a. Bitcoin Prehistory
3. Definition of Cryptocurrency
4. How Cryptocurrencies Work
   - Users
   - Cryptocurrency service providers
   - Blockchain
   - Transaction Data
   - Peer-To-Peer Network
   - Full Node/Server and Simplified Payment Verification/SPV Client
   - Miners (Verifiers)

Reference: 1 - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9 - 10 - 11 - 12 - 13

1. Basics of Cryptography
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As reflected in its name, cryptocurrency utilizes cryptographic techniques in its system. As an essential part of the cryptocurrency system, there would be no cryptocurrency without cryptography. Two cryptographic methods that are particularly important in a cryptocurrency system are digital signatures and hash functions.

1a. Asymmetric Cryptography
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By definition, asymmetric cryptography is a cryptographic technique using a public and private key pair. These two keys are used in different ways. The public key, like a phone number, can be shared with others. While the private key must be well guarded like guarding an ATM (Automated Teller Machine) PIN, of course, the private key does not need to be memorized one by one :)


Asymmetric Cryptography Image. Source: https://en.wikipedia.org/wiki/Public-key_cryptography

How asymmetric cryptography works in general, can be seen in the figure above.
Bob wants to send Alice a secret message that no one but Alice should know. The secret message is then encrypted by Bob using Alice's public key, which results in an encrypted message. The encrypted message is then sent to Alice, who can read the secret message after decrypting the information received from Bob.

Definitions of Encryption and Decryption can be found here: https://en.wikipedia.org/wiki/Encryption.

The assumption in asymmetric cryptography is that others cannot guess the private key even if they have information about someone's public key. One of the most recognized types of asymmetric cryptography is RSA, created by Ron Rivest, Adi Shamir, and Leonard Adlemen.

Reference
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- https://en.wikipedia.org/wiki/Public-key_cryptography
- https://en.wikipedia.org/wiki/Encryption
- R.L. Rivest, A. Shamir, and L. Adleman - A method for obtaining digital signatures and public-key cryptosystems
- Dimaz Ankaa Wijaya - Bitcoin Mining dan Cryptocurrency lainnya ...., Jasakom 2018, page 5-6
- Husna QA - Mata Uang Kripto (https://www.altcoinstalks.com/index.php?topic=321718.0)

[Husna QA]

1b. Digital Signature
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Digital signatures are an essential component of cryptocurrency systems. In general, the benefits of digital signatures are as follows:

• Authentication: Ensure that a known party creates the digital signature.
• Non-repudiation: ensuring that the creator of the signature cannot deny that they have created the signature.
• Integrity: ensuring that the information to which the signature is affixed has not undergone any unauthorized changes.

These three elements are essential in cryptocurrency, as the user's real identity is not required for financial transactions (except for anything related to the cryptocurrency market, which requires proof of identity).

Digital signatures ensure that only the money's rightful owner can use it. While digital signatures are not the only method of authenticating transactions, they are the primary method highly recommended.

In addition, digital signatures also ensure that the transaction data is unaltered. For example, Alice wants to send 0.5 XBT (one of the symbols of Bitcoin) of cryptocurrency to Bob. With a digital signature, Alice cannot deny that she sent the money to Bob.

Using the same example, it happens that Carol, who controls Alice's Internet network, can capture Alice's transaction information. Tempted by the high price of Bitcoin, Carol tries to modify the transaction data, which should be sent to Bob to Carol (herself). Digital signatures can detect this change, and the system can reject the altered transaction.

Digital signatures are one of the products that use asymmetric cryptography technology. How it works can be seen in the following image:



Figure How a digital signature works. Source: https://en.wikipedia.org/wiki/Electronic_signature#Digital_signature.

The two algorithms associated with digital signatures are the signing and verification algorithms. If you look closely, the process in the signing algorithm is a modification of the encryption process, as shown in the Asymmetric Cryptography figure (see section 1a. Asymmetric Cryptography) and a combination with hash techniques. In the signing process, the signer uses his private key to encrypt the hash value of the signed electronic document. This process results in a digital signature that can be attached to the electronic document.

The digital signature verification process is the reverse of the signing process. First, the electronic document and the digital signature are separated. The digital signature is then decrypted using the signer's public key, which was obtained previously. The result of this process is a hash value, which is then compared with the hash value of the electronic document. If both hash values are identical, then it can be said that the digital signature is valid.

Reference
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- https://en.wikipedia.org/wiki/Digital_signature
- https://en.wikipedia.org/wiki/Electronic_signature#Digital_signature
- Dimaz Ankaa Wijaya - Bitcoin Mining dan Cryptocurrency lainnya ...., Jasakom 2018, page 7-8
- Husna QA - Tanda Tangan Digital

[Husna QA]

1c. Hash Function
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A hash function is a function used to calculate the unique value of arbitrary-sized data. A hash function's result is a value with a certain length. The benefits of a hash function include the following:

• Producing unique characters that represent data.
• Protects the confidentiality of the data while ensuring the data does not change.

These two benefits can be explained in more depth as follows:
Firstly, a hash function will produce a unique character with a fixed length. For example, SHA256 will generate a hash value of 256 bits from large data, such as 1 GB. The fixed-sized hash value is useful as a unique "representative" of the data to distinguish it from others.



Image of the hash function. Source: https://www.researchgate.net/figure/Hash-algorithm-III-HASH-FUNCTION_fig1_310624366


Regarding the second function, the hash value will represent the data, so sensitive data such as keywords (passwords) do not need to be mentioned; only the hash value of the keywords is needed. The hash value also ensures that the keyword does not change because if the keyword undergoes even the slightest change, the hash value will change significantly.

Hash functions play a very important role in cryptocurrency systems. Almost all data in a cryptocurrency system is related to the hash function. The hash value of a block is what is looked for during the mining process of some cryptocurrencies, such as Bitcoin. The hash value of transaction data is also important to ensure that it never changes after being inserted into the block.

Reference
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- Turcanik, Michal & Javurek, Martin. (2016). Hash function generation by neural network. 1-5. 10.1109/NTSP.2016.7747793.
  https://www.researchgate.net/publication/310624366_Hash_function_generation_by_neural_network
- Dimaz Ankaa Wijaya - Bitcoin Mining dan Cryptocurrency lainnya ...., Jasakom 2018, page 8-9
- Husna QA - Fungsi Hash

[Husna QA]

2. History of Cryptocurrencies
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The history of cryptocurrency cannot be separated from the figure who calls himself Satoshi Nakamoto (https://bitcointalk.org/index.php?action=profile;u=3). Although no one has been able to confirm the actual identity behind this name until now, his work in starting a new form of currency called Bitcoin is worth knowing. In 2008, Satoshi published a whitepaper entitled 'Bitcoin: A Peer-To-Peer Electronic Cash System'.

The new system was implemented on January 3, 2009. The milestone in starting this previously unknown system is called the genesis block (https://en.bitcoin.it/wiki/Genesis_block), namely the block with serial number 0. This block is the beginning of all blocks that have been and will be created in the Bitcoin system.
Block 0. Main chain. 2009-01-03. Hash 000000000019d6689c085ae165831e934ff763ae46a2a6c172b3f1b60a8ce26f. Block explorer
Then, even though the new system is already running, its use is very limited among cryptography activists. It has not yet led to commercial activities because its value is still nil, and the focus is more on increasing system capabilities, testing, and updating features.

Before Bitcoin was released by Satoshi Nakamoto, the idea of ​​using cryptography to solve currency problems had been circulating since David Chaum first proposed the idea:
- Blind Signatures for Untraceable Payments (http://www.hit.bme.hu/~buttyan/courses/BMEVIHIM219/2009/Chaum.BlindSigForPayment.1982.PDF)
- Security without Identification Card Computers to make Big Brother Obsolete (https://chaum.com/security-without-identification/)

The focus of the type of currency that Chaum is trying to create is a currency that cannot be traced by the government or banks or is often referred to as anonymous currency.

Chaum's idea, which started in the 80s, then made other thinkers try to solve the same problem, including Wei Dai with B-money (http://www.weidai.com/bmoney.txt) and Nick Szabo with Bit Gold (https://unenumerated.blogspot.com/2005/12/bit-gold.html).

Reference
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- Satoshi Nakamoto: Bitcoin: A Peer-to-Peer Electronic Cash System (https://github.com/bitsblocks/bitcoin-whitepaper - https://bitcoin.org/bitcoin.pdf)
- https://en.bitcoin.it/wiki/Genesis_block
- Dimaz Ankaa Wijaya - Bitcoin Mining dan Cryptocurrency lainnya ...., Jasakom 2018, page 10-11
- Husna QA - Sejarah Mata Uang Kripto

[Husna QA]

2a. Bitcoin Prehistory
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Bitcoin technology cannot be separated from the other technologies behind it. The following is a timeline of several related moments up to Bitcoin's release on January 3, 2009.



Image source: https://x.com/ansellindner/status/1199681032125063173

Notes:
For a simpler timeline graph, see the following link:
- https://x.com/btcmrkts/status/964258271493345282
- https://x.com/100trillionUSD/status/1091478810426597376

- 1974 Robert E. Kahn / Vint Cerf TCP/IP = Internet
https://en.wikipedia.org/wiki/Internet_protocol_suite

- 1976 Whitfield Diffie / Martin Hellman / New Directions in Cryptography
https://ee.stanford.edu/~hellman/publications/24.pdf

- 1978 RSA Public Key Cryptosystem
https://en.wikipedia.org/wiki/RSA_(cryptosystem)

- 1980 Ralph Merkle Protocols Cryptosystems
http://www.merkle.com/papers/Protocols.pdf

- 1981 David Chaum Untraceable Electronic Mail, Return Addresses
https://en.wikipedia.org/wiki/David_Chaum

- 1982 Murray Rothbard The Ethics of Liberty
https://en.wikipedia.org/wiki/Murray_Rothbard

- 1983 David Chaum Blind Signatures
https://sceweb.sce.uhcl.edu/yang/teaching/csci5234WebSecurityFall2011/Chaum-blind-signatures.PDF

- 1985 Elliptic Curve Cryptography
https://en.wikipedia.org/wiki/Elliptic-curve_cryptography

- 1988 Timothy C. May The Crypto Anarchist Manifesto
https://www.activism.net/cypherpunk/crypto-anarchy.html

- 1989 David Chauman DigiCash
https://en.wikipedia.org/wiki/DigiCash

- 1991 Phil Zimmermann
https://en.wikipedia.org/wiki/Phil_Zimmermann

- 1991 Haber / Stornetta How to Time-Stamp a Digital Document
https://link.springer.com/article/10.1007/BF00196791

- 1992 / 1993 Eric Hugues A Cyperherpunk's Manifesto
https://bitcointalk.org/index.php?topic=178336.msg49471136#msg49471136

- 1992 Cypherpunk Founded
https://en.wikipedia.org/wiki/Cypherpunk

- 1994 CyberCash
https://en.wikipedia.org/wiki/CyberCash

- 1994 Timothy C. May
https://nakamotoinstitute.org/static/docs/cyphernomicon.txt

- 1996 E-Gold
https://en.wikipedia.org/wiki/E-gold

- 1996 NSA How To Make A Mint
http://groups.csail.mit.edu/mac/classes/6.805/articles/money/nsamint/nsamint.htm

- 1997 Adam Back HashCash
https://en.wikipedia.org/wiki/Adam_Back

- 1997 Nick Szabo Formalizing and Securing Relationships on Public Networks
https://ojphi.org/ojs/index.php/fm/article/view/548/469

- 1998 Nick Szabo Secure Property Titles with Owner Authority
https://nakamotoinstitute.org/secure-property-titles/

- 1998 Bit Gold
https://en.wikipedia.org/wiki/Nick_Szabo

- 1998 Wei Dai B-Money
https://en.bitcoin.it/wiki/B-money

- 1999 Dot Com Bubble
https://en.wikipedia.org/wiki/Dot-com_bubble

- 2001 Bram Cohen BitTorrent
https://en.wikipedia.org/wiki/Bram_Cohen

- 2001 Distributed Hash Tables
https://en.wikipedia.org/wiki/Distributed_hash_table

- 2004 Hal Finney / Reusable Proofs of Work
https://nakamotoinstitute.org/finney/rpow/index.html
 
- 2008 Satoshi Nakamoto / A Peer to Peer Electronic Cash System
https://bitcoin.org/bitcoin.pdf

- 2009 Bitcoin Launched Chancellor on brink of second bailout for banks
https://en.bitcoin.it/wiki/Genesis_block

Source image:
https://twitter.com/bitcoinje/status/1091672330277961728

Reference
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- https://github.com/Bitcoin-and-Markets/resources/wiki/Bitcoin-History
- https://x.com/ansellindner/status/1199681032125063173
- https://x.com/btcmrkts/status/964258271493345282
- https://x.com/100trillionUSD/status/1091478810426597376
- https://cointelegraph.com/news/bitcoin-history-pre-blockchain-digital-currencies
- VB1001 - Bitcoin Prehistory: https://bitcointalk.org/index.php?topic=5126554.0
- Husna QA - Bitcoin Prehistory
- Chikito - Re: [EDUKASI] Semua Hal Tentang Bitcoin: https://bitcointalk.org/index.php?topic=2996986.msg53642371#msg53642371

[Husna QA]

3. Definition of Cryptocurrency
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It is not easy to define Cryptocurrency because the types vary greatly from one Cryptocurrency to another. However, approximately Cryptocurrency will have the following components:

• A distributed database in the form of a blockchain or something similar.
• The type of consensus that reflects the degree of decentralization of the system.
• Assets (coins or tokens) contained in a system that can be moved from one entity to another.
• Readable transaction data (in certain portions, this data can be hidden).
• The protocol runs the system without any particular party's help to resolve possible disputes.
• An open system that allows anyone to join the system and leave the system whenever they want.
• User anonymity by not using real identities in a transparent system.

More than successfully entering the list of coinmarketcap.com or similar websites is required for a crypto asset (coin or token) or system to be called a cryptocurrency. Currently, several products are indicated as scams and are even on the list of 100 cryptocurrencies with the highest market value in the world. A more in-depth analysis is needed to determine the suitability of a product called Cryptocurrency.

According to Jan Lansky in his article entitled "Possible State Approaches to Cryptocurrencies": http://si-journal.org/index.php/JSI/article/viewFile/335/325
(https://web.archive.org/web/20180212005102/http://si-journal.org/index.php/JSI/article/viewFile/335/325)

Cryptocurrency is a system that meets all the following six conditions:

• The system does not require a central authority, distributed achieve consensus on its state.
• The system keeps an overview of cryptocurrency units and their ownership.
• The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
• Ownership of cryptocurrency units can be proved exclusively cryptographically.
• The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
• If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

Additional info:
In March 2018, the term Cryptocurrency was added to the Merriam-Webster dictionary: https://www.merriam-webster.com/dictionary/cryptocurrency

Cryptocurrency: any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.

Reference
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- https://en.wikipedia.org/wiki/Cryptocurrency#Formal_definition
- Lansky, Jan (January 2018). "Possible State Approaches to Cryptocurrencies". Journal of Systems Integration. 9/1: 19–31. - archive
- https://www.merriam-webster.com/dictionary/cryptocurrency
- Dimaz Ankaa Wijaya - Bitcoin Mining dan Cryptocurrency lainnya ...., Jasakom 2018, page 11
- Husna QA - Definisi Mata Uang Kripto

[Husna QA]

4. How Cryptocurrencies Work
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Some things related to how cryptocurrencies work will be briefly explained below, including information about cryptocurrency users, blockchain, transaction data, etc.
For more detailed information, please refer to references that provide more specific reviews.

4a. Users
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Some users in the cryptocurrency ecosystem include senders, recipients, and providers of cryptocurrency-related services. Each user has a function in the ecosystem and is interconnected with others. In fact, without them, the ecosystem would be incomplete.

The sender is the coin owner who wants to transfer their coin balance to another person with a different cryptocurrency address. So, before making a new transaction, they must have a cryptocurrency balance, either by buying from someone else or mining it themselves.

Meanwhile, the recipient will receive the coins from the sender. To become a recipient, there is no need to have a coin balance first. The only condition the recipient must fulfil is to create a cryptocurrency address per the provisions. For example, when you want to receive Bitcoin, you need a Bitcoin address instead of an Ethereum address.

The recipient can create a cryptocurrency address whenever necessary. Although cryptocurrency addresses act similarly to bank account numbers, they can be made at any time without the other party's permission and as often as the recipient wishes.

Even though cryptocurrencies have quite complex technical details, users can use cryptocurrencies without needing to know everything that happens in the system. Cryptocurrency systems and protocols will handle everything for users, both senders and recipients.

Reference
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- Dimaz Ankaa Wijaya - Bitcoin Mining dan Cryptocurrency lainnya ...., Jasakom 2018, page 12-13
- Husna QA - Pengguna