The Evolution of Digital Money

The concept of digital money was first put forward by David Chaum in 1982, and it was suggested that digital currencies be managed by a central authority. Subsequently, Bitcoin emerged as it became possible to carry out peer-to-peer transactions with a distributed system without requiring a centralized structure. Using the same infrastructure, other crypto currencies, altcoins (alternative crypto currencies), emerged after Bitcoin.

All cryptocurrencies have a three-layer structure: blockchain, protocol and currency. Each cryptocurrency typically has both a currency and a protocol, and may also have its own blockchain or run on the Bitcoin blockchain.

Block chain

Blockchain is a system in which a third-party intermediary is not needed to ensure security and verification in product or service transfer transactions. The concept of blockchain and its functioning mechanism first emerged in 2008 with the study published by Satoshi Nakamoto describing the creation and transfer of Bitcoin.

The main structure of Bitcoin and altcoins is based on the blockchain. Blockchain is a chain structure in which publicly accessible records are created in which all transactions are recorded by all users. In this system, confirmed transactions are collected in a block structure and added to the end of the chain.

The blockchain can be thought of as a three-column table, where the first column stores each row representing a separate transaction, the second column stores the time stamp of the transaction, the details of the transaction in the third column, and a summary of the current transaction and the hash of the previous transaction.

The blockchain is expanded by each additional block and therefore represents a complete ledger with the entire transaction history. Blocks can be verified by the network using cryptographic tools. This concept ensures the integrity of the entire blockchain from the first block (genesis block). If the validity of the transactions in a block and the validity of the block itself are agreed upon through a consensus mechanism, only then can a new block be added to the blockchain. Therefore, new transactions cannot be automatically added to the ledger. Instead, the reconciliation process ensures that these transactions are stored in a block for a certain period of time before being transferred to the ledger. Once consensus is reached, the information in the blockchain can no longer be changed.

Nakamato defines Bitcoin as a chain of digital signatures. Accordingly, each user transfers the money to the next one by digitally signing the Hash value of the previous transaction and the public key of the next user. The person who will buy crypto money can check the signatures by verifying the user chain.

In its simplest form, the system works as follows. In the blockchain, each user has a public and a private key. Signing of transactions is done with the private key. After transactions are digitally signed, they are published on the blockchain network. Digital signature also consists of the signing and verification stages of transactions.

Miner

The devices that verify the transactions to be recorded in the blockchain, receive crypto money as a reward in return for the verification process and produce crypto money, and the people who manage these devices are called miners. The process of approval of transactions in the blockchain by miners is called mining.

If we take the example of Bitcoin, blocks are created by miners who are rewarded with Bitcoin to verify the blocks. These blocks can only be created within a certain period of time. This period may vary for different cryptocurrencies. While a period of 10 minutes is required to produce each block in Bitcoin, a period of 12 seconds is targeted to produce a block in Ethereum, another cryptocurrency. During the time it takes to produce blocks, miners work on solving a difficult problem whose difficulty level varies in each block. The difficult problem that miners solve means calculating the Hash value of the block header. Each block in the blockchain is connected to each other with Hash values. All miners on the network compete until the appropriate Hash value is found. The miner who creates the block not only earns Bitcoin but also receives commissions for all transactions within the block. In the Bitcoin structure, the block creation reward is constantly decreasing. The amount of Bitcoin that can be produced is initially limited to 21 million units.