⚡ StackSats Saturdays | 2021 Week#10

💳 Lightning network ⛓ Nakamoto consensus 🖥 Running a Bitcoin node

🤔 What is the Bitcoin lightning network and its benefits?

The Bitcoin Lightning Network (LN) uses double-signed transaction.

Think of it like check that requires both parties to sign for it to be valid. The check specifies how much is being sent from one party to another. As new micro-payments are made from one party to the other, the amount on the check is changed and both parties sign the result

Benefits of LN

  • Instantaneous payments

  • Not dependent on miners

  • Micropayment friendly

  • Multi-signature friendly

  • Reduces blockchain load

  • Decreases waiting time

  • Helps in scalability

Image Source

Imagine Alice has to send some funds to Charlie via Bob:

1. Alice opens a channel with Bob

2. Bob opens a channel with Charlie.

3. Suppose Alice wants to interact with Charlie.

4. Charlie declares a random number and generates its SHA256 hash and hands it to Alice.

5. Alice sends 0.1 BTC to Bob with the condition that only someone who can submit the data required to get the same hash can retrieve the payment.

6. In order for Bob to misuse the funds he will need to have the data aka the pre-image required to generate that hash. Basically, Bob will have to give “A” which he doesn’t have.

7. Bob now hands over the funds to Charlie using the same condition. Charlie finalizes the payment from Bob by handing him over the pre-image “A”.

8. Bob finalizes the payment from Alice by handing her “A”.

🤔 What is a bitcoin node?

A node is a computer that runs the Bitcoin software. Your node is your own version of the Bitcoin blockchain and ruleset. Think of it as your own gateway to the Bitcoin ecosystem. It broadcasts transactions, verifies the bitcoin you receive are legitimate and maintains your privacy by allowing you to participate without reliance on anyone. When you connect your wallet to your node, you are not trusting anyone else to verify your transactions.

A full node is a program that fully validates transactions and blocks. Almost all full nodes also help the network by accepting transactions and blocks from other full nodes, validating those transactions and blocks, and then relaying them to further full nodes. Most full nodes also serve lightweight clients by allowing them to transmit their transactions to the network and by notifying them when a transaction affects their wallet. If not enough nodes perform this function, clients won’t be able to connect through the peer-to-peer network—they’ll have to use centralized services instead.

We can estimate the size of the Bitcoin network by finding all the reachable nodes in the network (currently about 10,000 operational full nodes on the Bitcoin network):

Global Bitcoin nodes distribution

Bitcoin Node Count History

Coin Dance

🤔 What is the Nakamoto consensus?

Nakamoto Consensus is the longest chain rule, using proof of work as its sybil resistance mechanism and leader election.

It can be broken down into roughly 4 parts.

  • Proof of Work (PoW) - The cost of this mining process is electricity, which has a real world financial value, thus giving the issued BTC for each mined block an inherent value.

  • Block Selection - A “lottery” process for miners competing to win the block reward for mining the next block. There is no voting process to determine the block leader. Instead, it utilizes a cryptographic puzzle predicated on incrementing a nonce in the block until the correct value that represents the block’s hash and required zero bits for the beginning of the nonce is reached. The miners in the network all compete to solve this puzzle and the first to find the solution wins the round of the lottery. The block is then propagated by the miner across the network to the other mining nodes who implicitly vote to accept the block as valid by adding the block to the longest chain.

  • Scarcity - Limiting the total number of Bitcoin that will be mined to 21 million

  • Incentive Structure - The deflationary design of Bitcoin creates an incentive mechanism for long-term vested interests by owners of Bitcoin and participants in the Bitcoin network to further secure and validate the network while also supporting the growth in value of Bitcoin itself. The deflationary nature of Bitcoin also creates an iterated game theory model where cooperation among individuals within the network is optimal through aligned interests driven by deflation in the long-term.

👀 Highlights of the week:

  • Tim Draper Believes Netflix Could be the Next Big Firm to Buy Bitcoin. (CoinGape)

  • Nearly 20% of Bitcoin Supply Hasn’t Budged In 7 Years. (Bitcoinist)

  • Primer on Bitcoin for Data Scientist — Part 1 (Coinmonks)

  • Bitcoin users in developing countries. (r/BitcoinBeginners)

  • No crypto ban in India: Finance Minister predicts “very calibrated” stance. (Cointelegraph)

  • Bitcoin Already Started to Replace Gold, Next Target $100,000: Bloomberg Report. (CryptoPotato)

  • How to Spend Bitcoin Using Apple Pay. (Decrypt)

  • The History and Future of Bitcoin Mining. (Genesis Block)

  • Bitcoin vs Ethereum. (Dan Held)

  • Decentralized Companies Are the New Norm and It’s the DAO Revolution That’s Making It Possible. (NewsBTC)

PS - Joined our community on Quora yet? A bunch of Bitcoin ₿elievers sharing, learning and looking out for each other.

Not financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.