Distributed Ledger

Before we move ahead, we need to go back to the idea of invisible coins. We know from the island example that a distributed ledger allows you to transact with coins, even if the underlined coins don’t physically exist (just like the coin at the bottom of the ocean). We also saw how it is nearly impossible to steal coins, because of the practice of each tribe member knowing exactly who owned each coin at any given point in time. Now imagine if these ledgers, instead of being stored in people’s heads, are stored in computers online around the world managed by incentivized volunteers- it would still work just the way it did on the island. Each computer would have a copy of the ledger showing coin ownership and  every time a person wanted to make a transaction, they would just announce to the computer network their intentions and all of the computers would update their internal ledgers to reflect said transaction. We would only be missing two things to make this workable in the real world.

First thing we’re missing is a way to disguise the identities of people on the public ledger. Most of us would never be willing to put our names and transaction history in public view. This can be solved with a hash function and each person’s identity details can be reduced to an unrecognizable 20 digit code, where only the owner knows the inputs required to generate the code, thus anonymizing participants.

The second thing we’d be missing to make this workable is a way to quickly compare ledgers between computers to make sure that they are starting from the same version of the transaction record- this can also be addressed with a hash function. Each computer can turn its ledger (which is just computer text) into a 20 digit code and compare with codes on the other computers. If the codes all agree (match), we know the ledgers are all the same, and if they are all the same, it is likely they all represent an accurate view of a coin’s ownership. This makes it almost impossible to tamper with the ledger, because to do so a person would have to tamper with thousands of other ledger copies stored independently in computers all around the world.

This is Bitcoin- the digital currency that you’ve heard so much about and is probably the reason you’ve ended up here on Network’s Learning Platform.