[JOURNAL] (Richa) GB : 01-06

[Richa-iitr]

Name: Richa

Book/ article to discuss - Grokking Bitcoin: 01-06

Questions:

1. Why Bitcoin is limited to 21 million?

Soln- The supply of bitcoin is limited(like other currencies) to slow down the rate at which new bitcoins come into circulation. In this way, inflation is stopped and the value of Bitcoin is prevented from being degraded. The figure '21' is just and "educated guess" by the founder Satoshi Nakamoto.

2. Since the block rewards keep halving every 4 years, what keeps the miners honest to their work?

Soln- Bitcoin miners earn through two ways: Block Rewards and Transaction Fees. Due to bitcoin halving the block rewards are cut in half every 4 years or after every 210000 blocks are mined. In this scenario, miners will be rewarded transaction fees for processing transactions. Once all the bitcoins have been mined, there may also be a case that transaction fees rise to a sufficient level, since the entire world uses digital currency then increasing the number of transactions and hence the fees. However, the consensus community increases the block size which may reduce the transaction fees. But due to the size increase, several transactions may be dropped until a new block is created. this scenario means higher transaction fees for miners since people will pay higher fees to get their payments through.
Thus, it is the rising transaction fees that provide incentives to miners and keep the network growing even after the reduction of reward.

3. What is the use of generating checksum in bitcoin addresses?

Soln- Checksum is used to check for typos in the addresses while copying them.

4. How do checksums work to check the correctness of data/address?

Soln- The checksum is created by hashing the versioned address twice through SHA256. The first 4 bytes of the result give the checksum which is appended at end of the address. While decoding, the checksum is first removed from the end and the remaining versioned address is used to again calculate the checksum. If the two checksums don't match then a typing error was made and the transaction does not proceed further.

5. When does a blockchain network split?

Soln- A blockchain network splits (fork) into two different chains due to a change in underlying software which is governing the network.

6. What is hard forking and soft forking with reference to bitcoin?

Soln- Hard forking refers to those changes in the software that are not compatible with older versions running previously on the network, they may be due to changes in consensus mechanisms, etc. Soft forking refers to changes in the software that are backward compatible i.e. the nodes running on older software are able to recognize the blocks added by nodes running on new software.

7. What is UTXO?

Soln- UTXO set is the actual ledger of the bitcoin system. It stores all the unspent transactions which are used as inputs for every transaction. Bitcoin nodes keep track of the UTXO set in order to determine exactly which coins exist and who can spend them thus solving the double-spend problem.

8. What are coinbase transactions?

Soln- This is the very first transaction in the block created by the miner. It is used by the miners to collect the block rewards for mining blocks. It also holds other transaction fees earned by the miner.

9. How double-spending takes place?

Soln- Suppose a person makes a transaction A, she also decides to make another transaction B at the same time to use the same money already used in transaction A(double-spend). The person sends the honest transaction A to the miners, while the miners validate the transaction to add into a block, she secretly puts the double-spend transaction B into a secret block on her own and starts working on it. If the person is able to find a valid proof of work for her fraud branch that exceeds the honest chain's proof of work, she'll publish all the blocks(valid+fraud) in her branch and then the miners will also switch to her branch due to larger proof of work. In this way, the transaction A is undone and the recipient won't get the money it thought it had when the transaction was done.

10. What is the source of transaction fees?

Soln- Transaction fees is rewarded to miners whenever a new block has been mined. The transaction fees is taken from the sender when sending a transaction. While sending a transaction through a wallet, there is an option to select the fee rate(sats/vByte). The rate multiplied by size of the transaction gives the transaction fees. Transaction fees also determine the speed of transactions. If you want transactions to happen quickly you can set high fee rate incentivizing miners to validate your transaction first, else if validation time doesn't matter to you then you can follow the current fee rate(2 sats/vByte).

11. What is bloom filters and SPV nodes?

Soln- Simplified Payment Verification is a method that allows nodes to verify transactions without keeping an entire copy of the blockchain. To get those selected transactions they use 'Bloom Filters'. Bloom filters are used to identify whether an item is already present in the set or not. These filters are used in lightweight wallets to tell full nodes whether or not to send a transaction to wallet.

[pradyuman-verma]

Soln3: Checksum is used to check for typos in the addresses while copying them.

It should be while typing, not while copying!!

[pradyuman-verma]

Soln5: A blockchain network splits (fork) into two different chains due to a change in underlying software which is governing the network.

The fork in the blockchain is a pretty common thing every day. It happens up to one or maybe two blocks. Remember blockchain fork happens when two people simultaneously produce and broadcast their block, and some nodes have block by the former miner, and remaining have by later one.

But the major split can happen due to an upgrade in the existing software.

[pradyuman-verma]

Great work, thanks for posting!