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A Foundational Discussion of Blockchain Security

Komodo’s form of providing security is called Delayed Proof of Work technology (dPoW). It builds on the most advanced form of blockchain security in existence, Proof of Work technology (PoW). The latter form of security is the method that the Bitcoin network utilizes. To understand the value of Komodo’s dPoW security, we must first explain how PoW works and why it is the most secure method of maintaining a decentralized blockchain. We must also examine PoW’s shortcomings, so that we may understand the need for Komodo’s dPoW method and the advantages it provides to the blockchain community.

To understand how PoW technology functions, we begin by explaining the roots that make the Bitcoin protocol a viable means of securely transferring value.

The creation of blockchain technology stems from the early mathematical studies of encryption using computer technology.

One such example is related to the information-encoding device, "Enigma," invented by the Germans at the end of World War I. Alan Turing, a British Intelligence agent, famously beat the Enigma device by inventing the world’s first "digital computer." This provided enough computing power to break Enigma’s encryption and discover the German secret communications.

This early affair with encryption set off a race throughout the world to develop myriad forms of securely transferring information from one party to another via computer technology. While each new form of computer encryption provided more advantages, there remained one problem that prevented encryption from being useful as a means of transferring not just information, but also financial value.

This challenge is known as the "Double Spend" problem. The issue lies in the ability of computers to endlessly duplicate information. In the case of financial value, there are three important things to record: who owns a specific value; the time at which the person owns this value; the wallet address in which the value resides. When transferring financial value from one person to another, it is essential that if Person A sends money to Person B, Person A should not be able to duplicate the same money and send it again to Person C.

The Bitcoin protocol, invented by an anonymous person (or persons) claiming the name of Satoshi Nakamoto, solved the Double Spend problem. The underlying math and computer code is both highly complex and innovative. For the purposes of this paper we need only focus on the one aspect of the Bitcoin protocol that solves the Double Spend problem: the consensus mechanism.

The consensus mechanism created by Nakamoto is perhaps one of the most powerful innovations of the twenty-first century. His invention allows individual devices to work together, using high levels of encryption, to securely and accurately track ownership of digital value (be it financial resources, digital eal estate, etc.). It performs this in a manner that does not allow anyone on the same network (i.e. the Internet) to spend the same value twice.

Let us suppose a user, Alice, indicates in her digital wallet that she wants to send cryptocurrency money to a friend. Alice’s computer now gathers several pieces of information, including any necessary permissions and passwords, the amount that Alice wants to spend, and the receiving address of her friend’s wallet. All this information is gathered into a packet of data, called a "transaction," and Alice’s device sends the transaction to the Internet.

There are several types of devices that will interact with Alice’s transaction on the Internet. These devices will share the transaction information with other devices supporting the cryptocurrency network. For this discussion, we need only focus on one type of device: a cryptocurrency miner.

The following descriptions are simplified explanations of a truly complex byzantine process. There are many other strategies cryptocurrency miners devise to out-mine their competition, and those strategies can vary widely.

This device is performing an activity called cryptocurrency "mining." Let us focus now on a mining device that captures Alice’s raw transaction data. This device is owned by a tech-savvy miner, named Bob, who wants to add Alice’s transaction to the permanent history of the Bitcoin network.

If Bob is the first person to properly process Alice’s transaction he will receive a financial reward. One key part of this reward is a percentage-based fee, taken from Alice’s total transaction amount.

Furthermore, Bob does not have just one transaction alone to mine. Rather, he has an entire pool of raw transactions, created by many people across the Internet. The raw data for each of these transactions sits in the local memory bank of each miner’s mining device, awaiting the miner’s commands. Miners call this pool of transactions, the "mempool." Most miners have automated systems to determine the transaction- selection process, based on estimated profit.

After Bob makes his choices about which transactions he will attempt to mine (and we assume that he includes Alice’s transaction), Bob’s mining device then begins a series of calculations.

His device will first take each individual transaction’s raw data and use mathematical formulas to compress the transaction into a smaller, more manageable form. This new form is called a "transaction hash." For instance, Alice’s transaction hash could look like this:


Bob will prepare potentially hundreds of transaction hashes before proceeding to the next step.One important thing to understand about the compression of data in the Bitcoin protocol, including the transaction hash above, is that calculations herein obey a principle called, The Cascade Effect.

The Cascade Effect simply means that were Bob to attempt to change even the smallest bit in the raw data—whether from a desire to cheat, or by mistake, or for any other reason—the entire transaction hash would dramatically change. In this way, the mathematical formulas in the Bitcoin protocol ensure that Bob cannot create an improper history.

Were Bob to attempt to create an incorrect transaction hash, other miners on the network could use the raw transaction data from Alice, perform the proper mathematical formulas in the Bitcoin protocol, and immediately discover that Bob’s hashes are incorrect. Thus, all the devices on the network would reject Bob’s incorrect attempts and prevent him from claiming rewards.

Now, using more mathematical formulas, Bob takes the transaction hashes he is attempting to process and compresses them into a new manageable piece of data.

This is called, "the merkle root." It represents all the transactions that Bob hopes to process, and from which he hopes to gain a reward. Bob’s merkle root could look like this:


Finally, Bob will gather information provided from the last miner that successfully added to the permanent blockchain history. This information is called, "the block header." It contains a large amount of complex data, and we won’t go into all the details. The one important element to note is that the block header gives Bob clues about how to properly add the next piece of information to the permanent Bitcoin history. One of these hints could look like this:

"difficulty" : 1.00000000

We will return to this clue further on.

Having all this information, Bob is nearly prepared. His next step is where the real challenge begins.

Bob’s computer is going to gather all the above information and collect it into a set of data called a "block." Mining this block and adding it to the list of blocks that came before is the process of creating a "chain" of blocks—hence the industry title, "blockchain."

However, adding blocks to the blockchain is not so easy. While Bob may have everything up to this point correctly prepared, the Bitcoin protocol does not yet give Bob the right to add his proposed block to the chain.

The consensus mechanism is designed to force the miners to compete for this right. By requiring the miners to work for the right to mine a new valid block, competition spreads across the network. This provides many benefits, including time for the trans- actions of users (like Alice) to disseminate around the world, thus providing a level of decentralization to the network.

Therefore, although Bob would prefer to immediately create a new valid block and collect his reward, he cannot. He must win the competition by performing the proper work first. This is the source of the title of the Bitcoin-protocol consensus mechanism, "Proof of Work" (PoW).

The competition that Bob must win is to be the first person to find an answer to a simple mathematical puzzle, designed by Satoshi Nakamoto. To solve the puzzle, Bob guesses at random numbers until he discovers a correct number. The correct number is determined by the internal complex formulas of the consensus mechanism and cannot be discovered by any means other than guessing. Bitcoin miners call this number a "nonce," which is short for "a ‘number’ you use ‘once.’" Bob’s mining device will make random guesses at the nonce, one after another, until a correct nonce is found. With each attempt, Bob will first insert the proposed nonce into the rest of his block. To find out if his guess is correct, he will next use mathematical formulas (like those he used earlier) to compress his attempt into a "block hash." A block hash is a small and manageable form of data that represents the entire history of the Bitcoin blockchain and all the information in Bob’s proposed block. A block hash can look like this:


Recall now The Cascade Effect, and how it states that changing one small number in the data before performing the mathematical computations creates a vastly different outcome. Since Bob is continually including new guesses at the nonce with each computation of a block hash, each block-hash attempt will produce a widely different sequence of numbers. Miners on the Bitcoin network know when a miner, such as Bob, solves the puzzle; by observing the clues that were provided earlier. Recall that the last time a miner successfully added data to the blockchain, they provided these clues in their block header. One of the clues from the previous block header can look like this:

"difficulty" : 1.00000000

This detail, "difficulty," simply tells miners how many zeros should be at the front of the next valid block hash. When the difficulty setting is the level displayed above, it tells miners that there should be exactly ten zeros. Observe Bob’s attempted block hash once again, which he created after making a guess at a nonce, adding this proposed nonce into his block, and performing the mathematical formulas:


The block hash above has ten zeros at the beginning, which matches the number of zeros in the difficulty level. Therefore, the hash that Bob proposed is correct. This must mean that he guessed a correct nonce. All the miners on the network can prove for themselves that Bob was correct by taking all the same information from their mempools, adding Bob’s nonce, and performing the mathematical calculations. They will receive the same result, and therefore Bob is the winner of this round. On the other hand, due to the Cascade Effect, if Bob’s attempted nonce had produced a block hash with the incorrect number of zeros at the front, his block hash would be invalid. The network would not afford him the right to add an incorrect block hash to the network, and all the miners would continue searching.

Once a miner discovers a nonce that produces a valid block hash, the miner has "found a new block," and can send the signal across the Internet. The consensus mechanism running on every other mining device can verify for themselves the calculations. Once verified, the consensus mechanism grants the miner the right both to add the proposed block to the blockchain, and to receive the reward. Let us return to Bob’s machine, having just guessed a correct nonce, and thus holding a valid block hash. Bob’s machine instantly sends out the winning information across the Internet, and Bob collects his reward from the Bitcoin network. All the other miners must readjust. Earlier, they were searching for the correct nonce based off the information from the previous block header. However, Bob’s new valid block includes a new block header. All the other miners on the network abandon their current work, adopt Bob’s new block header, make many recalculations in their underlying data, and begin their search for the next nonce. There is no sympathy in the Bitcoin protocol for any miner’s wasted efforts. Suppose another machine on the network was also trying to mine Alice’s transaction, and lost to Bob in the race. Only Bob earns the reward from Alice’s transaction, and the other miner receives nothing in return for their costs and time. For Alice, this process seems simple. She first indicated the wallet address of her friend and sent cryptocurrency. After a certain amount of time, her friend received the money. Alice can ignore the byzantine process of the miners that occurred between these two events. Alice may not realize it, but the PoW consensus mechanism provides the foundation of security upon which she relies.