Blockchain Working

 Unit 2

Q.1} What is digital token? State different types of digital tokens

Digital Token
            Digital tokens are either intrinsic or created by software and assigned a certain utility. Examples of intrinsic digital tokens are Bitcoin and Ether. The other type of digital token is asset-backed, which is issued to represent a claim on a redeemable asset such as legal tender or precious metals.

Different types of digital token

1.Currency Token
            Similar to how coins function, but more specific in their usage, payment tokens have the sole use of payment for services or goods. For example Bitcoin is a type of currency token meant to pay for goods and services. Bitcoin was, in fact, created to replace fiat (paper) money

2.Utility Token
            Utility tokens are more than a means of payment. Specifically, they give users the power to trade cryptocurrencies at lower fees since utility tokens provide them access to the developers’ platforms. The utility tokens are used to gain access to a certain part of a dApp, such as a particular service or product offering. An example of a utility token is Ethereum, although it can also fall under the currency token category. Ethereum, an example of a utility token, was intended for use on a single platform.

3.Investment / Security Token
            By the name itself, these tokens refer to assets that can give investors a positive return on their investment. These tokens make it easy for customers to access multiple investments: Just as a single E-Trade investment account can keep records for a variety of different stocks and bonds, a blockchain-based digital wallet can do the same for a range of different security tokens, representing equity, debt and even real estate.

4. Asset-Backed / Commodity Token
            Tokens that are backed by a real asset, such as gold, real estate or bonds, are called asset tokens. These tokens represent the value of real assets and can be used for buying/selling the assets that they back. This improves the trading of physical assets on digital platforms.

5. Hybrid Token
            These are special tokens that are designed to act as a reputation token for a specific blockchain application. These are given in rewards, usually for free, to someone as appreciation. A perfect example is Medipedia Point Rewards (MPR) which are given to the services providers on the platform based on their performance reviews. A reward token doesn’t necessarily have a real value same as a standard token.

Q.3} Explain PoW consensus

            The idea for Proof of Work(PoW) was first published in 1993 by Cynthia Dwork and Moni Naor and was later applied by Satoshi Nakamoto in the Bitcoin paper in 2008. Proof of Work consensus is the mechanism of choice for the majority of cryptocurrencies currently in circulation. The term “proof of work” was first used by Markus Jakobsson and Ari Juels in a publication in 1999.

            The process of verifying the transactions in the block to be added, organizing these transactions in a chronological order in the block and announcing the newly mined block to the entire network does not take much energy and time. The energy consuming part is solving the ‘hard mathematical problem’ to link the new block to the last block in the valid blockchain. When a miner finally finds the right solution, the node broadcasts it to the whole network at the same time, receiving a cryptocurrency prize (the reward) provided by the PoW protocol. At the time of writing this article, mining a block in the bitcoin network gives the winning miner 12.5 bitcoins. The amount of bitcoins won halves every four years or so(thats how the bitcoin network is designed). So, the next deduction in the amount of bitcoin is due at around 2020-21(with the current rate and growth)
            With more miners comes the inevitability of the time it takes to mine the new block getting shorter. This means that the new blocks are found faster. In order to consistently find 1 block every 10 minutes (That is the amount of time that the bitcoin developers think is necessary for a steady and diminishing flow of new coins until the maximum number of 21 million is reached (expected some time with the current rate in around 2140)), the Bitcoin network regularly changes the difficulty level of mining a new block. The miners bundle up a group of transactions into a block and try to mine. To mine it, a hard mathematical problem has to be solved. This problem is called the proof of work problem which has to be solved to show that the miner has done some work in finding out the solution to the problem and hence the mined block must be valid. The answer to the problem needs to be a lower number than the hash of the block for it to be accepted, known as the ‘target hash’.A target hash is a number that the header of a hashed block must be equal to or less than for a new block, along with the reward, to be awarded to a miner. The lower a target is, the more difficult it is to generate a block. A miner continues testing different unique values (known as nonce(s)) until a suitable one is produced. The miner who manages to solve the problem gets the bitcoin reward and adds the block into the blockchain by broadcasting that the block has been mined. The target hash adjusts once every 2016 blocks or approximately once every 2 weeks. All the miners immediately stop work on the said block and start mining the next block. Common cryptographic protocols used in Proof of Work systems: The most widely used proof-of-work consensus is based on SHA-256 and was introduced as a part of Bitcoin. Others include Scrypt, SHA-3, scrypt-jane, scrypt-n, etc

Features of Proof of Work system:

There are mainly two features that have contributed to the wide popularity of this consensus protocol and they are:

•  It is hard to find a solution for the mathematical problem
•  It is easy to verify the correctness of that solution