March 3, 2014 in Dogecoin
How is the Dogecoin network set up? How are transactions anonymous? How can you be sure it is completely secure? These are all questions that I have seen posed countless times about Dogecoin and other cryptocurrencies. So here's my attempt to explain this phenomenon of the Internet.
The first thing you must understand about the Dogecoin network is that it is completely decentralized. It is strictly peer-to-peer (doge-to-doge). This means that there isn't one master server that contains all of the data from transactions. EVERY miner (I'll get to mining later) has the exact same transaction data. Unlike a bank which has all of the data from all of the users, with cryptocurrencies, the users have all of the data from all of the other users. Because of the decentralized state of the network, it is impossible for someone to "hack" the network and steal coins.
The Blockchain is, in essence, a ledger of all of the transactions that have ever taken place, and the piece of data that is stored and exchanged between miners. The Blockchain is, like its name states, a chain of blocks. Each block contains all of the data from transactions occurring in approximately 1 minute. Each block in the chain is connected the block before it and after it in a chain-like fashion (much like a Linked List for you programmers out there). So how are the blocks created and verified? Mining.
Mining is the process by which dogecoin transactions are verified and new dogecoins are released into the network. Miners use their computing power (usually from graphics cards) to generate hashes. Hashes are numbers randomly generated via a function, that are used to encrypt the blocks. Hashes can be created but not decrypted, thus making them perfect for securing a network of transactions. Miners typically work in pools that combine their hashing power to create blocks. Once a pool has compiled enough hashes that meet the current difficulty, it is submitted.
Once a pool has created a block that meets the criteria, they get rewarded for their work. Currently, the payout is 1-500,000 Dogecoin per block (every 100,000 blocks the reward halves, see figure below). This reward is split up to the miners proportionally to how many hashes they contributed to the block. This is the clever part of the network structure. In order to keep the network secure, you need people hashing. With a reward being paid out, people will continue to mine and keep it secure. (Note: This is also what gives the coin value. I'll talk about that tommorrow)
A Dogecoin wallet is a small program that you run on your computer that allows you to send and receive Dogecoins from an address. A Dogecoin address is a public key hash of 34 letters and numbers, starting with a D (DJ7zB7c5BsB9UJLy1rKQtY7c6CQfGiaRLM,?Dogecoin Foundation). The addresses can be randomly generated from a wallet client. Because they are 34 characters long, the combinations are essentially infinite. Once you have a wallet, it downloads the lbockchain and your computer becomes a node on the network. Each time the wallet client is opened, it will synchronize with the network (other peers), and check for incoming transactions.
I hope you leave here a little less confused than you were before about the Dogecoin network. I could go way farther into detail about well, pretty much any of it, but I think I gave you the gist of it here.