Update ch08.asciidoc

Proposed changes

ch08.asciidoc

@@ -6,7 +6,7 @@
 
 Mining is the process by which new bitcoin is added to the money supply. Mining also serves to secure the bitcoin system against fraudulent transactions or transactions spending the same amount of bitcoin more than once, known as a double-spend. Miners act as a decentralized clearinghouse, validating new transactions and recording them on the global ledger. A new block, containing transactions which occurred since the last block, is "mined" every 10 minutes thereby adding those transactions to the blockchain. Transactions that become part of a block and added to the blockchain are considered "confirmed", which allows the new owners of bitcoin to spend the bitcoin they received in those transactions. Miners receive two types of reward for mining: new coins created with each new block and transaction fees from all the transactions included in the block. To earn this reward, the miners compete to solve a difficult mathematical problem based on a cryptographic hash algorithm. The solution to the problem, called the Proof-of-Work, is included in the new block and acts as proof that the miner expended significant computing effort. The competition to solve the Proof-of-Work algorithm to earn reward and the right to record transactions on the blockchain is the basis for bitcoin's security model. 
 
-The process of new coin generation is called mining, because the reward is designed to simulate diminishing returns, just like mining for precious metals. Bitcoin's money supply is created through mining, just like a central bank issues new money by printing bank notes. The amount of newly created bitcoin a miner can add to a block decreases approximately every four years (or precisely every 210,000 blocks). It started at 50 bitcoin per block in January of 2009 and halved to 25 bitcoin per block in November of 2012. It will halve again to 12.5 bitcoin per block sometime in 2016. Based on this formula, bitcoin mining rewards decrease exponentially until approximately the year 2140 when all bitcoin (20.99 million) will have been issued. After 2140, no new bitcoins are issued.
+The process of new coin generation is called mining, because the reward is designed to simulate diminishing returns, just like mining for precious metals. Bitcoin's money supply is created through mining, just like a central bank issues new money by printing bank notes. The amount of newly created bitcoin a miner can add to a block decreases approximately every four years (or precisely every 210,000 blocks). It started at 50 bitcoin per block in January of 2009 and halved to 25 bitcoin per block in November of 2012. It will halve again to 12.5 bitcoin per block sometime in 2016. Based on this formula, bitcoin mining rewards decrease exponentially until approximately the year 2140 when all bitcoin (20.99999998 million) will have been issued. After 2140, no new bitcoins are issued.
 
 Bitcoin miners also earn fees from transactions. Every transaction may include a transaction fee, in the form of a surplus of bitcoin between the transaction's inputs and outputs. The winning bitcoin miner gets to "keep the change" on the transactions included in the winning block. Today the fees represent 0.5% or less of a bitcoin miner's income, the vast majority coming from the newly minted bitcoins. However, as the reward decreases over time and the number of transactions per block increases, a greater proportion of bitcoin mining earnings will come from fees. After 2140 all bitcoin miner earnings will be in the form of transaction fees.
 
@@ -28,7 +28,7 @@ The finite and diminishing issuance creates a fixed monetary supply that resists
 
 The most important and debated consequence of a fixed and diminishing monetary issuance is that the currency will tend to be inherently _deflationary_. Deflation is the phenomenon of appreciation of value due to a mismatch in supply and demand that drives up the value (and exchange rate) of a currency. The opposite of inflation, price deflation means that the money has more purchasing power over time.
 
-Many economists argue that a deflationary economy is a disaster that should be avoided at all costs. That is because in a period of rapid deflation people will tend to hoard money instead of spending it, hoping that prices will fall. Such a phenomenon unfolded during Japan's "Lost Decade", when a complete collapse of demand pushed the currency into a deflationary spiral. 
+Many economists argue that a deflationary economy is a disaster that should be avoided at all costs. That is because in a period of rapid deflation, people will tend to hoard money instead of spending it, hoping that prices will fall. Such a phenomenon unfolded during Japan's "Lost Decade", when a complete collapse of demand pushed the currency into a deflationary spiral. 
 
 Bitcoin experts argue that deflation is not bad *per se*. Rather, deflation is associated with a collapse in demand because that is the only example of deflation we have to study. In a fiat currency with the possibility of unlimited printing, it is very difficult to enter a deflationary spiral unless there is a complete collapse in demand and an unwillingness to print money. Deflation in bitcoin is not caused by a collapse in demand, but by a predictably constrained supply. 
 
@@ -40,7 +40,7 @@ In the previous chapter we looked at the blockchain, the global public ledger (l
 
 But how can everyone in the network agree on a single universal "truth" about who owns what, without having to trust anyone? All traditional payment systems depend on a trust model that has a central authority providing a clearinghouse service, basically verifying and clearing all transactions. Bitcoin has no central authority, yet somehow every node has a complete copy of a public ledger that it can trust as the authoritative record. The blockchain is not created by a central authority, but is assembled independently by every node in the network. Somehow, every node in the network, acting on information transmitted across insecure network connections can arrive at the same conclusion and assemble a copy of the same public ledger as everyone else. This chapter examines the process by which the bitcoin network achieves global consensus without central authority.
 
-Satoshi Nakamoto's main invention is the decentralized mechanism for _emergent consensus_. Emergent, because consensus is not achieved explicitly - there is no election or fixed moment when consensus occurs. Instead, consensus is an emergent artifact of the asynchronous interaction of thousands of independent nodes, all following simple rules. All the properties of bitcoin, including currency, transactions, payments and the security model that does not depend central authority or trust derive from this invention. 
+Satoshi Nakamoto's main invention is the decentralized mechanism for _emergent consensus_. Emergent, because consensus is not achieved explicitly - there is no election or fixed moment when consensus occurs. Instead, consensus is an emergent artifact of the asynchronous interaction of thousands of independent nodes, all following simple rules. All the properties of bitcoin, including currency, transactions, payments and the security model that does not depend central authority or trust, derive from this invention. 
 
 Bitcoin's de-centralized consensus emerges from the interplay of four processes that occur independently on nodes across the network: 
 
@@ -64,10 +64,10 @@ Each node verifies every transaction against a long checklist of criteria:
 * Make sure neither lists of inputs or outputs are empty
 * The transaction size in bytes is less than MAX_BLOCK_SIZE
 * Each output value, as well as the total, must be within the allowed range of values (less than 21m coins, more than 0)
-* Check none of the inputs have hash=0, N=-1 (coinbase transactions should not be relayed)
+* Check that none of the inputs have hash=0, N=-1 (coinbase transactions should not be relayed)
 * Check that nLockTime is less than or equal to INT_MAX
 * Check that the transaction size in bytes is greater than or equal to 100
-* Check the number of signature operations contained in the transaction is less than the signature operation limit
+* Check that the number of signature operations contained in the transaction is less than the signature operation limit
 * Reject "nonstandard" transactions: unlocking script (scriptSig) doing anything other than pushing numbers on the stack, or the locking script (scriptPubkey) not matching isStandard forms
 * Check for a matching transaction in the pool, or in a block in the main branch, if so reject this transaction
 * For each input, if the referenced output exists in any other transaction in the pool, reject this transaction.
@@ -115,7 +115,7 @@ In the equation above, the value of an input is measured in the base unit, satos
 For a transaction to be considered "high priority" its priority must be greater than 57,600,000, which corresponds to one bitcoin (100m satoshis), aged one day (144 blocks) in a transaction of 250 bytes total size.
 
 ----
-High Priority = 100,000,000 satoshis * 144 blocks / 250 bytes = 57,600,000
+High Priority > 100,000,000 satoshis * 144 blocks / 250 bytes = 57,600,000
 ----
 
 The first 50 kilobytes of transaction space in a block are set aside for high priority transactions. Jing's node will fill the first 50 kilobytes, prioritizing the highest priority transactions first, regardless of fee. This allows high-priority transactions to be processed even if they carry zero fees.
@@ -292,7 +292,7 @@ The generation transaction input, however, looks like this:
 |=======
 |Size| Field | Description
 | 32 bytes | Transaction Hash | All bits are zero: Not a transaction hash reference
-| 4 bytes | Output Index | All bits are ones: 0xFFFF
+| 4 bytes | Output Index | All bits are ones: 0xFFFFFFFF
 | 1-9 bytes (VarInt) | Coinbase Data Size | Length of the Coinbase Data, from 2 to 100 bytes
 | Variable | Coinbase Data | Arbitrary Data used for extra nonce and mining tags
 In v2 blocks, must begin with block height
@@ -311,11 +311,11 @@ The first few bytes of the coinbase used to be arbitrary, but that is no longer
 
 In block 277,316 we see that the coinbase (see <<generation_tx_example>>), which is in the "Unlocking Script" or scriptSig field of the transaction input, contains the hexadecimal value +03443b0403858402062f503253482f+. Let's decode this value. 
 
-The first byte, +03+ instructs the script execution engine to push the next 3 bytes onto the script stack (see <<tx_script_ops_table_pushdata>>). The next 3 bytes, +0x443b04+, are the block height encoded in little-endian format (backwards, least significant bit first). Reverse the order of the bytes and the result is +0x043b44+ which is 277,316 in decimal. 
+The first byte, +03+ instructs the script execution engine to push the next 3 bytes onto the script stack (see <<tx_script_ops_table_pushdata>>). The next 3 bytes, +0x443b04+, are the block height encoded in little-endian format (backwards, least significant byte first). Reverse the order of the bytes and the result is +0x043b44+ which is 277,316 in decimal. 
 
 The next few hexadecimal digits (+03858402062+) are used to encode an extra _nonce_, or random value, used to find a suitable Proof-of-Work solution. This is discussed in more detail in the next section on <<mining>>
 
-The final part of the coinbase data (+2f503253482f+) is the ASCII-encoded string "/P2SH/", which indicates that mining node that mined this block supports the Pay-to-Script-Hash (P2SH) improvement defined in BIP0016. The introduction of the P2SH capability required a "vote" by miners to endorse either BIP0016 or BIP0017. Those endorsing the BIP0016 implementation were to include "/P2SH/" in their coinbase data. Those endorsing the BIP0017 implementation of P2SH were to include the string "p2sh/CHV" in their coinbase data. The BIP0016 was elected as the winner, and many miners continued including the string "/P2SH/" in their coinbase to indicate support for this feature.
+The final part of the coinbase data (+2f503253482f+) is the ASCII-encoded string "/P2SH/", which indicates that the mining node that mined this block supports the Pay-to-Script-Hash (P2SH) improvement defined in BIP0016. The introduction of the P2SH capability required a "vote" by miners to endorse either BIP0016 or BIP0017. Those endorsing the BIP0016 implementation were to include "/P2SH/" in their coinbase data. Those endorsing the BIP0017 implementation of P2SH were to include the string "p2sh/CHV" in their coinbase data. The BIP0016 was elected as the winner, and many miners continued including the string "/P2SH/" in their coinbase to indicate support for this feature.
 
 === Constructing the Block Header
 
@@ -430,7 +430,7 @@ The number used as a variable in such a scenario is called a _nonce_. The nonce
 
 To make a challenge out of this algorithm, let's set an arbitrary target: find a phrase that produces a hexadecimal hash that starts with a zero. Fortunately, this isn't so difficult! If you notice above, we can see that the phrase "I am Satoshi Nakamoto13" produces the hash 0ebc56d59a34f5082aaef3d66b37a661696c2b618e62432727216ba9531041a5, which fits our criteria. It took 13 attempts to find it. In terms of probabilities, if the output of the hash function is evenly distributed we would expect to find a result with a 0 as the hexadecimal prefix once every 16 hashes (one out of 16 hexadecimal digits 0 through F). In numerical terms, that means finding a hash value that is less than +0x1000000000000000000000000000000000000000000000000000000000000000+. We call this threshold the _target_ and the goal is to find a hash that is numerically _less than the target_. If we decrease the target, the task of finding a hash that is less than the target becomes more and more difficult. 
  
-To give a simple analogy, imagine a game where players throw a pair of dice repeatedly, trying to throw less than a specified target. In the first round, the target is 12. Unless you throw double-six, you win. In the next round the target is 11. Players must throw 10 or less to win, again an easy task. Let's say a few rounds later the target is down to 5. Now, more than half the dice throws will add up to more than 5 and therefore be invalid. It takes exponentially more dice throws to win the lower the target gets. Eventually, when the target is 2 (the minimum possible), only one throw out of every 36, or 2% of them will produce a winning result. 
+To give a simple analogy, imagine a game where players throw a pair of dice repeatedly, trying to throw less than a specified target. In the first round, the target is 12. Unless you throw double-six, you win. In the next round the target is 11. Players must throw 10 or less to win, again an easy task. Let's say a few rounds later the target is down to 5. Now, more than half the dice throws will add up to more than 5 and therefore be invalid. It takes exponentially more dice throws to win, the lower the target gets. Eventually, when the target is 2 (the minimum possible), only one throw out of every 36, or 2% of them will produce a winning result. 
 
 In the example above, the winning "nonce" is 13 and this result can be confirmed by anyone independently. Anyone can add the number 13 as a suffix to the phrase "I am Satoshi Nakamoto" and compute the hash, verifying that it is less than the target. The successful result is also proof-of-work, as it proves we did the work to find that nonce. While it only takes one hash computation to verify, it took us 13 hash computations to find a nonce that worked. If we had a lower target (higher difficulty) it would take many more hash computations to find a suitable nonce, but only one hash computation for anyone to verify. Furthermore, by knowing the target, anyone can estimate the difficulty using statistics and therefore know how much work was needed to find such a nonce.
 
@@ -515,7 +515,7 @@ Hashing Power: 127141 hashes per second
 
 As you can see, increasing the difficulty by 1 bit causes an exponential increase in the time it takes to find a solution. If you think of the entire 256-bit number space, each time you constrain one more bit to zero, you decrease the search space by half. In the example above, it takes 84 million hash attempts to find a nonce that produces a hash with 26 leading bits as zero. Even at a speed of more than 120 thousand hashes per second, it still requires ten minutes on a consumer laptop to find this solution. 
 
-At the time of writing this, the network is attempting to find a block whose header hash is less than +000000000000004c296e6376db3a241271f43fd3f5de7ba18986e517a243baa7+. As you can see, there are a lot of zeroes at the beginning of that hash, meaning that the acceptable range of hashes is much smaller, hence more difficult to find a valid hash. It will take on average more 150 quadrillion hash calculations per second for the network to discover the next block. That seems like an impossible task, but fortunately the network is bringing 100 Peta Hashes per second of processing power to bear, which will be able to find a block in about 10 minutes on average. 
+At the time of writing this, the network is attempting to find a block whose header hash is less than +000000000000004c296e6376db3a241271f43fd3f5de7ba18986e517a243baa7+. As you can see, there are a lot of zeroes at the beginning of that hash, meaning that the acceptable range of hashes is much smaller, hence more difficult to find a valid hash. It will take on average more then 150 quadrillion hash calculations per second for the network to discover the next block. That seems like an impossible task, but fortunately the network is bringing 100 Peta Hashes per second of processing power to bear, which will be able to find a block in about 10 minutes on average. 
 
 ==== Difficulty Representation
 
@@ -551,7 +551,7 @@ As we saw above the target determines the difficulty and therefore affects how l
 
 Bitcoin's blocks are generated every 10 minutes, on average. This is bitcoin's heartbeat and underpins the frequency of currency issuance and the speed of transaction settlement. It has to remain constant not just over the short term, but over a period of many decades. Over this time, it is expected that computer power will continue to increase at a rapid pace. Furthermore, the number of participants in mining and the computers they use will also constantly change. To keep the block generation time at 10 minutes, the difficulty of mining must be adjusted to account for these changes. In fact, difficulty is a dynamic parameter that will be periodically adjusted to meet a 10-minute block target. In simple terms, the difficulty target is set to whatever mining power will result in a 10-minute block interval. 
 
-How then is such an adjustment made in a completely de-centralized network? Difficulty re-targeting occurs automatically and on every full node independently. Every 2016 blocks, all nodes re-target the Proof-of-Work difficulty. The equation for retargeting difficulty measures the time it took to find the last 2016 blocks and compares that to the expected time of 20160 minutes (two weeks based upon a desired 10 minute block time). The ratio between the actual timespan and desired timespan is calculated and a corresponding adjustment (up or down) is made to the difficulty. In simple terms: If the network is finding blocks faster than every 10 minutes, the difficulty increases. If block discovery is slower than expected, the difficulty decreases. 
+How then is such an adjustment made in a completely de-centralized network? Difficulty re-targeting occurs automatically and on every full node independently. Every 2016 blocks, all nodes re-target the Proof-of-Work difficulty. The equation for retargeting difficulty, measures the time it took to find the last 2016 blocks and compares that to the expected time of 20160 minutes (two weeks based upon a desired 10 minute block time). The ratio between the actual timespan and desired timespan is calculated and a corresponding adjustment (up or down) is made to the difficulty. In simple terms: If the network is finding blocks faster than every 10 minutes, the difficulty increases. If block discovery is slower than expected, the difficulty decreases. 
 
 The equation can be summarized as:
 
@@ -735,13 +735,13 @@ Let's look at a specific example. Assume a miner has purchased mining hardware w
 
 Mining pools coordinate many hundreds or thousands of miners, over specialized pool mining protocols. The individual miners configure their mining equipment to connect to a pool server, after creating an account with the pool. Their mining hardware remains connected to the pool server while mining, synchronizing their efforts with the other miners. Thus, the pool miners share the effort to mine a block and then share in the rewards. 
 
-Successful blocks pay the reward to a pool bitcoin address, rather than individual miners. The pool server will periodically make payments to the miner bitcoin addresses, once their share of the rewards has reached a certain threshold. Typically, the pool server charges a percentage fee of the rewards for providing the pool mining service.
+Successful blocks pay the reward to a pool bitcoin address, rather than individual miners. The pool server will periodically make payments to the miners bitcoin addresses, once their share of the rewards has reached a certain threshold. Typically, the pool server charges a percentage fee of the rewards for providing the pool mining service.
 
 Miners participating in a pool, split the work of searching for a solution to a candidate block, earning "shares" for their mining contribution. The mining pool sets a lower difficulty target for earning a share, typically more than 1,000 times easier than the bitcoin network's difficulty. When someone in the pool successfully mines a block, the reward is earned by the pool and then shared with all miners in proportion to the number of shares they contributed to the effort. 
 
 Pools are open to any miner, big or small, professional or amateur. A pool will therefore have some participants with a single small mining machine, others with a garage-full of high-end mining hardware. Some will be mining with a few tens of a kilowatt of electricity, others will be running a data center consuming a megawatt of power. How does a mining pool measure the individual contributions, so as to fairly distribute the rewards, without the possibility of cheating? The answer is to use bitcoin's Proof-of-Work algorithm to measure each pool miner's contribution, but set at a lower difficulty so that even the smallest pool miners win a share frequently enough to make it worthwhile to contribute to the pool. By setting a lower difficulty for earning shares, the pool measures the amount of work done by each miner. Each time a pool miner finds a block header hash that is less than the pool difficulty, they prove they have done the hashing work to find that result. More importantly, the work to find shares contributes, in a statistically measurable way, to the overall effort to find a hash lower than the bitcoin network's target. Thousands of miners trying to find low-value hashes will eventually find one low enough to satisfy the bitcoin network target. 
 
-Let's return to the analogy of a dice game. If the dice players are throwing dice with a goal of throwing less than four (the overall network difficulty), a pool would set an easier target, counting how many times the pool players managed to throw less than eight. When a pool player throws eight or less (the pool share target), they earn shares, but they don't win the game because they don't achieve the game target (less than four). The pool players will achieve the easier pool target much more often, earning them shares very regularly, even when they don't achieve the harder target of winning the game. Every now and then, one of the pool players will throw a combined dice throw of four or less and the pool wins. Then, the earnings can be distributed to the pool players based on the shares they earned. Even though the target of eight-or-less wasn't winning, it was a fair way to measure dice throws for the players and occasionally produces a less-than-four throw. 
+Let's return to the analogy of a dice game. If the dice players are throwing dice with a goal of throwing less than four (the overall network difficulty), a pool would set an easier target, counting how many times the pool players managed to throw less than eight. When a pool player throws less then eight (the pool share target), they earn shares, but they don't win the game because they don't achieve the game target (less than four). The pool players will achieve the easier pool target much more often, earning them shares very regularly, even when they don't achieve the harder target of winning the game. Every now and then, one of the pool players will throw a combined dice throw of less then four and the pool wins. Then, the earnings can be distributed to the pool players based on the shares they earned. Even though the target of eight-or-less wasn't winning, it was a fair way to measure dice throws for the players and occasionally produces a less-than-four throw. 
 
 Similarly, a mining pool will set a pool difficulty that will ensure that an individual pool miner can find block header hashes that are less than the pool difficulty quite often, earning shares. Every now and then, one of these attempts will produce a block header hash that is less than the bitcoin network target, making it a valid block and the whole pool wins. 
 
@@ -755,7 +755,7 @@ Pool miners connect to the pool server using a mining protocol such as Stratum (
 
 ===== P2Pool
 
-Managed pools create the possibility of cheating by the pool operator, who might direct the pool effort to double-spend transactions or invalidate blocks (see <<51pct>>). Furthermore, centralized pool servers represent a single-point-of-failure. If the pool server is down or is attacked by Denial-of-Service, the pool miners cannot mine. In 2011, to resolve these issues of centralization, a new pooled mining method was proposed and implemented: P2Pool is a peer-to-peer mining pool, without a central operator. 
+Managed pools create the possibility of cheating by the pool operator, who might direct the pool effort to double-spend transactions or invalidate blocks (see <<51pct>>). Furthermore, centralized pool servers represent a single-point-of-failure. If the pool server is down or is attacked by Denial-of-Service, the pool miners cannot mine. In 2011, to resolve these issues of centralization, a new pool mining method was proposed and implemented: P2Pool is a peer-to-peer mining pool, without a central operator. 
     
 P2Pool works by de-centralizing the functions of the pool server, implementing a parallel blockchain-like system called a _sharechain_. A sharechain is a blockchain running at a lower difficulty than the bitcoin blockchain. The sharechain allows pool miners to collaborate in a de-centralized pool, by mining shares on the sharechain at a rate of one share block every 30 seconds. Each of the blocks on the sharechain records a proportionate share reward for the pool miners who contribute work, carrying the shares forward from the previous share block. When one of the share blocks also achieves the difficulty target of the bitcoin network it is propagated and included on the bitcoin blockchain, rewarding all the pool miners who contributed to the all the shares that preceded the winning share block. Essentially, instead of a pool server keeping track of pool miner shares and rewards, the sharechain allows all pool miners to keep track of all shares using a de-centralized consensus mechanism like bitcoin's blockchain consensus mechanism.