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TL;DR: In this series, we will talk from the very blockchain basics to building a complex DAPP.
What is FIAT? 💰
- The standard currency is called FIAT.
- FIAT requires a middle man authority (a bank or a government as examples).
- A cryptocurrency in some technology (like blockchain) relies on automatic rules to comply with the exchange rules.
- The most widely used digital currencies are cryptocurrencies.
- We call them crypto because it relies on mathematical cryptographic properties similar to password encryption.
- We cannot trust other people around without a middle man.
- We use cryptography to exchange value in the same way we use https to send sensitive data over the internet.
- We have been using math hashes for a long time in computer science.
- Hash functions take an input and produce a deterministic output.
- We use hashes on databases, algorithms, and data structures.
- A good hash function is easy to calculate on the input, but very hard (in computer time) to reverse from the output.
- Multiplying two integers is a very fast operation.
- Factoring an integer into its prime factors is a very expensive operation (provided factors are large enough).
- We can transform any data on blockchain into numbers and encrypt them very fast.
- If we chain a block content, its hash changes unless they have the same hash.
- We called this a hash collision and can keep its probability near zero using math.
The Blockchain ⛓️
What is a blockchain? 🔗
- Blockchain is about decentralized trust.
- You exchange value without an intermediate.
- Trust issues are not solved by a middle man like a market, broker, credit card, or bank.
- You don't trust or rely on reputation or a certified third party.
- Standard middlemen are expensive, slow, and human errors prone.
- Blockchain was first designed to exchange currency.
- Nowadays it has many other uses such as managing loans, supporting all kinds of contracts, NFTs, Tokens, etc.
Which was the first blockchain? 🥇
- Satoshi Nakamoto (a collective or fake alias) released the First Blockchain proposition.
- Bitcoin was the first blockchain implementation.
- Blockchain technology was first designed for digital currency exchange.
- Blockchain secures transactions in an not-trusted medium (the internet).
Blockchain Properties 🌟
- Decentralize trust and carry on distributed transactions and electronic commerce.
- Remove man in the middle, merchant accounts, banks, clearing services.
- Reduce charges and improve efficiency by removing the middle man.
- Full auditability and transactions history.
- No single point of failure.
- We replicate the database in many places.
- Most blockchains are public, tough transactions might be encrypted.
Blockchain Implementation 🔧
How does it work? 🎰
- All new data is added, never removed, or replaced.
- Blockchains are immutable databases on transactions.
- Most traditional databases (relational, files, hierarchical, spreadsheet) can be overwritten.
- Blockchain only allows CREATE and READ, No UPDATE or DELETE.
- It is not a traditional CRUD.
How do we store data? 💾
- To update a change, we need to add a new transaction at the end.
- This is analogous to account ledgers.
- Every Block has a group of transactions with (possible) different partners.
- Blocks are chained like a linked list.
- Since blockchain is immutable; stored data is available forever.
- Blocks are replicated in nodes.
- Nodes are replicated all over the net.
- If we want to add new data, we need to reach a consensus.
- All nodes have the same authority and a single vote.
- We reach a Consensus once one of them gets (50% + 1) votes.
- A Transaction can be anything as long as we can store it with bytes.
- To transfer cryptocurrency we will add to the ledger a Transaction for an amount with source a destination addresses.
The chain 🔐
- Genesis Block is block 0
- Next block stores the previous block's hash as a linked list.
- The hash guarantees chain is neither broken nor faked
The Nonce 🔑
- To make hash computation hard we need to introduce some random data with the transaction.
- We force the hash value of the transactions + the fake data to have an arbitrary form.
- We ask the computed hash function to have some leading zeroes.
- At Bitcoin there are currently 19 zeroes.
- The random data is called a Nonce.
- We need a nonce such as, together with the valid transactions, it yields a hash with some leading zeroes.
- It is very costly to search for this nonce.
- Bitcoin uses leading zeroes. Other blockchain implementations use similar mechanisms.
What is mining? 👨🏭
- Mining is the artificial process to find the proper Nonce to add to a group of transactions to achieve a hash with a fixed number of leading zeroes.
- Mining takes a lot of computational time and energy.
- Miners use specialized hardware where energy is cheap all over the world.
- Nowadays, Mining is a threat to the environment.
- Nodes compete for the price provided it is valuable.
- The first one who solves the math puzzle gets the reward.
- After global validation, new Bitcoins (or equivalent) are rewarded to the one who solves the puzzle.
- Global validation is easy since hash encoding is cheap as opposed to hash decoding (mining).
- The reward motivates miners to legitimize and monitor Blockchain transactions, ensuring their validity.
Integrity and Trust 💱
- Blocks are added after consensus.
- If 50% +1 agree to fake a chain, they can do it. This is known as the 51 % Attack
- Proof of work is the most used mechanism and it consists of global hash validation.
- Proof of Stake requires less computer power than Proof of work. it uses bet voting to select a winner.
- Currently, there are no efficient ways to carry on Proof of Stake in a decentralized way.
- There are several other alternatives.
Voilá. This is basic Blockchain. Subscribe to learn advanced topics on these series.