Chapter 2 Blockchain Basics PDF

[[Chapter 2: Blockchain Basics]]{.smallcaps} ======================================================== Introduction ------------ \"Chase the vision, not the money, the money will end up following you.\" - Tony Hsieh Internet Eras ------------- - The internet has evolved through distinct eras:...

[[Chapter 2: Blockchain Basics]]{.smallcaps} ======================================================== Introduction ------------ \"Chase the vision, not the money, the money will end up following you.\" - Tony Hsieh Internet Eras ------------- - The internet has evolved through distinct eras: - **First Era\*\*:** **Internet of Information**\ Web 1: Read-only web\ Web 2: Participative social web - **Second Era\*\*:** **Internet of Value**\ Web 3: Read, write, execute web b. Internet limitations - The internet is facing lots of **challenges**: - Centralization/Control - Privacy/Identity/Personal data - Security - Third parties "God protocol" - Digital conglomerates (data) - Not shared resources (was supposed to be) Blockchain Definition --------------------- - According to McKinsey, \'Blockchain is **a secure database shared** across a **network of participants**, where **up-to-date information** is available to **all participants** at **the same time**.\' Blockchain Benefits ------------------- - Key benefits of blockchain include:\ - **Enhanced security**: Information is tamper-resistant.\ - **Transparency:** Full history accessible to all participants.\ - **Real-time traceability:** Audit trails make fraud difficult.\ - **Efficiency and speed**: Transactions are validated faster and with fewer errors.\ - **Automated transactions**: Enabled by smart contracts.\ - **Cost reduction**: Fewer intermediaries reduce expenses and time. Centralized vs Decentralized Systems ------------------------------------  --------------------- Distributed Ledger Technology (DLT) ----------------------------------- - Investopedia defines DLT as **\'a database** that is consensually **shared** and **synchronized** across multiple **sites, institutions, or geographies**, accessible by **multiple people.** - Blockchain is one **type of DLT** but not all DLTs use blockchain. Examples include DAG (Directed Acyclic Graph) and Hashgraph. 6. Blockchain vs DLT 7. How Blockchain Works -------------------- - Steps involved in blockchain functionality: - A **transaction request** is initiated (e.g., buying/selling). - The request is **sent to the P2P** network (nodes). - Nodes **verify** and **approve** the transaction. - A **new block** is **created** and **added to the blockchain**. - The transaction is complete. What Type of Blockchain? ------------------------ - There are several types of blockchains: --------------------------------------- - Permissionless vs Permissioned ------------------------------ - Public vs Private ----------------- - Hybrid ------ - Consortium ---------- - That's the process of securing the information and communication using codes and algorithms, also called "encryption". ---------------------------------------------------------------------------------------------------------------------- - 2 types of encryptions: ----------------------- - Symmetrical ----------- - Asymmetrical ------------ Symmetric Encryption -------------------- - The sender obtains a **secret key**. - The sender uses the **key to encrypt the message, data** or file into ciphertext. - The sender **transmits the encrypted data** over to the receiver. - The receiver uses the **same secret key** to decrypt the message. Asymmetric Encryption --------------------- - The sender obtains the **receiver's public key** (from a public database or directly from the receiver). - The sender uses the *key to encrypt the message, data or file into* ciphertext. - The sender **transmits the encrypted** data over to the receiver. - The receiver uses **their private key** to decrypt the message - Never share your private key How to prevent double spending attacks -------------------------------------- - Sound consensus mechanisms: - **Inclusion of cryptographic items (e.g. nonce)** - **Timestamp** - **Smart contract audit** Consensus Mechanisms -------------------- - Consensus mechanisms **ensure agreement about the ledger\'s state** in blockchain systems. - Examples include:\ - **Proof of Work** (PoW): Energy-intensive, used in Bitcoin.\ - **Proof of Stake** (PoS): Validators \'stake\' tokens for block validation.\ - **Delegated Proof of Stake** (DPoS): Delegates vote on validators.\ - **Proof of Authority** (PoA): Validators are pre-approved.\ - **Proof of Burn** (PoB): Participants \'burn\' tokens to validate. a. Proof of work - Functioning: - **Miners** are **tasked with solving complex mathematical problems** that require significant computational power. - The **first miner to solve the problem** gets to **create the next block** on the blockchain. - As a **reward**, the **successful miner receives a portion of the block** (a fraction of Bitcoin). b. Proof of Stake - Functioning: - Most popular mechanism. - **Validators organized in nodes**, must \"**stake**\" (hold) tokens to **validate blocks**. - The system uses a **combination of factors**, including the **duration of staking**, an element of randomness, and the node\'s wealth. - The node that **validates the block receives a portion of the transaction fee** as a reward c. PoW vs Pos  Market Overview --------------- - The blockchain technology market was valued at USD 10.02 billion in 2022 and is expected to grow at a CAGR of 87.7% from 2023 to 2030. Blockchain Stakeholders ----------------------- - Key stakeholders in the **blockchain ecosystem** include:\ - **Developers\ **- **Companies\ **- **Investors**\ - **Miners**\ - **Regulators/Governments**\ - **Users/Customers** Double Spending Problem ----------------------- - Cryptocurrencies could be **spent twice due to their digital nature**. - To prevent this:\ - **Use sound consensus mechanisms**.\ - **Include cryptographic measures** (e.g., nonce).\ - **Maintain timestamps** and **conduct smart contract audits**. Programming for Blockchain -------------------------- Top programming languages for blockchain development include Solidity, JavaScript, Python, Simplicity, and C++.