1__Blockchain_and_Bitcoin.pdf

Blockchain and Bitcoin 1/2 Fintech Class (FNCE 481) Jaime Castillo Leon September 6, 2024 What is a Ledger? Placeholder Definition: A ledger is a record-keeping system that tracks transactions or movements of assets.It has been traditionally used in accounting t...

Blockchain and Bitcoin 1/2 Fintech Class (FNCE 481) Jaime Castillo Leon September 6, 2024 What is a Ledger? Placeholder Definition: A ledger is a record-keeping system that tracks transactions or movements of assets.It has been traditionally used in accounting to maintain financial records. Example: Scenario: Alice sends 1 BTC to Bob. Ledger Entry: — Date: 2024-09-03 — From: Alice — To: Bob — Amount: 1 BTC 2 / 25 The Challenge of a Decentralized Ledger Placeholder Decentralized Ledger: Definition A decentralized ledger is a record-keeping system where no single entity has control. Each participant in the network has a copy of the entire ledger. Transactions must be verified by the network as a whole, rather than by a central authority. Key Challenge: Achieving consensus among a distributed network of participants. Ensuring that the ledger is secure, accurate, and tamper-proof. Why It Matters: Without a central authority, the system must prevent fraudulent activities, such as double-spending. 3 / 25 The Double-Spending Problem Placeholder Definition The double spending problem refers to the risk that a digital currency can be spent more than once. In digital transactions, a user could potentially duplicate digital currency and spend it multiple times. Why It’s a Problem: Undermines the trust in the currency system. Could lead to inflation and devaluation of the digital currency. Example: Alice sends 1 BTC to Bob and then tries to send the same 1 BTC to Charlie. Without a proper mechanism to detect and prevent this, both transactions might be processed. 4 / 25 Which is the oldest blockchain? Placeholder A. Bitcoin B. Ethereum D. Other Think about it... 5 / 25 The World’s Oldest Blockchain Placeholder Surprise Answer: The world’s oldest blockchain has been hiding in the New York Times since 1995! How It Worked: In 1995, Stuart Haber and W. Scott Stornetta published hashes of digital records in the classified section of the New York Times. This was done to timestamp and validate the authenticity of digital documents. The hashes formed a chain, linking one to another, creating a primitive blockchain. Why It Matters: This early implementation laid the groundwork for the blockchain technology we know today. 6 / 25 Satoshi Nakamoto’s Solution (1) Placeholder Blockchain and Proof of Work: Satoshi Nakamoto introduced blockchain technology as a solution to the double spending problem. Transactions are grouped into blocks, which are then linked together in a chain. Each block is validated through a process called Proof of Work (PoW). 7 / 25 Satoshi Nakamoto’s Solution (2) Placeholder How It Works: Miners compete to solve a complex cryptographic puzzle. The first miner to solve the puzzle adds the block to the blockchain. The PoW mechanism makes it computationally impractical to alter any transaction. Result: The decentralized ledger is secured and double spending is effectively prevented. 8 / 25 What is a Transaction? Placeholder Definition A transaction is a transfer of value between participants in a blockchain network. It represents an agreement between two parties to exchange assets, such as cryptocurrency, documents, or other digital assets. Example: Scenario: Alice sends 1 BTC to Bob. Transaction Details: — Sender: Alice — Receiver: Bob — Amount: 1 BTC — Timestamp: 2024-09-03 This transaction is then broadcast to the blockchain network for validation. 9 / 25 What is a Block? Placeholder Definition A block is a data structure used to store a set of transactions on a blockchain. Each block contains a list of transactions, a reference to the previous block, and a unique identifier called a hash. Example: Block #12345: — Contains 500 transactions, including Alice’s transaction to Bob. — Previous Block Hash: 0000000000000000000769b6... — Current Block Hash: 0000000000000000000a7a3e... — Timestamp: 2024-09-03 This block is added to the blockchain after validation by the network. 10 / 25 What is a Blockchain? Placeholder Definition A blockchain is a decentralized, distributed ledger that records transactions across a network of computers. It is composed of a series of blocks, each containing a list of transactions, which are linked together in a chain. Key Components: Blocks: Containers that hold a set of transactions. Transactions: The actual data entries or exchanges recorded in the blockchain. Nodes: Computers that participate in the blockchain network, validating and relaying transactions. Consensus Mechanism: A process used by the network to agree on the validity of transactions (e.g., Proof of Work, Proof of Stake). 11 / 25 Types of Nodes (1) Placeholder Full Nodes: Full nodes store the entire blockchain and validate all transactions and blocks. They help maintain the security and accuracy of the blockchain by participating in the consensus process. Example: Bitcoin Core is a popular full-node software for the Bitcoin blockchain. 12 / 25 Types of Nodes (2) Placeholder Light Nodes (Lightweight Nodes): Light nodes do not store the entire blockchain. Instead, they store a subset of the data and rely on full nodes for transaction validation. They are more resource-efficient and are often used in mobile wallets. 13 / 25 Types of Nodes (3) Placeholder Mining Nodes: Mining nodes are specialized full nodes participating in the mining process. They validate transactions and attempt to add new blocks to the blockchain by solving cryptographic puzzles. 14 / 25 Proof of Work (PoW) and Proof of Stake (PoS) (1) Placeholder Proof of Work (PoW): PoW is a consensus mechanism where miners compete to solve complex cryptographic puzzles. The first miner to solve the puzzle gets the right to add a new block to the blockchain. Example: Bitcoin uses PoW, requiring miners to solve a SHA-256 hash puzzle. 15 / 25 Explore Proof of Work Cryptography Placeholder Curious about how the SHA-256 cryptographic puzzle works in Proof of Work? Try it here: https://emn178.github.io/online-tools/sha256.html Input any text and see how it generates a unique SHA-256 hash. Understand how miners use this cryptographic puzzle to secure the blockchain. Experiment with different inputs to observe how small changes drastically alter the hash. 16 / 25 Proof of Work (PoW) and Proof of Stake (PoS) (1) Placeholder Proof of Stake (PoS): PoS is a consensus mechanism where validators are chosen to create new blocks based on the number of coins they hold and are willing to "stake." Validators are selected randomly, but those with more staked coins have a higher probability of being chosen. Example: Ethereum 2.0 uses PoS, where validators lock up ETH as collateral. 17 / 25 Mempool Placeholder The mempool is a waiting area for transactions that have been broadcast to the network but have not yet been included in a block. Miners select transactions from the mempool based on factors like transaction fees and size. Transactions remain in the mempool until they are confirmed and added to the blockchain. 18 / 25 Explore Mempool Activity Placeholder Interested in seeing live mempool activity? Visit: https://jochen-hoenicke.de/queue/#BTC Monitor real-time transactions waiting to be included in a block. Analyze the size and status of the mempool. Gain insights into transaction fees and network congestion. 19 / 25 Mining Incentives (1) Placeholder Transaction Fees: Miners are rewarded with transaction fees for including transactions in a block. Users can attach fees to their transactions to incentivize miners to prioritize their transactions. Higher fees can lead to faster confirmation times. 20 / 25 Mining Incentives (2) Placeholder Block Rewards and Halving: Miners also receive block rewards, which are newly created coins, for successfully mining a block. Halving: In some blockchains like Bitcoin, the block reward is reduced by half approximately every four years. Example: In Bitcoin, the block reward started at 50 BTC and has gone through several halvings, with the current reward being 3.125 BTC as of April 20, 2024. Halving events reduce the rate of new coin creation, leading to scarcity and potentially increasing the coin’s value. 21 / 25 The Validation Process (1) Placeholder Transaction Validation: When a transaction is broadcast to the network, nodes verify its validity. Validation includes checking the digital signatures, ensuring the sender has sufficient funds, and confirming that the transaction follows the protocol rules. Valid transactions are then added to the mempool, where they await inclusion in a block. 22 / 25 The Validation Process (2) Placeholder Block Validation: Once a miner successfully mines a block, it is broadcast to the network for validation. Full nodes validate the block by checking the proof of work (or proof of stake) and ensuring all transactions within the block are valid. If the block is valid, it is added to the blockchain, and the network moves on to the next block. If the block is invalid, it is rejected by the network, and the miner receives no reward. 23 / 25 Explore Blockchain Activity Placeholder Want to see real-time blockchain activity? Visit: https://www.blockchain.com/explorer Monitor live transactions and blocks being added to the blockchain. Explore detailed information on individual transactions. View the latest statistics and data on the blockchain network. 24 / 25 Thank you! 25 / 25