Blockchain fundamentals

INTRODUCTION

You must have heard about Bitcoin, Etherium, Neo ( Chinese etherium), dogecoin, etc. All of these cryptocurrencies are a part of the "BLOCKCHAIN" ecosystem. But what exactly is a blockchain, and if we already have real-life tokens like rupee, dollar, etc, what's the use of these cryptocurrencies? Let's understand this...

    NEED OF BLOCKCHAIN

    The reason why the world needs a blockchain is because 

    1. It's DECENTRALIZED, meaning it doesn't have any kind of centrally organized system for any kind of transaction.
    2. Traditional technology doesn't provide privacy and transparency of data, i.e one has to rely on the central system for the security of their data ( like you have to trust Google to keep your data, password safe), but with blockchain, you don't have to worry about these issues anymore.
    3. It's a faster and more secure way of transacting for eg, Walmart was facing the problem of slow tracking of its truck which leads to supply of bad products as it took 8 days to communicate, so they collaborated with IBM and communicated through the blockchain, which reduced time from 8 days to seconds!!

    TYPES OF DLT

    Blockchain is not the only decentralized system, actually it a part of DLT ( distributed ledger technology). As the name suggests, any transaction(in DLT) of the ledger is done thro distributing it to the other users (which are called nodes).

    DLT has further 3 parts:-

    1. Blockchain
    2. Tempo
    3. DAG

    but the other 2 are yet to be scrutinized.

    What is blockchain technology
    Just as shown in the picture, every user (node) is connected, i.e no 3rd party is involved in a transaction, users approve transactions for other user's transaction.
     


    DEEP INTO BLOCKCHAIN

    Let us dig deep into blockchain...

    How exactly does a blockchain works?

    As the name suggests, these are chains, in which blocks (which have data of the transaction within them) are connected through a chain.

    There are 3 types of Blockchain

    1. Public blockchain:- In this, data of the transaction is visible to all the users ( but others can just the transactions, can't alter with them). More complex algorithms are present the safeguard, no one is in charge of this chain, which means its completely decentralized, e.g Bitcoin and Etherium and this chain is completely immutable, and miners are in charge of the validation of the blockchain,  and because of all these reasons, its expense, energy for the maintenance is high, thus decreasing the efficiency.
    2. Private blockchain:- In this, data is centrally stored, which means no decentralization is there, and consensus algorithm completely depends upon the organization, and miners MAY or MAY NOT be a part of it. Thus as only 1 organization controls the entire chain, it's more efficient but less secure .eg Bankchain and medicine.
    3. Consortium blockchain:- It's a mix of a private and public blockchain, here a certain group of people is in charge ( and they are selected according to votes given by the normal users ), giving high efficiency AND security. e.g R3, EWF

    HOW EXACTLY BLOCKCHAIN WORKS?

    Well, whenever a user tries to initiate a transaction with his/her friend, it is first stored in the memory pool ( where all un-initiated transactions are held before the miners start mining on them, basically a garage of cars where a car is parked until the user comes and take it out). 

    Read more on how BlockChain works behind  CRYPTOCURRENCIES

    Then the main part comes, i.e transaction, well different blockchain platforms have different ways of executing this process ( means every platform have their consensus mechanism), well different blockchains have different algorithms to execute this process, like any public blockchain, for e.g bitcoin and etherium, including miners in this process, and also incentives to perform successful mining, which creates a healthy competition btw them, like a bitcoin miner receives 12.5 BTC for this work, on the other hand, a private blockchain doesn't have the similar scenario.

    CONSENSUS ALGORITHM

    The main part is what consensus algorithm that blockchain platform performs to implement the transaction, ie different blockchain platforms use different protocols to execute transactions.

    There are 5 different consensus mechanism:-
    1.Proof of work - In this, the platform awards the miner to the transaction.

    How? First, let's examine the case of  bitcoin 

    In order to achieve immutability in these types of public blockchains , each block includes 2 types of hash , one which  is unique to that block ,and the other is of the previous block ( 1st block in chain cant have 2nd hash , thats why its called Genesis block) , and these block are connected thro hashing algorithm  (Hash-> converts variable length data into fixed alphanumeric strength), for e.g bitcoin uses SHA256 hashing algorithm , for further security , each hash is added with a nonce value which adds particular numbers of zero at the end of hash which is assigned to the block, which is completely random ,making it even harder for the hacker to hack that particular block, and a miner has to guess that particular nonce so as to add that transaction block to  the chain ,and also to make it even harder for the hacker to hack  each block in bitcoin ecosystem is added after every  10 mins , means a miner gets  10 mins to guess that nonce value , doing all the mathematical calculations , and add that block to the chain , if the miner fails to do it under 10 mins , bitcoin decreases the difficulty of maths included , and if miner guess it before 10 mins , bitcoin increases the difficulty. So if all the miners are working on the 90th block in bitcoin, and a hacker wants to hack the 80th block, he has to change all the nonce value from 80 to 90th block IN UNDER 10 MINS, which makes it completely impossible for the hacker to hack. Miner in bitcoin gets 12.5 BTC to do its mining.

    So, in this consensus, miners get rewards for their work


    Cryptocurrency the future of coins

    2.Proof of stake:- Problem in proof of work was that people use supercomputers and all to gain rewards, so another consensus was created

    In this type, blocks are already created ( meaning no rewards for block making), users connected to that transaction receive a transaction fee according to their share of tokens in the blockchain .eg Neo, and etherium too is shifting its consensus from proof of work to proof of stakes acc to CASPER.

    Product stack in crypto mining

    3.Delegated proof of stakes:- The problem with the previous one was, that the richer were getting richer, and the poor were getting poorer. So in the Users hold % votes, and vote for the miners(called witnesses here ) and only top 100 miners get a chance to mine and receive a part of transaction fee creating a healthy competition. Eg LISK

    4.Proof of authority:-Just like proof of stake but here their identity matters and not %tokens 

    5. Proof of weight:-Here a set  of users are  elected from voting  and for any transaction to occur, their consensus is taken, and if 2/3 yes are received ( acc to the byzantine problem) transaction will happen. eg file coin

    So here we saw how different blockchain platforms perform different ways of executing the transaction process. 

    Apart from this, if the miner fails to do mining, that transaction will again go to the memory pool, and another miner will  then perform mining

    WALLETS AND INSIDE IT

    Cruptocurrency wallet

    Lastly, every user has a digital wallet,  which has a private key, a public key, and tokens.

    A private key is used to initiate a transaction by the person who has to send something, this key acts as a digital signature for the transaction, and the person receiving it will receive it thro his public key,  which is used to generate the address of the transaction. 

    Read more on the share market and its fundamentals

    BITCOIN VS BLOCKCHAIN

    "Bitcoin is not blockchain, blockchain is the technology, bitcoin is merely the first mainstream manifestation of its potential"---> for those who think bitcoin is blockchain🤷‍♂️.

    SOME FACTS AND FIGURES

    1. Vitalik Buterin, founder of Ethereum blockchain, earlier worked in the bitcoin blockchain, he became frustrated with the shortcomings of bitcoin, so he first created HELIUM and came up with the idea of smart contracts which are just a mirror of real-life deal contracts.
    2. Bitcoin is limited, i.e only 21M BTC are there ( out of which Satoshi Nakamoto took 1M, which now worth around 5B USD), after that, miners won't get any reward in bitcoin blockchain after mining'.
    3. Blockchain is not a solution to every problem, while creating your blockchain solution, you have to think that is there any other solution to a particular problem or not.