2. WHAT IS BLOCKCHAIN TECHNOLOGY?
BLOCKCHAIN:
The blockchain in its basic form can be seen as the distributed, decentralized,
transparent and chronological database of transactions, sometimes also called the
ledger.
The data in the blockchain is divided into blocks.
E.g :transactions
Blocks are dependent.
It is a system in which a blockchain serves as the database.
The workers are responsible for appending new blocks to the blockchain.
A new block can only be appended after all nodes in the system reach a consensus
3. THE HISTORY OF BLOCKCHAIN
•2008: The first description of Bitcoin was published in 2008 by
an individual or a group under the pseudonym “Satoshi
Nakamoto”.
•2009: The Bitcoin Network goes live and the first Bitcoins are
mined.
•2010: The first cryptocurrency stock exchange for trading
Bitcoin is launched.
•2011: One Bitcoin equals one USD.
•2013: One Bitcoin now equals 100 USD.
•2014: Microsoft starts accepting Bitcoin as payments.
•2017: One Bitcoin equals 10'000 USD.
4. BEYOND CRYPTOCURRENCY: BLOCKCHAIN 2.0
CRYPTOCURRENCY APPLICATIONS:
• Some of those potential applications are:
• General (bonded contracts, multiple signature
transactions)
• Financial transactions (pensions, stocks ...)
• Public records (land tittles, vehicle registrations ...)
• Identification (drivers license, ids ...)
• Private records (loans, contracts ...)
• Physical asset keys (home, hotel rooms, rental cars)
• Intangible assets (patents, trademarks, ...)
• BLOCKCHAIN CATEGORIES:
• In literature [3] two main categories of blockchain are
distinguished:
1. Permission-less Blockchain
2. Permissioned Blockchain
Permission-less Blockchain:
Permission less blockchains are the ones where anybody can
join the network to be a verifier without obtaining any prior
permission to perform such network tasks.
Permissioned BlockchainThe other type is the so-called
permissioned blockchain where special permission is needed
from an authority to become a verifier in the system.
5. BITCOIN OVERVIEW & KEY TECHNOLOGY
BITCOIN:
Bitcoin represents the first decentralized cryptocurrency in the world and it is the largest of its kind in terms of
market value.
• The main parties in the Bitcoin protocol are:
• Sender: the one who initiates the transfer of currency.
• Receiver: the recipient of the transfer
• Miners: Independent nodes which verify and confirm the transactions, also sometimes called as workers.
The security of the system is guaranteed by these nodes.
• Blockchain: Decentralized ledger shared among all miners where all transactions are stored (the
complete history since the Bitcoin creation).
6. BITCOIN CHARACTERISTICS:
The system has following characteristics:
1. Decentralized
2. Pseudo-Anonymous
Bitcoin transaction:
A graph of a Bitcoin transaction can be seen in Figure.
Figure: Bitcoin Transactions
7. To create a transaction we need two parties who are involved.
Let us name them Alice and Bob and let us say Alice wants to send 50 BTC (Bitcoins) to Bob.
Both parties, Alice and Bob, use public-key cryptography and have generated public-private key pairs.
In this context public key is known as ”validation key” and represented with abbreviation VK
private key is known as ”signing key” and written as SK.
Alice, the initiator of the transaction has to specify few key points which make up a transaction.
Bob on the other hand does nothing and waits on the other side to receive the Bitcoins.
8. BLOCK CREATION
In this section we examine how transactions are incorporated in a block and how all nodes agree on the next
block which should be included in the blockchain.
After transactions are initiated (like transaction from Alice, explained in previous section), they are broadcasted
to all nodes in the system.
These nodes now need to incorporate the transactions into a block and append this block to the blockchain.
the node combines it with the hash of the previous block in the blockchain (the last published block).
The combination of those two hashes creates the so-called challenge.
To determine which block (a block computed by which node) is going to be included in the blockchain next,
proof-of-work puzzle has to be solved.
this proof is computationally intensive and whichever node solves it first, the block created by that node is
going to be accepted as the next block in the blockchain.
10. BITCOIN PROOF-OF-WORK
Proof-of-Work is essentially a puzzle which consists of a challenge to which a proof has to be found.
This concept has been known before Bitcoin and virtual cryptocurrencies and it has been used in spam and DoS
prevention.
The characteristics of a proof-of-work puzzle are:
1.Computationally difficult to compute
2.Easy to verify
This concept for example can be used to prevent spam by forcing the e-mail client to solve some puzzle which
can only be solved by brute force and takes up few CPU cycles
11. The solution to a puzzle is only possible to find by using brute force (no other deterministic way should exist).
->To apply this concept in protocols such as Bitcoin, we need to find a
puzzle which is a lot more difficult than the one for an e-mail client,
because here we are dealing with much more computation power
and much more nodes in the system.
->EXAMPLE: when we combine challenge and proof and hash it, the
output should have for example 40 leading 0s.
->This is very challenging problem because SHA-256, like other hash
Figure : Bitcoin Proof-Of-Work Concept functions, has the property that it is impossible.
12. Consensus:
After a node finds the proof, it broadcasts the proof together with the block.
All other nodes now only have to compute one hash to verify that the proof provided is indeed correct.
After verification the block is included in the blockchain and every other node can now abandon the
work they have been doing (they have been trying to incorporate the same transactions in a block which is
now published) and start incorporating new transactions
Incentive For Miners:
As seen from previous three sections, to incorporate a block in a blockchain is not an easy task.
Finding a proof is challenging and computationally intensive.
The question arises: Why would someone provide computing power and do all the work necessary?
In this section we explain the payout to the miners. In order to verify the transaction and create a block miner use
computation power which has its cost.
13. BLOCKCHAIN SECURITY
In this section we explore how Blockchain makes it highly improbable for someone to cheat the system or
to do fraudulent actions.
One of the biggest potential problems is the so-called double spending problem.
This means that a user can try to spend coins twice or more times.
That is: initiate multiple transactions with the same Bitcoins as an input.
Of-course this should not be allowed and only one transaction should go through and others should fail.
From before section we know that when a transaction is created it gets broadcasted to all nodes in the
system which, before incorporating the transaction in the blockchain.
14. BLOCKCHAIN 2.0:APPLICATIONS
• Domain registration (Namecoin)
• Trading Assets (Colored Coin)
• Cloud Storage
• Voting
• Crowdfunding
• Car sharing
• Gambling and prediction markets
• Internet of Things
15. WHAT IS ETHEREUM?
ETHEREUM:
The yellow paper of Ethereum [4] defines Ethereum as follows:
Ethereum is a project which attempts to build the generalized technology.
technology on which all transaction-based state machine concepts may be built.
Moreover it aims to provide to the end-developer a tightly integrated end-to-end system for building software
on a unexplored compute paradigm in the mainstream: a trustful object messaging compute framework.
16. ACCOUNTS AND TRANSACTIONS:
Ethereum is based on the concept of so-called smart contracts.
A contract is usually a piece of code that is stored on the blockchain.
Conceptually there exist two different types of accounts in Ethereum:
A. Externally owned accounts
B. Contract accounts
A externally owned account is controlled by a private key and owned by a real human being.
Contract accounts however are controlled entirely by code. Accounts consist of four main fields:
1. Nonce
2. Ether balance
3. Contract code
4. Account storage
17. ETHEREUM APPLICATIONS: DAO AND
AUGUR
The Rise and Fall of the DAO:
The DAO is a Decentralized Autonomous Organization that lives as a smart contract on the Ethereum
blockchain.
There are actually many DAO’s on Ethereum blockchain.
This section is going to focus on a DAO called ”the DAO”.
2 Augur:
Augur offers a decentralized platform that enables people to make predictions about the future.
After the event occured those who forecasted the event correctly win money, while the people who guessed
wrong will lose money.
18. BLOCKCHAIN: HOW DOES IT WORKS?
• We explain the concept of the blockchain by explaining how Bitcoin works since it is intrinsically linked to the
Bitcoin.
Figure : Financial Transactions using the Blockchain Technology
19. CONCLUSION
This report gives an introduction into the wide spectrum of use cases of the blockchain.
With Bitcoin and Ethereum we discussed probably the two most prominent state of the art representers of the
blockchain technology.
We saw that in recent years, people started to move away from building only economic systems on top of the
blockchain.
In times of a quite centralized Word Wide Web (Facebook, Google, Amazon etc.) this development seems quite
Refreshing.
The decentralized block chain applications could play a major role in the re-democratization of the
internet, by shifting the power from the big players back to the users.
this field is still pretty young, prone to problems and seemingly quite far away from being able to replace the big
players.
