Blockchain Deep-Dive: from Bitcoin to Ethereum to Crypto

Bitcoin, also called “internet magic money”, had a lot of hype and has drawn a lot of attention from the public. But is blockchain the same as Bitcoin?

The future is decentralized. After hundreds of years of relying on big institutions as middlemen, the internet and the blockchain are changing how people do businesses. These new technologies bring back the barter system, allowing people who don’t know each other; who are in different parts of the world; who speak different languages; who may eventually not trust each other, to trade between each other confidently in the same system.

Blockchain is definitely here to stay. In 2021, 12 years after the creation of Bitcoin, we finally see the mass adoption of blockchains and cryptocurrencies. Many big corporations are either buying cryptocurrencies or adopting blockchain technologies.

We see two terms being used frequently and interchangeably in the blockchain space: decentralized and distributed. What are the differences?

Understanding Decentralized and Distributed systems

Blockchains such as Bitcoin could solve the monetary problem with a fixed and predictable supply of the currency.

Do we really need these intermediaries? Or can we have a transparent system that allows transferring value without trusting a middleman?

Blockchain provide:

▸Consensus

▸Provenance

▸Immutability

▸Shared

▸Replicated

▸Permissioned

▸High Security

▸Faster Dealing

▸Cost saving

▸Auditable and verifiable

Wait, are we talking about use cases again? Yes, but now let’s look at some examples of the existing blockchain use cases in the market. We will cover only a few use cases as an example because to cover all the use cases I would have to write a 2000 pages book (probably more than the Atlas Shrugged and all the Lord of the Rings combined).

Blockchains are still limited for some use cases, and they may not be suitable at all to be used as:

•Data warehousing

•Storing big files or large volumes of data

•To replace purely centralized databases

•When there’s no need for a network or for sharing data

•When there’s a need for a very high I/O (there is some latency)

•Just to look cool to investors or to the management

Transactions are secured, encrypted and protected through cryptography which may bring design constraints

·Blockchain can reduce costs

·Improves discoverability

·Improves network effects

·Automate processes

·Trusted record keeping

·Blockchain can save time and speed up transactions

·Blockchain reduces risks related to fraud, tampering and cybercrime

A consensus mechanism is the way in which a majority of the participants in the blockchain agree on a value or piece of data

Do we really need these intermediaries? Or can we have a transparent system that allows transferring value without trusting a middleman?

Blockchain can radically transform the process and make it much more efficient. In most blockchains, the technology enables parties that don’t know each other and may even have conflicting interests to transact efficiently and faithfully

A PO Financing blockchain application allows different banks to have a node participating in the network. PO data is then synchronized across all the participants allowing everyone in that PO transaction to have access to the same data, and it will allow the creation of audit trails for other banks.

Track and tracing diamonds - De Beer’s, the biggest diamond company in the world, has implemented a blockchain application - The De Beer’s TrustChain - to track and trace diamonds for authenticity and ensure that they are not “blood diamonds”. Chow Tai Fook, the jewellery company in Hong Kong, is also using blockchain. Chow Tai Fook’s T MARK are blockchain-secured diamonds with digital diamond grading reports.

Wallmart partnered with IBM to build the IBM food trust. This food safety application creates an ecosystem of producers, suppliers, manufacturers, distributors, and retailers that feed the product’s supply chain application.

As you see, blockchains have multiple use cases in the supply chain. It provides a digitally permanent, immutable, auditable, that shows the provenance of any product.

Applications such as TradeLens provide end-to-end product traceability and digitization, no matter what industry they are from.

Contour is a letter of credit application developed by a consortium of 8 banks. Its objective is to connect the 4 parties in the Letter of Credit process seamlessly: buyer, seller, issuing bank and nominated bank.

Smart Contracts enable to code events. Smart contracts are self-automated computer programs that can execute terms of a contract. They need to run in a Virtual Machine such as EVM - Ethereum Virtual Machine.

NFT’s are tokens that have fungibility, meaning that each token is unique and irreplaceable. They generally use the Ethereum ERC-721 standard that was introduced in the Ethereum network in January 2018 and revolutionized an entire industry.

In simple terms, DeFi can be defined simply as an open or decentralized financial system that’s devoid of a centralized setup in which powers are in the hands of a few powerful organizations such as exchanges or banks, with the help of blockchain technology and smart contracts.

Just like any other new technology, organizations may face challenges when adopting a blockchain. These adoption barriers may be seen as constraints that need to be addressed and explored to improve the way the organization is innovating.

Blockchain use cases quiz

This is getting pretty serious now! This section will clear out any confusion related to the technology. We are going to the blockchain bottom line and look at all the blockchain components here, and you will be one step closer to become a blockchain expert! Now serious, the objective is to get some key concepts right to navigate the blockchain technology.

Although there are a few definitions for blockchain, it all comes down to one thing: blockchain is a decentralized database-like system that is very transparent to all the nodes in the network.

All the blockchain participants agree on common rules on how a block is included in the blockchain. Each blockchain may have a different consensus mechanism defining how blocks are included.

There are different blockchain types, and they have different use cases -public blockchains and private blockchains.

Side-chains are blockchains connected to the main blockchain, where assets or transactions can be carried in the side-chain and later be recorded in the main-chain.

Let's now take a look at permissioned blockchains. We have already talked about private blockchains, and although most private blockchains are also permissioned, private and permissioned are not synonyms and to keep this book accurate, it's better to make a clear distinction.

Distributed ledgers are often confused with blockchains. They can be private or public, sharing data often on a need-to-know basis among participants.

Cryptocurrencies are blockchains that, due to their nature and use case, also need a "coin". These "coins" are used not only to exchange value between users or store value, but they also have another critical functionality.

Let’s look at some of the components that make a blockchain a blockchain. In this section, we will start with addresses – i.e., what is a blockchain address, transactions and transaction fees, blocks, how are blocks formed, smart contracts and much more.

In a blockchain, addresses are unique identifiers associated with an entity, a wallet or a smart contract.

Validating nodes in a blockchain, also known as miners, need to perform some work in order to include the transactions in the blockchain.

Some blockchains like Ethereum or Hyperledger Fabric use Turing complete programming languages meaning that developers use to create smart-contracts that can do pretty much anything, from simple to more complex functions.

A block in the blockchain is usually composed of the block hash, the previous block hash, time-stamp, nonce, a Merkle root and/or a number of transactions.

A block explorer is a user interface for users to look at the blockchain. It is a tool, often a web-based app, the allows users to view and explore all the information in a blockchain, including transactions, transaction history, addresses, blocks, etc..

Block reward: the Bitcoin block reward is at the moment 6.25 BTC. This is the miners' reward as an incentive for them to contribute to the network and create blocks.

As an example, let's take a look at the coinbase transaction included in the first block ever in the Bitcoin blockchain – the genesis block!

A smart contract is a piece of a computer program that can execute a contractual agreement between two parties.

Smart contracts can pretty much execute any contractual condition or functions.

Oracles are third party sources of data that are considered trusted.

Consensus mechanism is an algorithm that defines the rules for the multiple nodes on a blockchain to agree on how the blockchain should look and what constitutes valid data in the blockchain.

Hash functions are the heart of blockchain technology. Hash functions take any input value of any size and create an output of a fixed length.

A dApp is an application that outsources part of its logic in the blockchain. dApps resource to smart contracts for some of its logic, but they are not 100% hosted and decentralized in the blockchain.

The difficulty represents how hard it is to find the hash needed to mine a new block in the blockchain in a proof of work blockchain.

Digital signatures are very hard to forge when comparing with traditional handwritten signatures.

Multi-signature is a security feature that requires signatures of multiple pre-defined entities in order to issue a transaction.

Double spending is a type of attack where the attacker attempts to duplicate a transaction.

Ethereum is the first blockchain 2.0, allowing smart contract scripting in the Turing-complete EVM – Ethereum Virtual Machine, with a programming language called Solidity.

Forks may happen because of changes in the protocol. In blockchains, updates can never be retroactive.

A 51% attack happens when a person or a group tries to gain control of the network by acquiring more than 50% of the network's computing power.

Mining is the method that is used in the blockchain to group transactions into a block, append this block to the blockchain and broadcast the new block to the network.

A wallet is used to store a private and public key.

The Blockchain Technology Deep-Dive Quiz

Consensus mechanisms, cryptography, prime numbers, random numbers, mathematics and hashing?! Don’t worry, I promise this section will be more exciting than going to the dentist! You will learn and play around with some really cool stuff. After this chapter, you will be top 1% most blockchain knowledgeable people in the world.

Let’s look at how a block is structured in the blockchain and then, we take a deeper look at some of the block’s components.

Difficulty: the difficulty is determined by the number of zeros that the hash needs to begin with when the hashing process occurs.

Digital signatures are an important cryptographic component of blockchain transactions, where a transaction is digitally signed by the sender and verified by the receiver.

There are many different consensus algorithms, and they all have advantages, disadvantages and security trade-offs.

Bitcoin's consensus mechanism, and most first-generation blockchains. Proof of work is a leader-based consensus mechanism.

Bitcoin's consensus mechanism, and most first-generation blockchains. Proof of work is a leader-based consensus mechanism.

Bitcoin's consensus mechanism, and most first-generation blockchains. Proof of work is a leader-based consensus mechanism.

Bitcoin's consensus mechanism, and most first-generation blockchains. Proof of work is a leader-based consensus mechanism.

The mechanics and incentives of proof of state algorithms work differently.

Delegated Proof of Stake is something very similar to democracy

Proof of burn is an experimental consensus mechanism and a fascinating concept.

PBFT tries to solve the Byzantine General's problem.

Also known as PoET, this consensus is everything but poetry!

In the proof of importance consensus, nodes receive a rating according to the stake they have (i.e. the number of coins owned) plus for how long the node owned those coins.