Blockchain Technology: An Introduction to Blockchain and Cryptocurrency
Blockchain Technology and the various applications built on it (Cryptocurrency, Smart Contracts, DApps, etc.) have seen huge gains in popularity both in use and in pop-culture. But what technically is a Blockchain and how are Cryptocurrencies, Smart Contracts, and other Decentralized Applications (DApps) related to Blockchain?
This series will explore the technical underbelly of these newly emerging and still-being-developed protocols; in addition to outlining how to use these systems for your own use, by either building your own or using existing platforms.
Though we won’t be providing a comprehensive history of how Blockchain Technology came to be, we will outline historical footnotes to provide context for today’s Blockchain landscape.
A Brief History of Blockchain
It is a common belief that the bankruptcy filed by Lehman Brothers, a Wall Street Banking giant, on September 15, 2008, triggered the global financial crisis in 2008-2009. Excessive risk exposure in the subprime mortgage and financial derivatives by large banks almost brought down global financial systems. The crisis was the ultimate consequence of a fundamental breakdown of trust in the relationship between customers and the financial institutions that should have been serving them.
Shortly after that, Satoshi Nakamoto, a mysterious and anonymous entity, published a whitepaper on October 31, 2008, called Bitcoin: A Peer-to-Peer Electronic Cash System, which is considered the origin of Bitcoin and all cryptocurrencies. Satoshi proposed a completely decentralized approach for Peer-to-Peer (P2P) payment without central banks or intermediaries. He outlined the principles and functions of what would be developed and introduced as Bitcoin in the following year.
The technologies behind his invention are called Blockchain and have since evolved well beyond Bitcoin and digital payment. It is now a suite of technologies, forming the foundation of distributed ledgers and cryptocurrency. No one knows who or what Satoshi is, if it is one individual or a group, but its paper is profoundly changing money, cryptocurrencies, business, and the world.
The purpose of this series is to introduce the tools and technologies in the Ethereum ecosystem and get started developing Smart Contracts and end-to-end decentralized applications.
Introducing Blockchain Technology
To boil-down Blockchain to its simplest form its essentially a distributed shared ledger technology supported by three components: P2P Networks, Cryptography, and a Consensus Mechanism. To better understand the fundamental components of Blockchain is best to establish some key building blocks of Blockchain Technology:
- Transaction: A transaction is a value transfer between two parties. It could be a transfer of money, tangible assets, or cryptocurrency. Transactions are broadcasted to the blockchain network. They are validated and verified by all nodes and collected into blocks. Once the block reaches a certain depth – in Bitcoin, this is 6 blocks-those transactions in the block can be considered irreversible.
- Block: All verified transaction records are collected into a data structure called a block. It has a header and body part, where the header contains a cryptographic hash of the previous block, a timestamp, and a Merkle tree root hash of all transactions in the block. The body is the container of transaction data.
- The chain of block (blockchain): A blockchain is a linked list of a chain of blocks. Blocks are linked together using a cryptography hash as the pointer to the previous block.
- Decentralized P2P network: It is a P2P network in which interconnected nodes share resources amongst each other without the use of a central authority or some sort of intermediary.
- Consensus protocol: The consensus protocol in blockchain is a set of rules that all network nodes will enforce when considering the validity of a block and its transactions. The consensus mechanism is the process used by the network nodes to achieve agreement on the network state. It is a fault-tolerant mechanism to ensure the reliability and integrity of the network.
- Mining: Mining is the process by which network nodes in blockchain systems add new blocks to the blockchain and get rewarded with crypto-incentives.
We learned about the events which sparked the development of Bitcoin by Satoshi Nakamoto which leverages Peer-to-Peer Networks, Cryptography, and a new consensus mechanism to facilitate payment without central banks or intermediaries.
We also established the core components of Blockchain and how they fit together. In the next segment, we’re going to explore more of these concepts and explain the fundamentals of Decentralized P2P networks.