Blockchain

Where It All Started

Blockchain technology was first introduced in a whitepaper
entitled: “Bitcoin: A Peer-to-Peer Electronic Cash System,” by
Satoshi Nakamoto in 2008.
https://bitcoin.org/bitcoin.pdf

A blockchain is a growing list of records, called blocks, that are

linked using cryptography. Each block contains a cryptographic
hash of the previous block, a timestamp, and transaction data.

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Blockchain - Introduction
• A blockchain carries no transaction cost. (An infrastructure cost yes, but no
transaction cost.) The blockchain is a simple yet ingenious way of passing
information from A to B in a fully automated and safe manner.
• One party to a transaction initiates the process by creating a block.
• This block is verified by thousands, perhaps millions of computers
distributed around the net.
• The verified block is added to a chain, which is stored across the net,
creating not just a unique record, but a unique record with a unique
history.
• Falsifying a single record would mean falsifying the entire chain in millions
of instances. That is virtually impossible. Bitcoin uses this model for
monetary transactions, but it can be deployed in many others ways.
Blockchain - Definition

• A blockchain is, in the simplest of terms, a time-stamped series of

immutable record of data that is managed by cluster of computers
not owned by any single entity. Each of these blocks of data (i.e.
block) are secured and bound to each other using cryptographic
principles (i.e. chain).
• The blockchain is an incorruptible digital ledger of economic
transactions that can be programmed to record not just financial
transactions but virtually everything of value.” – Don & Alex Tapscott,
authors Blockchain Revolution (2016).
Centralized Vs. Decentralized
Blockchain - Example
• Think of a railway company. We buy tickets on an app or the web. The
credit card company takes a cut for processing the transaction.
• With blockchain, not only can the railway operator save on credit card
processing fees, it can move the entire ticketing process to the blockchain.
The two parties in the transaction are the railway company and the
passenger.
• The ticket is a block, which will be added to a ticket blockchain. Just as a
monetary transaction on blockchain is a unique, independently verifiable
and unfalsifiable record (like Bitcoin), so can your ticket be.
• Incidentally, the final ticket blockchain is also a record of all transactions
for, say, a certain train route, or even the entire train network, comprising
every ticket ever sold, every journey ever taken.
Blockchain - Disruption
• But the key here is this: it’s free. Not only can the blockchain transfer
and store money, but it can also replace all processes and business
models which rely on charging a small fee for a transaction. Or any
other transaction between two parties.
• The gig economy hub Fivver charges 0.5 dollars on a 5 transaction
between individuals buying and selling services. Using blockchain
technology the transaction is free. Ergo, Fivver will cease to exist. So
will auction houses and any other business entity based on the
market-maker principle.
The Three Pillars of Blockchain Technology - Decentralization

• Decentralization - In a decentralized system, the information is not stored

by one single entity. In fact, everyone in the network owns the information.

• Every node in a decentralized system has a copy of the blockchain.

• Data quality is maintained by massive database replication and computational trust.
• No centralized "official" copy exists and no user is "trusted" more than any other.
• Mining nodes validate transactions, add them to the block they are building, and
then broadcast the completed block to other nodes.

• In a decentralized network, if you wanted to interact with your friend then

you can do so directly without going through a third party. That was the
main ideology behind Bitcoins. You and only you alone are in charge of
your money. You can send your money to anyone you want without having
to go through a bank.
Transparency

• One of the most interesting and misunderstood concepts in

blockchain technology is “transparency.” Some people say that
blockchain gives you privacy while some say that it is transparent.
Why do you think that happens?
• Well… a person’s identity is hidden via complex cryptography and
represented only by their public address. So, if you were to look up a
person’s transaction history, you will not see “Bob sent 1 BTC” instead
you will see “1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ sent 1 BTC”
Transparency
Transparency
• Speaking purely from the point of view of cryptocurrency, if you know
the public address of one of these big companies, you can simply pop
it in an explorer and look at all the transactions that they have
engaged in. This forces them to be honest, something that they have
never had to deal with before.
• However, that’s not the best use-case. We are pretty sure that most
of these companies won’t transact using cryptocurrencies, and even if
they do, they won’t do ALL their transactions using cryptocurrencies.
However, what if the blockchain technology was integrated…say in
their supply chain?
• something like this can be very helpful for the finance industry.
Immutability
• Immutability, in the context of the blockchain, means that once
something has been entered into the blockchain, it cannot be
tampered with.
• The blockchain is a linked list which contains data and a hash pointer
which points to its previous block, hence creating the chain.
• A hash pointer is similar to a pointer, but instead of just containing
the address of the previous block it also contains the hash of the data
inside the previous block.
What are Blockchains Good for
▪ Immutably storing the digital representation of entities (e.g.
Bitcoin) as their state changes via transactions
▪ Cryptocurrencies/Store of value - What is my account balance?
▪ Digital Identity - Who are you and how have you changed over time?
▪ Digital representation of a vehicle/Tokenization – Who owned this car
over time?
▪ Tracking provenance of food or drugs – What country & postal code
did this chicken come from
Evolution of Blockchain
▪ 1st generation: Store and transfer of value (e.g. Bitcoin, Ripple,
Dash)
▪ 2nd generation: Programmable via smart contracts (E.g. Ethereum)
▪ 3rd generation: Enterprise blockchains (E.g. Hyperledger, R3 Corda
& Ethereum Quorum)
▪ Next gen: Highly scalable with high concurrency (E.g. RChain)
Cryptocurrency Summarized
• Bitcoin was the first digital, i.e., cryptocurrency

• A maximum of 21 million Bitcoins can be generated

• Just as with real world mining, energy must be invested

to solve complex mathematical problems by which
systems earn Bitcoins

• Most circulated: Bitcoin, Ethereum, Litecoin

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The Technology Behind Bitcoin
• Think of Bitcoin as an electronic asset (as well as a digital
currency)

• A network of computers keeps track of Bitcoin payments, and

adds them to an ever-growing list of all the Bitcoin payments
that have been made, called “The Bitcoin Blockchain”

• The file that contains data about all the Bitcoin transactions is
often called a “ledger”

• Bitcoin value is created through transaction processing,

referred to as “mining,” which is performed by distributed
processors called “nodes” of the peer-to-peer network

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Mining Evolution
• Mining is the process whereby value is created through
transaction processing that occurs on nodes of the network.
• In 2009, one could mine 200 Bitcoins with a personal home
computer. In 2015, it would take about 98 years to mine just 1
Bitcoin.
• Today there is almost no money to be made through traditional
home mining.
• ASIC (Application Specific Integrated Circuit) has been designed
strictly for mining Bitcoins.
• Groups of miners have formed mining pools, with each being paid
their relative share for their contribution to the work performed.

© Elliott Davis Decosimo, LLC © Elliott Davis Decosimo, PLLC

 Videos
• https://www.youtube.com/watch?v=SSo_EIwHSd4
• How to mine bitcoins on your own
• https://www.cnbc.com/2014/01/23/cnbc-explains-how-to-mine-bitcoins-on-
your-own.html
How Blockchains Work: Basics
• Chronological Ledger
• Transactions often “pseudo-anonymous”
• Transactions are grouped together in “blocks”
• Transactions are logged and stamped with information about the time,
amount, and participants as if a notary is present at every transaction

• Blockchain is not centralized (does not have one owner), therefore

there are strict rules about how it must be maintained
How Blockchains Work: Maintenance
• The individuals who maintain and update the Blockchain are
“miners,” and they are paid a reward

• The Miners process transactions by:

• Solving a complex mathematical problem
• Sending transactions to other nodes to be verified.
What decides the price of bitcoin?

• The supply of bitcoin and market demand for it

•The cost of producing a bitcoin through the mining process
•The number of competing cryptocurrencies
•The exchanges it trades on
•Regulations governing its sale
•Its internal governance
Why do bitcoin mining?
• Miners are getting paid for their work as auditors. They are doing the
work of verifying previous Bitcoin transactions. This convention is
meant to keep Bitcoin users honest and was conceived by Bitcoin's
founder, Satoshi Nakamoto. By verifying transactions, miners are
helping to prevent the "double-spending problem."
• Let's say you had one legit $20 and one really good photocopy of that
same $20. If someone were to try to spend both the real bill and the
fake one, someone who took the trouble of looking at both of the
bills' serial numbers would see that they were the same number, and
thus one of them had to be false. What a Bitcoin miner does is
analogous to that--they check transactions to make sure that users
have not illegitimately tried to spend the same Bitcoin twice.
Rewarding Miners
Rewarding Miners
• The amount of new bitcoin released with each mined block is called
the "block reward." The block reward is halved every 210,000 blocks
or roughly every 4 years. In 2009, it was 50. In 2013, it was 25, in
2018 it was 12.5, and sometime in the middle of 2020, it will halve to
6.25.
What’s bitcoin mining?
• The backbone of a cryptocurrency is the blockchain, which is a global
ledger formed by linking together individual blocks of transaction data. The
blockchain only contains validated transactions, which prevents fraudulent
transactions and double spending of the currency. The resulting encrypted
value is a series of numbers and letters that do not resemble the original
data and is called a hash.
• A hash is a function that converts an input of letters and numbers into an
encrypted output of a fixed length.
• Hashing requires processing the data from a block through a mathematical
function, which results in an output of a fixed length. Using a fixed-length
output increases security since anyone trying to decrypt the hash won’t be
able to tell how long or short the input is simply by looking at the length of
the output. Hashing the word “hello” will produce an output that is the same length as the
hash for “I am going to the store.”
Bitcoin Mining
• Solving the hash is essentially solving a complex mathematical
problem, and starts with the data available in the block header.
• Mining a block requires the miner to produce a value that, after being
hashed, is less than or equal to one used in the most recent block
accepted by the Bitcoin network.
• Mining involves the use of computers to run hashing algorithms to
process the most recent block, with the information needed in mining
found in the block's header. The cryptocurrency network sets a target
value for this hash – the target hash - and miners try to determine
what this value is by testing out all possible values.
Bitcoin Mining
• Processing the hash functions needed to encrypt new blocks requires
substantial computer processing power, which can be costly.
• In order to entice individuals and companies, referred to as miners, to
invest in the required technology, cryptocurrency networks reward them
with both new cryptocurrency tokens and a transaction fee. Miners are
compensated only if they are the first to create a hash that meets the
requirements set forth in the target hash.
• This number is between 0- (the smallest option) and 256-bits (the largest
option), but is unlikely to ever be the maximum number. Because the
target hash could be a huge number, the miner may have to test a large
number of values before being successful. An unsuccessful miner has to
wait for the next block, which leads to miners likening the finding of a hash
solution to winning a race or the lottery.
• What is the right answer to a numeric problem"?
• The good news: No advanced math or computation is involved. You may
have heard that miners are solving difficult mathematical problems—that's
not true at all. What they're actually doing is trying to be the first miner to
come up with a 64-digit hexadecimal number (a "hash") that is less than or
equal to the target hash. It's basically guesswork.
• The bad news: Because it's guesswork, you need a lot of computing power
to get there first. To mine successfully, you need to have a high "hash rate,"
which is measured in terms of megahashes per second (MH/s), gigahashes
per second (GH/s), and terahashes per second (TH/s).
 Bitcoin: A Peer-to-Peer Electronic Cash System
Satoshi Nakamoto
• A purely peer-to-peer version of electronic cash would allow online payments to be sent directly
from one party to another without going through a financial institution.
• Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party
is still required to prevent double-spending.
• We propose a solution to the double-spending problem using a peer-to-peer network.
• The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-
of-work, forming a record that cannot be changed without redoing the proof-of-work.
• The longest chain not only serves as proof of the sequence of events witnessed, but proof that it
came from the largest pool of CPU power.
• As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the
network, they'll generate the longest chain and outpace attackers.
• The network itself requires minimal structure. Messages are broadcast on a best effort basis, and
nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof
of what happened while they were gone