Advanced Blockchain

Blockchain is a peer-to-peer, decentralized, distributed ledger that records transactions efficiently and verifiably. It is an irreversible, trustless, chronological, and real-time public ledger formed by a digital chain of blocks containing encrypted information. Because of this, the transactions can’t be modified or controlled by a centralized authority like a bank or a single individual, but they are auditable.

Bitcoin introduced the world to the blockchain. Blockchain is the technology Bitcoin relies upon, while the term ‘Bitcoin’ represents both the Bitcoin blockchain and the Bitcoin cryptocurrency.

Blockchains have many use cases. Various industries will see a disruption in their current methodologies. Among them are supply chain, tracking health records, lending and saving money, art, music, energy, voting, and many others which we’ll get into later in the following courses.

Blockchain can also replace many centralized authorities like banks and governments. We’re seeing the beginning of a shift around the world from centralized to decentralized economies which is made possible by blockchain.

How does blockchain work?

In the simplest terms, it’s a network of computers known as nodes that run and maintain the blockchain.

A blockchain is a chain of blocks holding encrypted information. Every new block is chained to the previous block by retaining a portion of the contents of the last block.

The network members are anonymous individuals called nodes that run and maintain the blockchain. They validate the originality and accuracy of transactions. Suppose all nodes reach a consensus and agree that the transaction is authentic and valid. In that case, they work together to encrypt and store the data inside a new block they create.

Blocks

Authenticating data within transactions involves a node solving mathematical problems to create a new block. Every new block is chained to the previous block by storing a summary of the contents of the last block. It’s important to note that each block is limited in size and cannot take more than a certain number of transactions. All transactions waiting to be confirmed by the network exist in a memory pool before they are permanently stored in a block. *1

Upon creating a new block, every node in the network checks and confirms the accuracy of the mathematical computation. If they reach a consensus and agree that the data is accurate and valid, all nodes update their copy of the distributed ledger, enabling them to stay up-to-date and continue supporting the rest of the network. The blockchain protocol rewards these nodes with their cryptocurrencies or fees (or both) in exchange for the nodes in the network validating the transactions and creating more blocks.

Conversely, suppose the network confirms the computations are incorrect. In that case, they will not update their ledger and continue working on the legitimate blockchain. Bitcoin protocol recognizes the longest chain as the legitimate blockchain. So, no matter how many alternative chains are created by bad actors, most of the network will make the longest chain, maintaining control.

Here are the components of a Bitcoin block:

• Magic Number
• Block size
• Transaction counter
• Transactions
  • Transaction hash
  • Version
  • List of inputs
  • List of outputs
  • Lock time
  • Size

• Block Header
  • Version
  • Hash of the previous block
  • Merkle root
  • Timestamp
  • Difficulty target
  • Nonce

Methods of cryptocurrency mining

There are three ways to mine cryptocurrencies:

• Individual mining
• Joining a mining pool
• Cloud mining

If you were an early pioneer of Bitcoin mining in 2009, you’d argue it was easy and efficient compared to today. Few people knew about mining; it cost less than a dollar on average to mine, and rewards were earned daily. Today that is not the case. By 2013, The Bitcoin rate rose to $100.00, and the number of solo miners increased so tremendously that it began taking months to receive rewards. Shortly after that, ASICs were created to mine Bitcoin efficiently. Today, it’s no longer profitable to mine Bitcoin at home.

Individual or “solo” mining benefits those mining relatively new cryptocurrencies. The equipment is independently owned and operated. All transaction fees and coins mined belong to the miner’s owner.
However, the equipment has to have enough power to support the computational complexity of a significant hash rate.

By joining a mining pool, users can pool resources via sharing computing power over a network and splitting the block reward into amounts equal to contributions. Due to the increasing network complexities, these have become common for mining popular cryptocurrencies. There are many types of mining pools available today, and there are four things to consider when joining a pool.

• Pool Size
• Fee
• Minimum payout
• Reward method

Cloud mining involves renting someone else’s hardware and letting them do the mining on your behalf. These eliminate the need to purchase hardware upfront and allow a monthly payment to be paid in “rent” instead.Each mining method can be considered a passive-income source, depending on whom you ask. More often than not, it is beneficial to follow the cryptocurrency rate to increase profitability.

What is a smart contract, and why is it “smart”?

In its simplest form, a smart contract is a program stored on a blockchain that executes when its conditions are met. It’s a self-executing contract.
You might wonder how to build proof of physical degradation. That’s where the Internet of Things (IoT) kicks in. *2 For blockchains to interact in the natural world, blockchains need sensors and actuators. The Blockchain revolution won’t happen unless the IoT revolution comes first.

Such applications relying on smart contracts are called Decentralized Apps, or DApps. *2

Smart contracts naturally extend to smart property and a lot more smart things. The thing to remember is that “smart” means “no intermediaries” or “technically enforced.” Blockchains are a new way to eliminate the need for intermediaries in businesses – just like the internet disintermediated music distribution. *2

What Is A Blockchain? Take Two.

Let’s take a look at blockchain from different angles.
What it does: A blockchain allows you to securely share or process data between multiple parties over a network of non- trusted peers. Data can be anything, but the most exciting use concerns information that requires a trusted third party
to exchange. Some examples include money (requires a bank), proof of property (needs a lawyer), and a loan certificate, which requires a lender.

From a technical point of view, the blockchain is an innovation relying on three concepts: peer-to-peer networks, public-

key cryptography, and distributed consensus based on the resolution of a random mathematical challenge. These concepts aren’t new. The combination of them creates a breakthrough in computing. If you don’t understand everything, don’t worry; very few do. *2

People don’t know enough to be able to develop a blockchain on their own (which is a problem). But not understanding the blockchain doesn’t prevent you from using it, just like you can build web apps without knowing about TCP slow start and Certificate Authorities.

The blockchain is a database replicated as often as there are nodes and (loosely) synchronized. Another way to describe blockchain is like a supercomputer formed by combining the CPUs/GPUs of all its nodes. You can use this supercomputer to store and process data, just like you would with a remote API. Except you don’t need to own the backend, and you can be sure the data is safe and processed correctly by the network. *2

Practical Implications

Data can’t be lost on the blockchain. It’s there forever, replicated as many times as there are nodes. The blockchain doesn’t simply encapsulate the final state of the data; it keeps the history of all passed states, so everyone can check the correctness of the final state by replaying the data from the beginning.

Facts in the blockchain can be trusted, as they are verified by a technically-enforceable consensus. Even if the network contains black sheep, you can trust its judgment as a whole.

Storing data in the blockchain isn’t fast, as it requires a distributed consensus. *3

People Who Think It’s a Big Deal

The blockchain is the most disruptive technology I have ever seen.- Salim Ismail
The most interesting intellectual development on the internet in the last five years.- Julian Assange

I think the fact that within the Bitcoin universe, an algorithm replaces the functions of the government is pretty cool. – Al Gore

These intelligent people have seen huge potential in the blockchain. It concerns disintermediation. The blockchain can potentially replace all the intermediaries required to build trust. *3

Let’s look at a few proof-of-concept applications:

• Monograph lets authors claim their work and set rules (and fares) for use.
• La Zooz is a decentralized Uber. Share your car, find a seat, without Uber taking a fee.
• Augur is an online bookmaker. Bet on outcomes and get paid.
• Storj.io is a peer-to-peer storage system. Rent your unused disk space or find ultra cheap online storage.
• Muse is a distributed, open, and transparent database tailored for the music industry.
• Ripple enables low-cost cross-border payments for banks.Many successful businesses on the internet today are intermediaries. Think about Google for a minute: Google managed to become the intermediary between you and the entire internet. Think about Amazon: they became the intermediary between sellers and buyers for any good. That’s why a technology that allows the removal of intermediaries can potentially disrupt the entire internet. *5

Will it benefit end users, who won’t need third parties to exchange goods and services anymore? The internet had the same promise of heavy disintermediation. Yet Google built the first market capitalization worldwide as an intermediary. That’s why it’s crucial to invest in the blockchain quickly because the winners and losers of the next decade are being born right now. *3

You Won’t Build Your Blockchain

The technology behind the blockchain uses advanced cryptography, custom network protocols, and performance optimizations. Blockchain is too sophisticated to be redeveloped each time a project needs a blockchain. Fortunately, aside from Bitcoin, there are several open-source blockchain implementations. Here are the most advanced:

• Ethereum is an open-source blockchain platform by the Ethereum Foundation
• Hyperledger is another open-source implementation, this time by the Linux Foundation.
• Eris Industries provides tools helping to manipulate Ethereum, Bitcoin, or independent blockchains, mainly to build private networks.
• Experts recommend Eris for a closed Blockchain or to discover and play with the technology.
• Ethereum for a shared Blockchain

Bitcoin isn’t an excellent choice for building an application because it’s designed for money transactions. However, you can program pseudo-smart contracts (but you have to love assembly). The network currently suffers a severe growth crisis. Transactions wait in line for up to one hour to get inserted in a block. Miners often select transactions with the highest fees, so money transfers in Bitcoin become more expensive than in a Bank. The developer community is at war, and the speculation on the cryptocurrency makes the face value move too much. *2

Which industries could blockchain disrupt?

“All of them,” Catalini says. “The technology is what economists call a general purpose technology, and we will see many applications across different verticals.” *4

Many central banks — including those in Canada, Singapore, and England — are studying and experimenting with blockchain technology and cryptocurrencies. The potential applications include lower settlement risk, more efficient taxation, faster cross-border payments, inter-bank payments, and novel approaches to quantitative easing. Imagine a central bank stimulating the economy by delivering digital currency automatically to citizens. Don’t expect big moves from big countries soon. The risk is too high, Catalini says. But expect to see smaller, developed countries with a high tolerance for technology experimentation lead the way and possibly experiment with a fiat-backed, digital currency for some of their needs.*5

Finance: The busiest area of application so far. Companies that use blockchain technology seek to offer low-cost, secure, verifiable international payments and settlements. *13 Ripple is one of the leaders on the banking side in this space. Companies like Digital Asset and Chain seek to create a

faster, more efficient financial infrastructure for tracking and exchanging financial assets of any type. *6

Money transfer: In 2014, two MIT students raised and distributed $100 worth of bitcoin to every MIT undergraduate. They wanted to see what would happen and generate interest on campus. Catalini and professor Catherine Tucker designed the experiment and studied the results. While 11% immediately cashed out their bitcoin, 49% held onto some bitcoin. Some students used the funds to purchase at local merchants who accepted bitcoin. *7

Others traded with each other. Meanwhile, startups worldwide competed to become consumer trading applications for bitcoin. Then PayPal bought Venmo, a payment platform that changes cash. PayPal’s own mobile app allows for peer- to-peer transactions, as well. The bitcoin-based consumer payment industry cooled down. But blockchain application remains attractive because of the lower costs they could offer parties in global, peer-to-peer transactions. Circle stopped allowing users to exchange bitcoin last year but is building a protocol to enable digital wallets to exchange value using a blockchain. Web browser company Brave uses a blockchain to verify when users have viewed ads and, in turn, pays publishers when those same users consume content.

Micropayments: What if you paid only for the articles you read instead of subscribing to a news site online? As you click through the web, your browser tracks the pages and records them for payment. Or what if you could get small payments for doing work — completing surveys, working as a freelance copy editor — for various clients? *8

By reducing the cost of the transaction and verifying the legitimacy of parties on either end, blockchain could make these micropayments, new types of cross-platform subscriptions, and forms of crowdsourcing possible.
A company called Brave is already attempting this, with potential ramifications for the digital advertising industry. *9

Identity and privacy:

In October 2013, the arrest of the founder of Silk Road, a deep web marketplace where users paid for illegal goods with bitcoin, showed just how anonymous bitcoin wasn’t. Nor was it designed to be — bitcoin addresses function much as a pseudonym does for a writer. Users can never wholly mask their transactions. Zcash promises to be an entirely private cryptocurrency. There are significant downsides to the anonymity a blockchain could offer, such as the ability to fund terrorism or facilitate money laundering. But there are many virtuous application. Google’s DeepMind is attempting to use blockchain to layer privacy and security in electronic healthcare records. *4

Smart contracts: This application is still in the early stages. Still, by recording information on a blockchain, contracts could use that information to make themselves self-executing once certain conditions are met. This idea backfired last year when code was exploited. Someone stole $60 million from The DAO, a blockchain-based venture capital firm.

Provenance and ownership: Blockchain can record details about physical products, helping verify their authenticity and prevent fraud and counterfeiting. London-based EverLedger is tracking diamonds and envisions doing the same for fine wines. A blockchain is only as valuable as the quality of the information recorded in the first place.

Internet of things, robotics, and artificial intelligence: Your appliances are already talking to each other — think intelligent home technologies like Nest thermostats and security systems. What if they could barter or acquire resources? What if
a highway could verify the identity of and accept payment from a self-driving car, opening up a pay-per-use fast lane to commuters in a rush? At the outer edge of application, but not outside the realm of possibility, Catalini says.

When will this disruption happen?

Many believe blockchain has internet-level disruption potential that will last over the next decade. Still, like the internet, it will come over a multi-decade timeline with fits and starts and occasional setbacks. Some industries, especially finance, will see a drastic change soon, and others won’t for some time.

“A lot of the work in this space is experimental,” Catalini says. “We are at the infrastructure-building stage. Bitcoin has a market capitalization of $42 billion, which is nothing compared to the mainstream financial platforms and exchanges that move trillions of dollars daily. Technology is maturing and growing. At some point, one of the startups in this space could reveal itself as the Netscape of cryptocurrencies. What would follow is something we have seen play out many times in history.” *4