The Blockchain

An Introduction to Blockchain, Bitcoin ₿, and related concepts

Martin Thoma
Jan 12 · 12 min read
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An example of a blockchain. Image by Martin Thoma.

The Idea of a Ledger

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German Ledger from 1828 (Source: RaphaelQS)
Date             | Sender    | Receiver |  Amount
-------------------------------------------------
2021-01-01 06:00 | (Deposit) | Anna | $100
2021-01-01 06:01 | (Deposit) | Bob | $100
2021-01-01 06:08 | (Deposit) | Charlie | $100
Date | Sender   | Receiver | Amount |       A  |  B   |  C
------------------------------------| ------------------
1 | (Deposit)| Anna | $100 | $100 | $0 | $0
2 | (Deposit)| Bob | $100 | $100 | $100 | $0
3 | (Deposit)| Charlie | $100 | $100 | $100 | $100
4 | Bob | Charlie | $20 | $100 | $80 | $120
5 | Bob | Anna | $30 | $130 | $50 | $120
6 | Anna | Bob | $130 | $0 | $180 | $120

How to get rid of the Bank

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Photo by the blowup on Unsplash

Let’s make it digital!

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Photo by Joshua Sortino on Unsplash
  1. Everybody regularly checks if there are newer transactions in any of the other ledgers.
  2. If there is just one ledger with at least one new transaction, they just copy the newer transactions.
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Anna sees new transactions from Bob and Charlie. They all have the same green blocks, but bob discarded the blue blocks in which he sent money to charlie. He created the red and the yellow ones to fool Anna. Image by Martin Thoma
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Anna sees the same number of new transactions from Bob and Charlie, but transaction #43 is different. Bob tries to tamper with the amount he sent Charlie. Image by Martin Thoma
  • Storing the previous transactions' hash value prevents dropping existing transactions by the sender. It also prevents duplication attacks.
  • Storing a proof of work per transaction prevents re-computation of many transactions at the end of the ledger.
  • Having the chain of transactions, the ledger, distributed among all participants makes the current state transparent. It’s a pre-requisite of preventing the re-computation.
  • Amount of transaction
  • Sender
  • Receiver

Example vs Bitcoin

One part I haven’t addressed at all is how the users of Bitcoin interact. We didn’t talk about the network at all. Just to be clear: It’s NOT the case that everybody adds their own website and everybody else has to know and check. That was just a simplification. There is a Peer-To-Peer protocol in place.

Bitcoin vs Blockchain

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Photo by Thought Catalog on Unsplash
  • A Consensus Algorithm
  • A data structure for storage
  • Distribution via Peer-to-Peer protocols
  • Consensus Algorithm: Proof of Work (Proof of Stake would be an alternative)
  • Storage: Merkle Tree
  • Distribution: A TCP-based peer-to-peer protocol (source 1, source 2)

Blockchain vs DLT

Blockchain is a distributed ledger technology (DLT). Two other examples of DLT are Tangle and Hashgraph.

When is Blockchain useful?

As with every hype, people want to apply it everywhere. But where does it actually make sense?

  • Latency: Probably less than 5 seconds for Visa, but about 1 hour for Bitcoin (source).
  • Queries: We have lots of database types. Especially relational databases allow very complex queries. You will not have that with the blockchain.
  • Supply Chain Management: Many brands nowadays want to make their supply chain more transparent. They want to prove to the customers where their product came from; “traceability” is the buzzword. They also want to make sure that counterfeits can be identified. So they upload data and about the origin of their products at every step. Those steps have timestamps and are very fine-granular. One problem the blockchain doesn’t solve is that all of the uploaded data could be faked. If you want to know more, get in touch with my friend Peter Merkert. He built retraced, a company that supports the clothing industry in supply chain management. A big thank you also to him for proof-reading this article 🤗
  • Real Estate: I know that in Germany we have pretty good maps of the country, of ownership of every single piece of land. The process of buying and selling land includes a trusted party — a notary. The notary gets 1.5% of the amount you pay for the land. A square meter of land costs about 4000 EUR in Munich. A small house has about 300m² — so you would pay 1.2 million EUR for the land and thus 18k for the notary. This is a pretty good incentive to get rid of the notary, isn’t it?
    The other case is that you might not have such a process in all countries.
  • Capital Markets: Blockchain-based digital securities provide cost advantages because they can be issued and exchanged without middlemen (source). The numbers in this source are pretty crazy: Cashlink and Finoa estimate that cost savings from 35% to 65% for tokenization compared to traditional securitization are possible.
  • Energy can be traded using blockchain. Read When Energy Trading meets Blockchain in Electrical Power System: The State of the Art to learn more.

What’s next

  • Hashing: What it is, what cryptographic hashing is, what SHA / MD5 is
  • Merkle Trees: What they are, how they work, and how they are used in Bitcoin
  • Public-Key Cryptography and RSA: Public- and private keys, Digital Signatures, Trapdoor functions. What it is and why it’s so important
  • Proof of Work: How it works, how difficult it is, and what Bitcoin / Ether / Stellar use.
  • Smart contracts: What they are and how they work; e.g. with Etherium as an example
  • Initial Coin Offering (ICO)
  • Bitcoins consensus algorithm
  • Bitcoin and the network: How do people connect?
  • Bitcoin Wallets
  • Peer-To-Peer Stuff: How Gossip Protocols work

See also

Literature

Videos

Bosch created an awesome introductory video:

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Martin Thoma

Written by

I’m a Software Engineer with focus on Data Science, Machine Learning. I have over 10 years of experience with Python. https://www.linkedin.com/in/martin-thoma/

Coinmonks

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

Martin Thoma

Written by

I’m a Software Engineer with focus on Data Science, Machine Learning. I have over 10 years of experience with Python. https://www.linkedin.com/in/martin-thoma/

Coinmonks

Coinmonks

Coinmonks is a non-profit Crypto educational publication. Follow us on Twitter @coinmonks Our other project — https://coincodecap.com

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