BLOCKCHAIN SERIES
What are the potential Blockchain Components?
This article will go through blockchain and its essential components, including nodes, ledgers, wallets, accounting models, and consensus.
What is Blockchain?
Blockchain is a distributed ledger that records every transaction in such a way that it cannot be altered or tampered with. Blockchain is a chain of connected blocks, as its name suggests. Each block includes some data as well as its own hash and the hash of the block before it. Hash is always unique and identifies both the block and the data it contains. The image below demonstrates how blocks are connected in a blockchain.
The essential components of blockchain is listed below.
1. Nodes
Blockchain is made up of nodes. Nodes are responsible for storing, sharing, and preserving blockchain. They are interconnected and serve as a representation of the network’s users. A node can be run by anyone, and it can come and go at any time.
There are two types of nodes:
1.1 Full Node
Full nodes store a complete copy of the blockchain’s transaction history since its inception. They receive blocks and transactions from other full nodes, validate the transactions contained inside the blocks, and then communicate this data to other full nodes. This requires a lot of bandwidth, computer power and gigabytes or even terabytes of data to keep the network running.
Full nodes store the blockchain in redundant ways. There are backups in case one node disappears. This ensures network reliability. To make a new block, a miner will always run a full node. It cannot reliably decide which proposed transactions are valid without the complete history.
1.2 Partial Node
Due to the amount of data that full nodes can store, the majority of users don’t need to run a full node. The use of partial node follows. It is also known as a lightweight node. It doesn’t keep a complete copy of the blockchain ledger on hand. instead simply keeps the transaction’s hash value. This hash value is the sole way to obtain the entire transaction. Compared to complete nodes, these nodes offer less processing capacity and less coverage.
2. Ledger
A ledger is a type of database where all the verified transactions are kept.
There are different kinds of ledgers that exist:
2.1 Centralized Ledger
A central node has complete control over a centralized ledger. One central node handles both the sending and receiving of all data, and it is the only one that can alter the ledgers.
2.2 Decentralized Ledger
Decentralized ledgers can be thought of as a distributed network of centralized ledgers. Multiple nodes can control, update, and validate these ledgers. Each node gets a copy of the updated ledger each time a transaction is made. Only once a majority of nodes have approved the transaction will the ledger be updated.
2.3 Distributed Ledger
Each node in a distributed ledger keeps a copy of the ledger. They can collectively verify and add new blocks. Only balance information is kept in the distributed ledger for cryptocurrencies like Bitcoin. Any type of information, including health and real estate data, can be stored in the distributed ledger using blockchain platforms like Ethereum.
2.4 Public Ledger
Public ledgers are accessible to everyone and transparent. There is no centralized authority in charge of controlling access to the ledger. Data can be read or written by anyone on the network. It is known as a permissionless ledger as well.
2.5 Private Ledger
A ledger is referred to as a private ledger if a central authority controls access to it. It also goes by the name of permissioned ledger.
3. Crypto-Wallet
In essence, crypto wallets are computer programs or pieces of software that contain both public and private keys. A public key can be shared with anyone so that they can transfer tokens to your wallet. Your private key must not be disclosed to anyone else. To process cryptocurrency payments, we use a private key.
Crypto wallets are classified into two types: Hot and Cold wallets.
3.1 Hot Wallet
Hot wallets are linked to the internet via other firms or your own computer, and they can be accessed online or via an application. They are often used for day-to-day online transactions. Hot wallets like Coinbase can be used if we are mining cryptocurrencies and want to send the proceeds right away. Online attacks are more likely to target hot wallets. Software wallets can be considered as hot wallets.
3.1.1 Software Wallet
Software wallets are primarily based on internet exchanges like Coinbase or Binance. Public and private keys are kept on their server in this instance. Through your account, they enable you to access them. They can use your private key inappropriately because they are completely aware of it.
3.2 Cold Wallet
Cold wallets are either written on paper or connected to a computer through a USB. You can also refer to these wallets as offline wallets. The largest danger posed by a cold wallet is the possibility of forgetting or losing the passphrases. Use hardware wallets like Ledger Live if you plan to invest in cryptocurrencies so that you can unplug the USB and verify that no hackers may access your private keys.
3.2.1 Paper based
A paper wallet has public and private keys written on paper, as well as optional QR codes that simplify cryptocurrency transactions. One major drawback of this wallet is that we frequently misplace or accidentally destroy the piece of paper. This is the least feasible and most secure way to store the cryptos.
3.2.2 Hardware Wallet
Hardware wallets are just USB sticks that store the public and private keys. No one can access your private keys if you unplug them. They are really safe. Ledger Live, for instance, requires 24 key phrases to sign in to the system. However, there is no recovery procedure. You will undoubtedly lose your cryptos if you forget the passphrase. In addition, they cost more than ordinary wallets.
4. Accounting Models
For digital money to be useful, it needs to be transferable. The transfer of money on a blockchain is initiated by the owner, creating a transaction. This transaction informs the network about how much money is changing hands and who the new owner is. This transfer mechanism is done by adopting any of the below 3 accounting models:
4.1 Account Model
The account model more closely resembles the conventional banking system. The system examines the balance sheet to determine whether the users have adequate funds to conduct transactions. The amount is credited to the receiver as soon as the transaction is completed. Ethereum uses account model and each node must manage 7 billion accounts and update them every second in order for the account model to scale.
Think of Anna, Ben, and Clara as three users. Anna, and Ben initially receive 10 and 6 BTC from a transaction, txo, respectively. Anna sends Clara 5 BTC in transaction tx1, and Ben sends Clara 2 BTC in transaction tx2. Clara sends 2 BTC to Anna and 5 BTC to Ben in transaction tx3 later on. Finally, Ben possesses 9 unspent Bitcoins, while Anna holds 7 Bitcoins. The image below clearly depicts this balance sheet.
4.2 UTXO ( Unspent Transaction Output )
The UTXO paradigm builds a chain of past transaction outputs and uses them to build new outputs that will be used in subsequent transactions. The transfer of assets is documented in a UTXO model as a directed acyclic graph, where the nodes are transactions and the edges are transaction outputs, and each additional transaction consumes some of the UTXOs while adding new ones. UTXO is a digital integer that represents an abstraction of currencies or tokens. UTXO can be compared to actual coins or banknotes.
The unspent outputs are tracked in each user’s wallet. The total of all the unspent outputs is used to compute the wallet balance. The UTXO paradigm, which is what Bitcoin employs, does not contain the idea of account management. It merely verifies the transaction scripts without the sender or recipient’s awareness.
The example given in account model is depicted as UTXO model in the graphic below.
4.3 eUTxO ( Extended Unspent Transaction Output )
eUTXO is an extended implementation of UTXO. The eUTXO architecture aims to provide more expressive programmability while preserving all the advantages of Bitcoin’s UTXO mechanism. By incorporating additional data, known as datum, within transactions, eUTXO expands upon the Bitcoin concept. The datum retains arbitrary contract-specific data in conjunction with validation logic, enabling changes in the blockchain transaction state. Transaction context data is also given to the validation logic in the eUTXO model. This makes transactions deterministic and allows for contract continuity.
5. Consensus
A consensus mechanism refers to methodologies used to achieve agreement, trust and security across decentralized computer network. Publicly shared ledgers need a mechanism to ensure that all the transactions occurring on the network are genuine and all the participants agree on a consensus on the status of the ledger. This is known as consensus. It is a set of rules that decides on the legitimacy of changes made by the various participants of the blockchain. There are many consensus mechanisms. But PoW and PoS are the most common ones.
5.1 PoW (Proof of Work)
In the Proof of Work (PoW) mechanism, miners compete to validate transactions by cracking a cryptographic problem. The block is deemed genuine and is posted to the blockchain once the problem has been solved. The person who figured out the riddle will also receive a reward. PoW consensus is used in Bitcoin. Ethereum switched from PoW to PoS recently.
Certain flaws exist with PoW. The first thing to notice is that as the number of miners rises, so does the puzzle’s difficulty. Therefore, miners and mining businesses are motivated to spend money on expensive computer hardware in order to stay competitive in transaction verification. As a result, mining becomes more expensive, and the computer power is centralized. Additionally, compared to alternative consensus processes, the energy consumption of mining major cryptocurrencies like Bitcoin is relatively significant in PoW.
5.2 PoS (Proof of Stake)
In Proof of Stake(PoS), the block validation is dependent on the number of coins being staked. The likelihood of being chosen as a validator increases as a person owns more staking currency. He will receive a reward for successfully validating the transaction. PoS introduces some fairness because validators are chosen at random to validate. PoS is also scalable considerably better than PoW. PoS is used in Ethereum and Cardano.
To learn more about different consensus in detail, see 101 Blockchains.
Summary
Up until now, we’ve talked about blockchain technology and its key components. Blockchain is undoubtedly a technical revolution, and many of its components are essential to its operation. Discover the blockchain universe for yourself.
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