MEETING #3

BLOCKCHAIN FUNDAMENTALS
The technology behind Bitcoin, Ethereum, Avalanche, and Solana
BLOCKCHAIN BASICS
THE HISTORY OF BLOCKCHAIN
- Blockchain technology— in particular Bitcoin (the rst major use case)— came about
after 2008 Financial Crisis

- For hundreds of years people had put their trust in central banks and large institutions,
the result was near collapse of the system

- A largely academic construct, in 2008 Satoshi Nakamoto (alias?) wrote a White Paper
detailing how use of a novel technology, called Blockchain, that could enable nancial
transaction to take place in a decentralized fashion
- Why trust banks when you can trust networks and mathematical algorithms that are
consistent, secure, and decentralized
- He called this idea for a new currency Bitcoin
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 DEFINING BLOCKCHAIN
- Blockchain is a technology that creates a public ledger that focuses on THREE main principles:
- Decentralization: Instead of all of the data belonging to ONE entity (ie. Bank, Google, Facebook) it
can be created, viewed and veri ed by anyone.

- Security: The principle of blockchain ONLY works if the data cannot be manipulated. In
centralized banking or data- you have to “trust” the bank or the company (Google, FB) because
only the institution has access to the information.

- Scalability: How many transactions can you do? How fast is it?
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WHAT IS A BLOCKCHAIN?
- It is a digital “chain” made up of blocks of data that are linked together to create a chain of data
—> A LEDGER
- Ledgers are viewable by ANYONE on the network
- Once a “block” has been veri ed and added to the chain, it cannot be changed without changing
the block
- How blocks are veri ed depends on the chain (Proof of Work, Proof of Stake, Proof of History)

Bitcoin & Ethereum Avalanche Solana

Proof of Work Proof of Stake Proof of History

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CREATING A BLOCKCHAIN
 WHAT INFORMATION IS IN A BLOCK?
- The “blocks” in each blockchain are slightly di erent BITCOIN

- ALL blocks have at least 3 major components:

TRANSACTION DATA

- DATA (transaction info, smart contract, picture, etc)

To:
From:

- Hash # (identi er)- a string of numbers & letters like a nger

print created by an ALGORITHM
Amount:
HASH #

- Previous Block Hash #

01cd4x

PREVIOUS BLOCK HASH #

- If ANY data is changed on a block- the cryptography that codes

the block automatically changes the Hash and it becomes a new
0012fx

block
- Every single Hash is unique, no two blocks have the same
hash
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HOW ARE BLOCKS VALIDATED?
- It depends on the chain- with Bitcoin the block is sent to validators who have to solve a
math equation (Proof of Work) and verify that the HASH and all data within the block
are correct
- For Bitcoin this takes approximately 10 MINUTES per block
BITCOIN
BITCOIN BITCOIN
TRANSACTION DATA TRANSACTION DATA TRANSACTION DATA

To: STEVE To: KATE To: CARLOS

From: JEN From: STEVE From: LILA
Amount: $100 Amount: $300 Amount: $50
HASH # HASH # HASH #

01cd4x 02ef5x 03gh6x

PREVIOUS BLOCK HASH # PREVIOUS BLOCK HASH # PREVIOUS BLOCK HASH #

0012fx 01cd4x 02ef5x

HOW SECURE ARE THE BLOCKS?
- What if someone tries to hack in and change the data on a block? It invalidates the
entire block behind it because ANY change in data—> changes the HASH.
BITCOIN BITCOIN BITCOIN

TRANSACTION DATA TRANSACTION DATA TRANSACTION DATA

To: STEVE To: KATE To: CARLOS

From: JEN From: STEVE From: LILA
Amount: $100 Amount: $500 Amount: $50
HASH # HASH # HASH #

01cd4x 04jk8y 03gh6x

PREVIOUS BLOCK HASH # PREVIOUS BLOCK HASH # PREVIOUS BLOCK HASH #

0012fx 01cd4x 02ef5x

 EXAMPLE
- Jen sends $1000 of Bitcoin to Steve
New Block sent to
To: Steve Validators Steve’s Public Key:
12x93pd9
From: Jen
Jen sent
you:
Amount: $1000 $1000

Jen’s Private Key:

************ 1) Veri es Digital Signature:
Jen’s Private Key + Public
Steve’s Private Key:
Key = Unique 256bit ID ************
Jen
Unique HASH created Steve
2) “Proof of Work” adds the
encrypted block to the
chain
3) Validators VERIFY the
work done by the
“winner”
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WHAT IS PROOF OF WORK?
- “Proof of Work” is a system to validate a transaction by having all of the validators on a
network compete to solve a complex math equation
- For example: Using the unique identi ers in the public/private key- who can generate a
HASH that begins with 30 zeros rst using the algorithm built into the blockchain:

- It takes on average 10 MINUTES for the Bitcoin blockchain algorithm (SHA-256) to use
the input data to nd a unique HASH that results in a 256bit number starting with 30
zeros: 01101010100010101010101010101
010101010111101000101010101010
10101001100000001111001010101
011101010101000101010101010101
SHA256 (“JensGuess”) = 0101111111111110000001010100010
010101010101010000111101010101

11110101010101010101010111100101
001010000111001010101011100100
If you change “JensGuess” to
010111000101010000111001010010
“BensGuess” then the entire
1110001010110110100110101000101
HASH code changes
10111110000011101010101010101010
11101011100010000011000000000
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WHAT IS MINING?
- The computer/user that does the Proof of Work/Validation gets a payment- called a
“mining fee”
- This is called mining because it is brand new currency— it is NOT coming from
exchange of at money, it is being added to the system.
- When the validator “wins” the Proof of Work problem- another line of code is added
with the mining fee attached

DATA
DATA

HASH #

PREVIOUS HASH

MINING FEE
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PROBLEMS WITH MINING
2009-2015 you could “mine” from your home PC
- Reward for mining ONE block in 2009 was 50 BTC
- In 2021 it is 6.25 BTC, however odds of nding “winning number” are 1: 30 trillion
- Cost of GPUs + electricity + cooling >>>> odds of “winning” with a small number
- Cost annually is 91 TeraWatts- the cost to run an entire country of 5.5 Million People (Hungary, New Zealand)
- Cost per transaction is 1,176 KiloWatt hours —> average household energy consumption for 6 weeks

- Every four years the number of coins being mined have halved

- Now people have set up ENORMOUS mining farms in Scandinavia, Iceland, Russia, China with millions of GPUs to increase their chances

- Miners can join blocks called “mining pools” to increase their chances
- Results in decreased decentralization
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BITCOIN: THE OG BLOCKCHAIN
BITCOIN BASICS
- Blockchain 1.0
- Created in 2009 (after White Paper in 2008)
- Cap: 21M, Current Supply: 19M (2M irretrievably lost)
- Speed: 7 transactions per second
- Energy consumption: A LOT!! 2260 KiloWatt Hours (by contrast 100,000 visa transactions 150)

- Type of Validation: PROOF OF WORK

- Pros:
- Highly decentralized
- Highly secure

- Cons:
- Low scalability due to speed
- High energy consumption for computing power to solve Proof of Work
WHY IS BITCOIN HERE TO STAY?
- Highly decentralized and highly secure makes it ideal for use as a currency

- Bitcoin is comparable as an asset to gold (store of value)

- Store of value: when markets are uctuating, it will hold its value
- Finite supply (21 Million)
- Hedge against in ation
- Highly portable
- Stored correctly- impossible to steal (cold wallets + private key)
- Can’t make copies or counterfeit
- Very little technology needed to use it (basic mobile phone)
- Name/brand recognition
- Owned by many - EVERYONE buying crypto buys Bitcoin

- Bitcoin is the ONLY cryptocurrency trying to compete with gold or at currency (like USD)- it has NO competitors
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BEYOND BITCOIN: MORE THAN A CURRENCY
 BLOCKCHAIN AS A TECHNOLOGY
- Bitcoin is primarily using the blockchain as a way to facilitate decentralized banking
and transfer of funds (Blockchain 1.0)
- Bitcoin is considered a currency, technology too slow & energy intensive for doing
much else
- Has a data limit of 1MB per block

- Other “blockchains” use di erent technology to move more data, faster, cheaper
- Di erent Proof of Work (PoW) algorithms
- Smart contracts (Ethereum)
- Proof of Stake (Avalanche)
- Proof of History (Solana)
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THE BLOCKCHAIN TRILEMMA
ETHEREUM
- Blockchain 2.0
- White Paper (2013) and Launched in 2015
- Proof of Work (modi ed algorithm)- 14 transactions per second
- Unlimited supply (now is 120M)- but capped at 18M new coins per year

- Winning Technology:
- Smart contracts (in their blocks)

- Pros
- Winning the developers- high number decentralized blockchain for building decentralized Apps (dAPPs)
- 3000 dApps
- 80% of the NFT market
- High brand recognition and trust
- Buterin Vitalik (co-founder)- has a lot of street cred
- Will move to Proof of Stake in 2023 making it more energy e cient

- Cons
- Slow & VERY Expensive (average cost $50-100 per transaction)
- Energy consumption relatively high
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SMART CONTRACTS
- The “terms” of a contract are written in the blockchain (IF abc ; THEN xyz)
- Immutable- cannot be changed
- Distributive- an entire system has to validate it for terms to be released

- Example: Kickstarter
- If I raise $5000, I will write a book about Crypto Jen gets $5000 &

- If YES—> Then Smart Contract will distribute the money

writes a book

- If NO —> Then Smart contract will return money to donors

Funds > $5000

Donations
Funds < $5000
Jen gets nothing &
funds get returned
PROOF OF STAKE
- Used by Avalanche (AVAX), Cardano, Solana, Polkadot, Cosmos, etc
- Instead of using “Proof of Work” where validators on the network have to solve an equation- they are randomly selected

- In order to be selected as a validator- you have to “stake” some of your supply

- The more you stake, the higher your chances of being chosen

- The validator is incentivized with newly minted coins

- If they fraudulently validate- they LOSE more than they make from the transaction

- Pros:
PROOF OF WORK VS PROOF OF STAKE

- Uses less energy

- MUCH faster
- Theoretically more decentralized because of mining pools
- Encourages individuals to stake and participate
 PROOF OF HISTORY
- Adds an extra piece of code called a Veri able Delay Function which acts as a time
stamp

- It works mathematically the same as dropping dye into a glass of water and watching it
di use. Anyone can look at pictures and know what came rst.
DATA VDL

HASH #

01cd4x

PREVIOUS BLOCK HASH #

0012fx
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