LECTURE SUMMARY

What is blockchain?

Blockchain is a technology that was actually developed in

1991 by two people called Stuart Haber and Scott Stornetta
but the idea got improved and the word blockhain got
widely adopted only after Bitcoin was invented in 2009.
Blockchain stands for the technology Bitcoin is built upon
while the term ‘Bitcoin’ represents both the Bitcoin
blockchain and the bitcoin cryptocurrency.
Blockchain can be defined as a decentralized, trustless,
irreversible, chronological and real-time public ledger that
is formed by a digital chain of blocks which contain
encrypted information.
Blockchain can have many uses such as making payment,
monitoring supply chain, lending money, voting,
forecasting, betting, tracking health records, etc.
Blockchain can replace many centralized authorities such
as banks and governments in the future.

See you in the next lecture!

 LECTURE SUMMARY

How does
blockchain work?

A network of computers, known as nodes, runs and

maintains the blockchain.
These nodes validate the originality and correctness of
transactions. If they decide that a transaction is authentic
and valid, they encrypt it and store it inside a block they
create.
Nodes have to solve a mathematical problem in order to
create a new block.
Every block has a limited size and cannot take more than a
certain number of transactions.
Every new block on the blockchain is chained to the
previous block by containing the summary of contents of
the previous block.
In case someone attacks and alters an older block, the
chain between the blocks protects the whole chain by
automatically making the following blocks invalid.
If an attacker intends to alter an older block, he/she will
have to run extremely difficult computations to recreate all
of the blocks that come after that block in order to fool the
network that the new blockchain he/she created is the
genuine one. This requires an insane amount of computing
power and is almost impossible unless the attacker(s) hold
more than half of the computing power of the network.
Also, the older the block that is attacked, the more difficult
the task will be to accomplish.
The transactions that await confirmation before they are
stored inside a block temporarily live in a memory pool.

As one of the nodes solves the mathematical problem

before others, it creates the new block, adds it to the
blockchain with a reference to the previous block that
comes before it, and broadcasts the solution to every other
node on the network. At this moment, not only the new
block is confirmed and added to the end of the blockchain
but also all transactions included in that block become
confirmed as well.
After a new block is created, every node in the network
checks whether the new block is correct and if the answer
is yes, they update their copy of the distributed ledger in
order to stay up-to-date with the rest of the network and
stay operational. On the other hand, if the block is
incorrect, they don’t update their ledger and continue
working on the legitimate blockchain.
Nodes are highly critical for the continuous operation of
the blockchain and to keep it secure and decentralized.
The blockchain protocol rewards these nodes with
cryptocurrencies or fees, or with both, in return for their
activity of validating transactions and creating blocks.
Rewards are not free. The processes of transaction
validation and block creation, which are also called mining,
require the nodes to use computing power that also
requires electricity.

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 LECTURE SUMMARY

What is Bitcoin?

Bitcoin is the first successful decentralized cryptocurrency

that allows people to make payments and transfer money
fast, cheap and secure without having to rely on
intermediaries such as banks.
Bitcoin bears all three requirements for being considered
as a currency: unit of account, medium of exchange and
store of value.
Bitcoin was invented in 2009 by a visionary person or group
that use the cover name Satoshi Nakamoto, with the
objective of giving the power back to the hands of the
people.
Bitcoin transactions cannot be altered after they are
confirmed.
Bitcoin transactions usually take 10-20 minutes to be
confirmed and cost $1.5 but these can change dramatically
when network is busy.
Bitcoin transactions are not completely anonymous in
contrast with the public belief. In fact, founder of Silk Road
has been arrested in 2013 due to this reason.
1/100,000,000 of a bitcoin is called a Satoshi.
On 22 May 2010, Laszlo Hanyecz paid 10,000 bitcoins for 2
large pizzas.

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 LECTURE SUMMARY

How does Bitcoin work?

To create a Bitcoin block, miners need to solve a

mathematical problem which works as a function that has
inputs and outputs.
The output of this function must have a prefix with specific
numbers of zeros, which is determined by the Bitcoin’s
protocol.
Bitcoin’s protocol adjusts the difficulty of the mathematical
problem by changing the required number of zeros every
2,016 blocks (approximately every 2 weeks) so that solving
the problem and creating the block would always take 10
minutes in average.
By mining alone, it’s highly possible that your life time will
not be sufficient to create a block because of the difficulty
of the Bitcoin’s mathematical problem.
Nonce is an integer which stands for ‘number used once’.
Every miner uses it as an input for solving the
mathematical problem alongside the block contents, and
continuously increments it at each attempt so that he/she
can quickly try another solution after each fail.
Every Bitcoin block includes a reference to the previous
block in the form of a SHA-256 cryptographic hash of the
previous block’s header. This is to ensure the security of
the system.
By solving the mathematical problem, miners are proving
that they have in fact used computing power and
consumed the required energy to complete the job, which
is called ‘Proof of Work’.
Block reward is halved in every 210,000 blocks
(approximately every 4 years). Currently, it is 12.5 bitcoins
per block.
The total supply limit for bitcoin is set as 21 million
bitcoins; and due to the halving every 4 years, it is expected
for the mining reward to decrease to zero by 2140.
Afterwards, miners will still maintain the blockchain but
just by collecting fees instead of both block rewards and
fees.

See you in the next lecture!

 LECTURE SUMMARY

What is hashing and

hash function?

Hashing is the transformation of any length of characters

into a value or key that has a fixed length representing the
original string.
Hashing can be used in databases, encryption algorithms
and blockchain.
Hashing algorithms are called hash functions.
Value returned by a hash function has many names such as
hash value, hash code, digest, or simply hash.
Bitcoin uses SHA-256 hashing algorithm while Ethereum
uses KECCAK hashing algorithm.
Characteristics of cryptographic hash functions are as in the
following:
Output is always of a specified length determined by
the algorithm.
Output is usually, but not necessarily, shorter than
the input.
Output changes dramatically even if the input is
changed only slightly.
Two distinct inputs cannot map into the same
output, or at least the probability should be
extremely low (This concept is called collision
resistance).
It is almost impossible to reverse the function to
find the input data from the hash value.
This impossibility level of reversal varies according
to the strength of the encryption used.
The output does not give any information about
what the input can be and looks random.
For a hash function to be efficient, hash value of an
input should be returned very fast.

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 LECTURE SUMMARY

What is inside a
Bitcoin block?

Contents of a Bitcoin block are as below:

Magic number: Specific number that states the
block is a Bitcoin block
Block size: Space required to store the block
Transaction counter: Number of transactions inside
the block
Transactions: List of all transactions stored in the
block. Each transaction consists of:
Transaction hash: Hash of the remainder of
the transaction
Version: Identifies the version of Bitcoin
protocol
List of inputs: Sources of the transaction +
sender’s signature
 List of outputs: Amount of transaction +
receiver’s public key
Lock time: Period of time required for the
transaction to be processed
Size: Space required to store the transaction
Block header: An element of the block that contains
the following information:
Version: Identifies the version of Bitcoin
protocol
Hash of previous block: Hash of the previous
block’s header
Merkle root: The final hash that is found by
continuously hashing pairs of transaction
hashes
Timestamp: The moment in time that the
block is created
Difficulty target: Difficulty of the
mathematical problem used in mining
Nonce: An integer used as input for the
mathematical problem used in mining

See you in the next lecture!