Blockchain essentials

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Introduction

“To understand the power of blockchain systems,

and the things they can do, it is important to
distinguish between three things that are commonly
muddled up, namely the bitcoin currency, the
specific blockchain that underpins it and the idea of
blockchains in general.”

The Trust Machine, THE ECONOMIST, Oct. 31, 2015

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Blockchain terminologies

● Blockchain – What is it?

o Aka DLT (Distributed Ledger Technology) - rudimentary
shared accounting system

o Technologically, it is :
• Distributed database – public ledger (you can insert,
select data, but can’t update or delete data.
• Distributed computer – execute digital contracts
• Based on p2p (peer-to-peer) technology, cryptology
and API

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Blockchain terminologies

● Blockchain – What is it?

In fact, the blockchain is more than a technology, it
o Usually contains financial transactions
o Is replicated across a number of systems in almost real-time
o Uses cryptography and digital signatures to prove identity,
authenticity and enforce read/write access rights
o Can be written by everyone in a public blockchain (but only
certain participants in a private blockchain)
o Can be read by participants, often a wider audience
o Has mechanisms to make it hard to change historical
records, or at least make it easy to detect when someone is
trying to hash
do so hash hash hash
Block 1 Block 2 Block 3 Block 4
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Blockchain terminologies

● Distributed ledger – What is it?

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Blockchain terminologies

● Distributed ledger – How it works?

Users initiate Nodes

Users One or more
transactions aggregate
Broadcast their Nodes begin
using their validated
transactions to validating each
Digital transactions
Nodes transaction
Signatures into Blocks

Nodes Block reflecting

Broadcast Consensus “true state” is
Blocks to each protocol used chained to prior
other Block

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Blockchain terminologies
● Transaction & blocks
o A transaction is a value transfer; a block is a collection of
transactions on the bitcoin network, gathered into a block
that are hashed and added to the blockchain.

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Blockchain terminologies

● Mining
o This process of solving cryptographic problems using
computing hardware also triggers the release of
cryptocurrencies

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Blockchain terminologies

● Mining
o The process by which transactions are verified and added to a
blockchain.

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Blockchain terminologies

● Mining
o Miners on the network select transactions from pools and
form them into a ‘block’.

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Blockchain terminologies

● Forks
o A fork is the creation of an ongoing alternative version of the
blockchain, by creating two blocks simultaneously on
different parts of the network. This creates two parallel
blockchains, where one of the two is the winning blockchain.

o When does it happens?

• Block found at the same time
• Software incompatibility
• “We don’t agree” split

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Blockchain terminologies

● Forks

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Image source: Scorechain
Blockchain terminologies

● Bitcoin
o Crypto currency, first asset based on Blockchain
o Used for drug/weapons e-commerce, ransom ware
o Used for remittance, speculation, store of value

“What is needed is an electronic payment system based on

cryptographic proof instead of trust, allowing any two willing
parties to transact directly with each other without the need for
a trusted third party.”
Satoshi Nakamoto – October
31st, 2008

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Blockchain terminologies

● Bitcoin
o Monetary creation

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Blockchain terminologies

● Bitcoin
o Inside Bitcoin’s Blockchain
BLOCK
(Units of the blockchain, like pages of transactions in a
ledger)
Header
(It is hashed twice to create the fingerprint
which is referred to in the next block)

Transaction count
(How many transactions are in the block,
including the coinbase transaction)

Block content
Coinbase Bitcoin
transaction transactions
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Blockchain terminologies

● Bitcoin
o Inside Bitcoin’s Blockchain
- Block Header : includes Technical
data, Previous block hash, Merkle Root,
Timestamp, Difficulty target, Nonce.
Here is an example:

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Image source: www.blockchain.com
Blockchain terminologies

● Bitcoin
o Inside Bitcoin’s Blockchain
- Block content : Transaction Flow
Mining Coinbase Regular Address to Address Transaction

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Blockchain terminologies

● Bitcoin
o Inside Bitcoin’s Blockchain
- Block Transaction example:

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Blockchain terminologies

● Bitcoin
o How the
money transfer works

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Blockchain terminologies

● Ethereum
o Proposed in late 2013 by Vitalik Buterin (cryptocurrency
researcher and programmer)
o Online crowdsale during summer 2014
o Bitcoin on steroids!

“A blockchain is a magic computer that anyone can upload

programs to and leave the programs to self-execute, where the
current and all previous states of every program are always
publicly visible, and which carries a very strong
cryptoeconomically secured guarantee that programs running
on the chain will continue to execute in exactly the way that
the blockchain protocol specifies.”
VitalVitalik Buterin
Source: https://medium.com/blockchain-review/how-does-the-blockchain-work-for-dummies-explained-simply- 20
9f94d386e093
Blockchain terminologies

● Ethereum
o Decentralised app platform (dapps)
o Transaction & smart-contracts ledger
o Based on the Ethereum Virtual
Machine (EVM)
o Cryptocurrency called ether (ETH)

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Blockchain terminologies

● Ethereum
o Smart Contract

How a “Traditional”
contract works:

Source: https://www.investopedia.com/terms/s/smart-contracts.asp 22
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Blockchain terminologies

● Ethereum
o Smart Contract

How a “Smart Contract”

contract works:

Source: https://www.investopedia.com/terms/s/smart- 23
contracts.asp/