Blockchain: Introductory Course On Blockchain - What Is Blockchain?

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Teaching video--The origin of blockchain

Blockchain technology proposes a new paradigm capable of penetrating, interconnecting and optimizing every existing organizational system in multiple ways. Disadvantages, on the other hand, are few and mostly related to technical, specification, or scalability issues that will only be ironed out over time. Throughout the course, we will learn about the revolution proposed by blockchain and what is the path that led us here. The evolution of blockchain as a technology can be understood as a journey through different stages, each reaching new heights in functionality, empowering users and the ability to explore its potential. The first stage is Bitcoin.

Bitcoin is an initiative of the blockchain concept, giving rise to the so-called blockchain 1.0. But... what is real Bitcoin? Bitcoin was launched in 2008 by an anonymous user (or possibly a group of people identified by an alias). Today, Bitcoin is the largest and most notorious digital currency, created and held entirely electronically. Its price has risen from less than 1 cent of a euro eight years ago to more than $4,000 now. Let's imagine this using basic calculations. If you invested $5 in Bitcoin in 2010, your investment in 2017 would be $4.4 million. Crazy, right?

Let us remember that on May 22, 2010, a user spent 10,000 BTC in exchange for two pizzas. Today, that's equivalent to $22 million. Let us understand the reasoning behind this process. Bitcoin has a peer-to-peer structure. This means that they are transferred from one user to another over the Internet without going through a bank or any other financial institution. Among other things, this means a significant reduction in transaction fees and the possibility of using them in every country. At the same time, research shows that implementing blockchain technology in the banking industry can reduce infrastructure costs by 30%. In fact, 90% of major North American and European banks are exploring or testing the suitability of blockchain.

The value of traditional currencies depends on the market demand for them, just like the value of goods and services. Cryptocurrencies are no exception, and there are subtle but important differences. Their rise and fall is closely tied to the willingness of markets and countries to accept them and consider them to be effective methods of payment. Different countries have taken different approaches to this. Japan recently accepted Bitcoin as a legal payment method, but has always considered it an asset rather than a currency. India has set up a committee to assess the impact of accepting cryptocurrencies, with everything pointing towards legalizing the currency.

Among other things, legalizing Bitcoin as a payment method would mean allowing taxes on investors and their profits. Russia, once an avowed enemy of cryptocurrencies, has made a U-turn and now aims to legalize its use by 2018. Lack of confidence in local currencies, especially in specific regions of Asia, has also increased demand for Bitcoin. To date, Bitcoin has a market capitalization of $77 billion, and this number is expected to grow steadily. There are many geopolitical and economic reasons for this rapid growth, including the recent change of president in the United States and rising debt levels in some of the world's major economies.

Experts defend the topic saying that this will incentivize sovereign countries such as Russia or China to accept Bitcoin as an effective alternative to the US dollar, which will further increase Bitcoin’s market price. In 2017 alone, prices surged 125%. Bitcoin has transformed from a promising concept to a strong currency whose movements influence the entire market. Its success was so overwhelming that it inevitably spurred the creation of hundreds of equally successful new cryptocurrencies. They all have different purposes or value propositions, but are all based on blockchain technology. Here we have some of the most prominent ones.

The second largest market capitalization is US$23 billion, the third is US$6.7 billion, and the fourth is US$2.5 billion. The cryptocurrency market has a trading volume of $120 billion. Let's take another example. is a digital asset designed to reward solar power generation around the world. Photovoltaic panel owners can recycle solar energy by simply producing solar electricity. Producers receive 1 bonus for every MWh produced. This proves that cryptocurrencies can be used as a means to incentivize and reward certain behaviors. One of the main reasons why digital currencies have increased significantly in market capitalization is that, like gold, they are not backed by governments.

This illustrates the rise of blockchain technology as an online payment method. One of many areas where blockchain shows great potential for disruption. But how exactly does blockchain work? What makes blockchain so special? Come and discover with us.

Glossary

Creation of Blockchain

Watch this video to learn about blockchain technology and its main features: storage, immutability, and immutability.

Lessons for Blockchain Developers

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Teaching video--digital signature & hash chain

In the previous lesson, we discussed Bitcoin and digital currencies. Bitcoin’s blockchain enables peer-to-peer transactions of electronic cash. But what is “blockchain” and why is it necessary? Blockchain is a new organizational paradigm. It is an unbreakable ledger that allows users to connect without middlemen or third parties and records all transactions in a decentralized database. Let’s look at the challenges we face when we try to make electronic cash transactions possible. If we manage to understand how these mechanisms work, then we will understand how blockchain works.

Suppose we have three people: Alice, Bob, and Chuck. Everyone has a computer and an internet connection, and they want to start trading with the currency they created. Suppose they name their currency ABC-coin and decide to allocate an initial quantity of 10 units to each currency. Chuck takes the lead in creating a spreadsheet that serves as a ledger for ABC coin distribution and grants read and write permissions to Alice and Bob. Whenever there is a new transaction, the sender writes a new record in a row of the spreadsheet indicating the previous owner of ABC Coin, the new recipient, and the amount being transferred.

Over time, however, this solution proved ineffective because they had to trust each other and trust that no one would deceive the records or try to manipulate the spreadsheets. Additionally, the database is stored on Chuck's computer, so he always has access to it. worse! If Chuck's computer crashed, they feared all data would be lost. To avoid this, they decided that everyone would keep an exact copy of the ledger documents. This is a good decision. But what happens if Chuck insists on falsifying the data? Imagine that Chuck registers a new transaction in his ledger indicating that he received 10 ABC coins from Alice.

Alice never executed this transaction, so there will be a conflict the next time they compare the ledgers. There are some ways to resolve this situation. They need to ensure that transactions can only be registered by the person sending the coins. After some thinking, they found the perfect solution. They decided to add digital signatures to every transaction. To enable the system, each system is assigned a pair of keys, a public key (visible to other users) and a private key (visible only to the owner). They added a new column to the spreadsheet and labeled it "Signature." When Alice wants to send 1 ABC coin to Bob, she signs the transaction using her private key.

The private key will be saved in the spreadsheet, and now Bob and Chuck will be able to verify the signature using Alice's public key. Everyone agrees that the sender of ABC Coin must always send a record of the signed transaction to others so that they can also add the transaction to their ledger. Chuck cannot easily add new fake transactions. However, he can delete old transactions or change the number of tokens he sends to someone and add new digital signatures for those people. Modifications can be tracked and discovered, but this requires significant time and resources. No one wants to control this! Chuck is very persistent.

Therefore, they need a way to avoid manipulating the history of the ledger and make it immutable. In order to achieve this, all transactions need to be linked in a way that modifies the old transaction, while also changing all post-transactions. This makes cheating much more difficult. They concluded that the digital signature solution is based on information about the previous owners of each coin. This can be done by adding the hash of the previous transaction. This hash value is used as an identifier, which will be explained in a later lesson. This way, each new transaction is linked to the previous transaction, allowing the chain of ownership to be tracked.

Imagine Alice wants to send 2 ABC coins to Bob. To register the transaction, she will use the hash of the transaction in which she first received 2 coins and Bob's public key. Most importantly, she will sign both values ​​with her private key. So, as the Bitcoin white paper shows. "Each owner transfers coins to the next coin by digitally signing the hash of the previous transaction and the next owner's public key and adding those coins to the end of the coin" Now, the cheat is a A more difficult job. The three of them took the first steps towards creating a blockchain. However, as we all know, every law has loopholes.

Join us to learn about the other challenges they will face and how they will ultimately create a fully functional blockchain!

How does blockchain work?

Blockchain technology provides a storage system that is more resistant to database attacks than any other technology. Watch this video to fully understand how blockchain works, the players involved, and the rewards involved. You'll also learn where all your data is stored and who is protecting it.

Lessons for Blockchain Developers

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Teaching video--Proof of work and consensus mechanism

In the previous lesson, we saw how Alice, Bob, and Chuck fixed all the holes they found in their ledger. They found a way to understand all the transactions going on and figured out ways to identify fake transactions and track fraudulent modifications. It's now impossible to manipulate ownership history, but Chuck still figured out a way to cheat. He owes Bob and Alice some money. Therefore, he creates two new transactions to simultaneously transfer ABC coins to Alice and Bob, one of which only has enough funds. When Alice receives a transaction, she considers it valid. So does Bob.

They have no way of knowing if the coins they receive have been spent elsewhere. This problem is called "double spending." Once again they found a solution. They ensure that all transactions occur in a specific order, so the same transaction cannot occur twice at the same time. To do this, one or more transactions need to be collected and placed into what is called a block. In the case of Bitcoin, a block contains approximately 2,000 transactions. Each block will contain the previous hashed form of the identifier. This produces a series of blocks. Blockchain.

They have built a very resilient system! But what if Alice, Bob, and Chuck disagree about the information shown in the blockchain? Suppose they disagree on the exact order in which the blocks should be stored. They need a consensus mechanism to decide who is right. How to achieve network consensus? Users regularly compare their versions of the ledger. When they discover a discrepancy, each user votes for the version of the ledger they believe is honest. Each account has one vote, and the final version of the ledger is the one voted on by the majority of users. In our scenario, the blockchain will discard the ledger where Chuck registered both transactions.

By adding this mechanism, they achieved a very secure private network. In other words, a private blockchain. However, after validating their system, they didn't want to stop there! Now they want to open their ABC-Coin network to the public so that everyone can have an account and start trading ABC Coin. As soon as they did, Chuck tried to cheat again. Chuck registered 10 accounts pretending to be a new user. He later used these accounts to vote for certain modified versions of the ledger, in which he owned more coins than he actually had. We've just encountered the major problem with virtual identities. There is no control over how many different accounts belong to the same person.

To ensure that each user has an account, the system should rely on formal authentication via passport or ID card from outside the system. However, this is the opposite of what they are trying to achieve, and even so, in many cases it is desirable to allow multiple accounts per person. To stop Chuck from cheating, they needed a voting mechanism based on something that couldn't be easily replicated. It needs to be based on the scarce resources that users must have. That scarce resource might be computing power. This voting mechanism is called proof of work. Voting can also be based on the amount of money in the account.

The more money you have, the more power you have to vote. This is called Proof of Stake. Both of these aspects will be explained thoroughly in the later weeks of the course, but let's see how our team handles this situation. In these cases, in order to succeed, the attacker must have enough computing power or funds to force his version of the ledger to vote. Doing so requires a lot of effort, in the first case, or money, and in the second case, may be punished by the system. The benefits gained from counterfeit transactions will be minimal compared to the resources invested. That's why we say it's economically disadvantageous.

Suppose Alice, Bob, and Chuck decide to use proof-of-work. This is also the mechanism used by Bitcoin. They came up with an original version where you can vote after solving computational challenges generated by the system. For example, the challenge might be to guess a secret random number within a specific time interval. Guessing random numbers can be very difficult and they must invest a lot of work and computing resources. This process is called mining. Miners who successfully guess the number will receive newly created ABC coins. Upon success, the miner appends the mined block to the previously correct block.

Alice, Bob, and Chuck created a trustless, immutable, and decentralized network. Blockchain. We now know that blockchain can be used to trade electronic cash, but this is just one of the many things blockchain can do. Follow us to discover what happens next!

How can blockchain be more efficient than traditional data storage systems?

We’ve learned a lot about blockchain’s potential to optimize organizational systems.

However, when you talk about blockchain as a powerful technology that will take over the world, there is no shortage of skepticism. What's your impression?

Do you think blockchain can truly take over banks and financial institutions? Can it become a technology used to effectively decentralize every system based on transactions?

It's time to share your opinion. We're very interested in your insights on this topic!

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discuss

consensus mechanism

Blockchain distinguishes between legitimate transactions and fake transactions without a centralized authority.

Watch this video to learn about the different consensus models (proof of work and proof of merge), how blocks in a blockchain are connected, what a tree is, and how transactions are confirmed.

Lessons for blockchain developers.

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Instructional Video - Proof of Work and Proof of Stake

As we mentioned before, there are two algorithms that can be used to reach consensus in public blockchains. Proof of Work and Proof of Stake. In this lesson, we will explain in detail how these two algorithms work and analyze the advantages and disadvantages of each algorithm. As obvious as it sounds, the goal of a consensus algorithm is to achieve consensus. This would be an easy thing if we were sure that everyone in the system is honest and will always be honest. But what happens if there are a large number of malicious actors? This is tricky.

The maximum percentage of dishonest participants an algorithm can handle while finding a true version of the ledger is called Byzantine Fault Tolerance. The higher the tolerance, the more dishonesty the system can handle.

Additionally, the algorithm must have low operating costs compared to the benefits achieved when reaching consensus. We can't afford to spend more to secure the exchange than we get from enabling it!

The algorithm also requires a mechanism to prevent certain parties from gathering within the system and gaining power over other users. Finally, the algorithm needs to suppress malicious behavior by making it very expensive to execute. If these criteria are met, we have found a suitable consensus mechanism.

Now let's delve into the technical details of two of the most popular mechanics. Proof of Work and Proof of Stake.

Previously we learned that voting rights in consensus mechanisms are allocated based on ownership of scarce resources. For proof of work, that resource is computing power. In order to verify and store a set of transactions in a blockchain, a lot of computing power is required.

The process is as follows: Transactions that occur in the network are broadcast to miners. Miners collect multiple transactions and put them into a group called a "block". In order to successfully store data, miners need to find the correct hash of each block. A hash is a mathematical function that maps data of any size to a string of numbers and letters. Hash functions have the property that inversion is infeasible. You can't guess the input by looking at the output. Miners need to find a specific hash value. When a hash value starts with the minimum number 0, it is accepted as a correct hash value. Now this is where the work begins.

Whenever a miner modifies the data in a block, the hash of that block changes completely. However, this is exactly what a miner needs to do to get the correct hash value. Therefore, miners keep adding small packets, which are named Nonce. A nonce is a 32-bit number and it is impossible to predict which bit combination will produce the correct hash value. Try many different random values ​​and recalculate the hash for each value until you find one that contains the desired number of zeros at the beginning of the string.

Since this iterative computation requires time and resources, finding a block with the correct random value constitutes proof of work. To be successful, the miner does not have to find some predefined hash, but the hash must start from a certain number of zeros. Mining difficulty can be adjusted by setting a minimum amount of 0.

The competition is very fierce at present, and the system needs to adjust the block production speed by adjusting the difficulty. The probability of a single miner successfully obtaining a hash and mining a block is very low, so miners tend to form associations with other miners called mining pools. When one of the miners succeeds, the reward is distributed to all members of the pool. In the case of Bitcoin, the reward for a successful miner is the sum of 12.5 newly generated Bitcoins plus all transaction fees paid by the user for transactions stored in that block.

In order to balance the economy, Bitcoin rewards become lower and lower over time, and one day only transaction fees are used as rewards.

Different mining pools compete with each other to mine each block. Larger mining pools have a higher probability of success because they have more computing power. But the reward ratio each member receives will also be quite low.

Proof-of-work has successfully powered the Bitcoin blockchain since 2009. So what does it take to prove equity? Well, proof of work has some weaknesses. First, proof of work requires a lot of energy. Very specific hardware is used to perform all hashing iterations, and the sum of all devices accounts for 0.08% of the total energy consumption. It is estimated that Bitcoin and Ethereum consume over $1 million per day in electricity and hardware costs as part of the consensus mechanism. This is a lot of energy. Stof of Stake is an experimental concept that aims to provide an equally secure consensus mechanism while addressing these flaws.

Very few blockchains currently use proof-of-stake, but many large companies (such as Ethereum) plan to adopt it in the near future. But does Stof of Stake really work? Remember Alice and Chuck? They built a strong proof-of-work chain, but now they want to explore evidence-based consensus. In chain-based proofs, one user is selected pseudo-randomly as the validator for each block. The probability of a participant being selected as a validator depends directly on the number of tokens he owns. The greater the ownership, the higher the probability. In other words, the algorithm selects those with more money.

Suppose Alice is randomly selected as a validator, so she has the authority to add new blocks to the chain. Alice votes for the chain she thinks is correct, and she does this by attaching her neighbors to that chain. In chained proof of equity, the selection of the main chain and the real chain is based on the "longest chain rule". Assume that a fork has occurred and the main chain is divided into two, chain A and chain B. Alice sees that some blocks in chain B are invalid and appends her blocks to chain A. In proof-of-work, the system will reward her honest behavior with newly generated coins.

For the next block, choose Chuck as the validator. Now we know that Chuck will never give up on his cheating, so he just appends his block to both chains with the goal of getting rewarded twice. With proof of work, he needs twice the computing power, but nothing can stop him now! Chuck should have finished his homework! The system could be designed to penalize every validator that publishes a block in multiple chains, as well as those that publish in chains that are subsequently terminated by other validators! We just learned about the different ways to achieve consensus in blockchain. But does this apply to all existing blockchains? Explore other types of chains with us.

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course quiz

What definitions can be applied to blockchain technology? Select all answers that you think are correct.

It is a ledger that records transactions without the need for a central authority. This is an organizational paradigm that empowers users. It was the digital currency before Bitcoin. It is an alternative to the banking system and also reduces transaction processing time.

Oriole Chief Education Officer

Blockchain technology is essentially a new organizational paradigm that allows users to record transactions in a distributed shared ledger without the need for middlemen.

What is "double spending"? Select all answers that you think are correct.

This is a common problem in systems without central authority. This is a phenomenon that allows users to spend the same funds in two different places. This takes into account the energy consumed by guaranteed transactions. This is a malicious behavior that allows users to double the funds in their accounts.

Oriole Chief Education Officer

Double spending is a recurring problem in systems on the Internet that do not have a central actor acting as a validator. Without a central authority, it is difficult to prevent users from copying individual transaction records.

What is the purpose of incorporating evidence-based consensus mechanisms? Select all answers that you think are correct.

Suppress attacks on the system. Improve the processing speed of the system. Solve computational problems. Rewards miners and validators.

Oriole Chief Education Officer

Including professor-based consensus ensures user participation in securing the system. The algorithm rewards users for their participation, increases the speed at which the system processes transactions and inhibits malicious behavior.

What is Byzantine Fault Tolerance?

A metric indicating how many computers are likely to crash before the system shuts down. The amount of malicious behavior the system can tolerate while still finding the correct answer. A mechanism to prevent parties from coming together to influence the vote. The key factor for the system to reach consensus.

Oriole Chief Education Officer

The fault tolerance of a system defines the system's ability to recover from attacks. A higher tolerance will allow the system to continue functioning normally even if a certain number of users behave maliciously.

(Advanced) Glossary

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This week in review

Here are the main ideas you have to start this week:

Digital currencies have changed the financial industry forever. They have the potential to impact how banks operate globally. New digital currencies are being created to operate in very specific applications, such as energy trading or incentivizing certain behaviors. One example we saw in this unit is.

Blockchain is a natural evolution of centralized organizational systems and the old traditional approach that relied entirely on centralized authority. This new model provides users with power and decision-making capabilities, eliminating unnecessary middlemen and unreasonable transaction fees.

Blockchain improves the security of the system and allows users to move forward and control the security of the system. All this without centralized authorization.

Blockchain solves the problem of how users themselves determine the validity of transactions. Current algorithms require large amounts of energy to work, so research is now focused on finding new, efficient ways to implement these processes in a more sustainable way from an energy perspective.

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