Ethereum is one of the implementations of blockchain. Ethereum is an open source, public, and distributed computing platform. On Ethereum, developers can deploy smart contracts written in the Solidity language and build a decentralized application—also called dApp, Ðapp, Dapp, or DApp.
Smart contracts are small programs where developers can define the rules of the trust that they intended to code. One of the mind-boggling properties of smart contracts is immutability—once they are deployed on the blockchain, their code cannot be changed. This immutable property makes it very hard to program smart contracts and predict errors/bugs beforehand.
In this chapter, we will learn more about blockchain technology, and when and where blockchains should be used. We will also introduce Ethereum and smart contracts.
A blockchain is a timestamped series of immutable transactions that is managed by a cluster of computers using special computer algorithms. These immutable records are not owned by any single entity. A blockchain is a decentralized P2P network of nodes. Each node in a blockchain shares the same copy of data, also called the digital ledger. Each node present in the network uses the same algorithm to reach a consensus.
A blockchain, by design, is resistant to the modification of data. The ledger can record transactions between two parties in a verifiable and permanent way. Whenever there is a change in the ledger using transactions, changes are distributed to all the nodes, to verify and update their own copy of the ledger. Once a transaction is stored and verified by all the nodes in the network, then it is not feasible to change the transaction without altering all the subsequent and previous blocks. That's why blockchain transactions are irreversible, as blockchain transactions and their data are append only.
Each computer that participates in this P2P network is called a node. Each node maintains the records of transactions in multiple consecutive blocks. The P2P network is also used in torrents such as BitTorrent; however, torrent networks are not like blockchains, as they are designed to shares files only.
Blockchain technology is also called Decentralized Ledger Technology (DLT), as each node in the network keeps the same copy of the ledger. Please have a look at the following diagram:
Chain of connected blocks
In the preceding diagram, each block is connected with a link (also known as a chain). The chain is usually recognized as the chain of all the blocks. The link between two blocks is implemented by having a record of the cryptographic hash of the previous block in each block, so that you can visit the chain in reverse chronological order.
One question that may arise in your mind is, what is the difference between a traditional software application that processes the transaction and a blockchain that also processes the transaction? Then, why you would need blockchain technology? Well, blockchain technology solved one of the hard problems of computer science—the double-spending problem. Let's understand what is the double-spending problem..
It is extremely hard to reverse a blockchain transaction. However, there have been cases when a 51% attack allowed an attacker to double-spend coins. One such example is when Ethereum Classic (symbol: ETC) was attacked with a 51% attack, in which approximately $1.1 million worth of ETC was lost.
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As we know, we can share documents and pictures over the internet with someone. When we share those documents or pictures with another person, we actually share a copy of the file. Once that copy is sent to another person, you and the other person have the same copy of that document.
However, things such as money, bonds, and shares must not be shared as copies, like we do for documents/pictures when we need to transfer them over the internet. If you try to send money P2P, without using any intermediaries, then both parties end up having the same copies of the money. This is called the double-spending problem.
For example, if Alice gives a $10 bill to Bob, then Alice must not hold a copy of the $10 bill, as it's given to Bob. These are called value transfers. To transfer those items that have values over the internet, we need to depend upon Trusted Third Parties (TTPs). Banks and stock exchanges are the TTP on which we rely for transferring values (money and shares) from person A to B. For value transfers between two parties over the internet, they both have to depend upon a trusted middle party (centralized) to process the transactions and ensure the safety of transactions.
Blockchain solved this double-spending problem. Now, for value transfers between two parties, neither of them have to depend upon a middleman (trusted party). They both can do safe transactions directly. Blockchain's decentralized network and consensus algorithm ensures the safety of transactions and prevents the double-spending problem.
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Blockchain has properties of both decentralized and distributed networks. Using those types of networks along with cryptography adds more properties. We are covering properties related...
