Understanding Blockchain and Cryptocurrencies

A Primer for Implementing and Developing Blockchain Projects

Akira Summers

• Publisher: CRC Press
• Year: 2022
• Print ISBN: 9781032034072
• eBook ISBN: 9781000549324
• Edition: 1
• Topic: Computer Science
• Subtopic: Computer Networking
• Index: Computer Science

Whether you are a project manager looking to lead blockchain projects, a developer who would like to create blockchain-based applications, or a student with an interest, this book will provide you with the foundational understanding that you need.

You have probably noticed that blockchains are growing in popularity. Governments are investigating Digital Currencies, supply chains are adopting Digital Ledgers, games makers and artists are developing NFTs (Non-Fungible Tokens), and new use-cases are emerging regularly.

With such growth, many people will find themselves needing to understand how these technologies work. There will be new project teams, with technical leads managing blockchain projects and developers creating distributed applications. This book is great for them as it explains the concepts on which blockchain technologies are based, in simple terms.

We will discuss and explain topics such as hashing, Merkle trees, nodes, mining, proof of work and proof of stake, consensus mechanisms encryption, vulnerabilities, and much more. The structures and principles described will be relevant for developers and managers alike, and will be demonstrated through relevant examples throughout the text.

If you are looking to understand this exciting new technology, this is the book for you.

Chapter 1What are blockchains for?

DOI: 10.1201/9781003187165-1

Provenance and trust

A key feature of blockchains is that they allow you to manage and verify the history of an asset, removing the necessity to trust in a supplier. In doing this, they allow you to establish ownership or proof of origin.

One way in which they stand out from other data types, such as conventional databases, is that they are immutable. That is to say that once something has been added to a well-functioning blockchain it is practically impossible to change it. We will talk later about how a blockchain achieves this immutability.

Let’s look at an example of a supply chain managed by a blockchain and how this works to eliminate the need to trust. As they say in the blockchain community, don’t trust, verify.

Let’s assume I am manufacturing cars. I claim that my car has been made using only high-quality, safety-tested and compliant components (fig 1.1).

Figure 1.1Product supply chain.

Normally as a manufacturer, I have to trust those people who provide me with parts to supply the parts that I have ordered, to the specifications that I have required and anyone who receives a car from me has to trust me in the same way. The truth is that they could quite easily switch to using cheaper, less regulated sources for their components and I might not be able to tell (fig 1.2). I must trust them.

Figure 1.2Dishonest supply chain.

Instead, consider an alternative where the whole supply chain is managed through a blockchain (fig 1.3). Because blockchains offer a way in which we can track the components and their history and this data cannot be changed and is available to see throughout the process, we no longer need to trust in the supplier, we can verify using the blockchain.

Figure 1.3Blockchain supply chain.

In this situation, all the individual manufacturers can check where each of their products has come from, the resources that they were made with, as well as when they were delivered and other information related to the supply. It would not be possible for a manufacturer to claim that their product was made from something that it was not, at it would be easily visible to everyone when they consulted the blockchain.

Downtime

Blockchains are available 24 hours a day, 7 days a week and 365 days a year. Because they don’t require people to operate the system in the same way that comparable systems do, they can provide a continuous service.

Because of the level of validation checking, and the decentralized approach, they are very robust and resistant to attack. In an age of hacking, identity theft and cyber-attacks increased security is a greatly desirable trait.

They can drastically reduce the amount of administrative overhead and in doing so create great cost savings. Their increased transparency makes auditing easier and fraud more difficult. All these benefits and more are derived from the blockchain’s unique approach to data storage and transmission. This approach, the structures, methods and rules that it comprises are all part of the blockchain protocol. We will start by looking at the data structures employed and move onto the networking and transmission.

Not for everything

Blockchains can be very powerful. They are however not for everything. There are certainly some downsides to using blockchains. They can be resource hungry for example, when compared to other methods of storing and working with data. One of the first questions that you should be asking as a developer or project manager is whether a blockchain is needed for your system. As you read through this book and learn more about blockchains, you will develop an understanding of the strengths of blockchains and the associated costs, so that you can answer that question.

Key points about blockchain uses

• Blockchains allow for trustless relationships.
• They can be used to establish provenance.
• They have many applications.
• They are resilient against issues with downtime.

Chapter 2Basic principles of blockchain

DOI: 10.1201/9781003187165-2

Block structure

There are many features of a blockchain. To make things easy to understand, we will start with a highly simplified model and gradually add and explain additional features, to build up our conceptual model.

At its simplest, blockchains store information by chunking data into blocks and linking them. This is not a new concept in computing. At this level, a linked list (fig 2.1) works in a similar manner, though there are many important differences which we will discuss.

Figure 2.1Linked lists.

With linked lists, each node contains data and a pointer to the location of the next node. Blockchains work in a slightly different way. The following diagram shows the contents of a Bitcoin block (fig 2.2).

With blockchains, each block contains an amount of data and is linked to the previous block. Often blocks are compared to the pages of a book, the complete book being the blockchain and the data sitting inside the page.

Figure 2.2Beginning blockchain.

Each block in addition to the data contained also includes a header consisting of several pieces of metadata about the block. We will explore the structure of this header as we build up our understanding of the blocks and the blockchain that they form.

The blocks are stored as files. They are indexed by a separate index file, outside of the chain, together with other useful information for the system. Bitcoin, for example, has a blkindex.dat file which contains an index of the block files. Block data are stored in the blk000n.dat file, where 000n is the number of the block (fig 2.3).

Figure 2.3Blockchain with index.

Though they are present in blockchains, we will generally leave this indexing information of...

Table of contents

• Cover
• Half-Title Page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of tables and figures
• About the author
• Preface
• Who is this book for?
• Acknowledgement
• Notes
• What should you know before reading this book?
• Why learn about blockchains?
• Chapter 1 What are blockchains for?
• Chapter 2 Basic principles of blockchain
• Chapter 3 Decentralized computing
• Chapter 4 Forks
• Chapter 5 Cryptocurrencies
• Chapter 6 Coins and transactions
• Chapter 7 Mining
• Chapter 8 Summary of blockchain so far
• Chapter 9 Blockchain 2.0
• Chapter 10 Public and private blockchains
• Chapter 11 Privacy coins
• Chapter 12 Blockchains and cryptocurrency issues and answers
• Chapter 13 Attacks
• Closing words
• Glossary
• Index