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Blockchain Simple Basics

October 17, 2024

blockchaintheory

This post is just a grain of very basic blockchain theory. I am not an expert in blockchain technology, but I am super excited about it. I love to share my excitement and knowledge here :D

New internet?

  • 1.0: Static web pages
  • 2.0: Dynamic web pages
  • 3.0: Decentralized web page. This is where we are going. A decentralized web page is a web page that is hosted on a decentralized network. It is not hosted on a single server. It is hosted on a decentralized network. It is not controlled by a single entity. It is controlled by the network. It is censorship resistant. It is permissionless. It is transparent. It is trustless. It is open source. It is decentralized. It is immutable.

Purpose of Blockchain

  • Decentralization - It is not controlled by a single entity and it is controlled by the network.
  • Immutability - It cannot be changed once deployed.
  • Security - It is secure because it is decentralized and immutable.
  • Transparency - Each transaction is visible to everyone.
  • Trustless - You do not need to trust anyone to use it.
  • Open Source - The code is open source. Anyone can see it.

Minuses of Blockchain

  • Speed - Blockchain is not so fast, because consensus algorithm use a lot of time to verify transactions.
  • Cost - Creating a blockchain network is expensive. It requires a lot of computational power and energy.
  • Scalability - Blockchain networks can become slower and less efficient as the number of participants and transactions increases.
  • Energy Consumption - Blockchain, especially proof-of-work systems like Bitcoin, requires significant computational power and contributes to high energy consumption.

How do blockchains work?

Blockchain Demo - A visual demo of blockchain working.

Block 1
Number of the block
Nonce
Hash of the previous block
Hash of the current block

Structure of the blocks

  • Hash - A unique fixed-length string that identifies data. Created by hashing algorithms. Hashing algorithms are one-way functions.

  • Block - A block is a collection of data. It contains a block header and a block body. The block header contains the hash of the previous block, the hash of the block body, and the nonce. The block body contains the transactions.

  • Genesis block - The first block in the blockchain

  • Nonce - A nonce is a number that is used to change the hash of the block.. It is used to change the hash of the block header. Miners solve a cryptographic puzzle to find the nonce.

If we break the hash of the block one block, we break the hash of all the blocks that follow.

  • Private key - A private key is a secret number that is used to sign transactions

  • Public key - A public key is a number that is derived from the private key. It is used to verify transactions. Use to verify that a transaction came from you.

Private key -> Public key -> Address

  • Each transaction burn(destroy) some ETH and part of it goes to the miner = transaction fee

Consensus algorithms

  • Proof of work - Miners compete to solve a cryptographic puzzle. The first miner to solve the puzzle gets to add the next block to the blockchain. The miner is rewarded with ETH. The miner is also rewarded with the transaction fees. The miner is also rewarded with the block reward. Uses a lot of energy.

  • Proof of stake - Validators are chosen based on the amount of ETH they stake. The validators are responsible for adding the next block to the blockchain. The validators are rewarded with ETH. The validators are also rewarded with the transaction fees. Uses less energy, becouse validators are chosen based on the amount of ETH they stake, but it is not so secure as proof of work, becouse validators can be chosen based on the amount of ETH they stake.

  • Nakamoto consensus - The consensus algorithm used by Bitcoin. It is a proof of work consensus algorithm.

  • Shardding - Blockchain in the blockchain

Layers of blockchain

  • Layer 1 - The base layer. The blockchain itself. Ethereum, Bitcoin, etc.

  • Layer 2 - Any app that runs on top of the blockchain. For example, a decentralized exchange, a decentralized social network, a decentralized marketplace, etc. Difference between ETH and BTC - ETH is programmable, and BTC is not. ETH is a platform for building decentralized applications, while BTC is just a store of value.

Smart Contracts

  • Cannot be changed once deployed (immutable)
  • Automatically execute when certain conditions are met (trustless)
  • Everyone can see the code (transparent)
  • Cannot be stopped (censorship resistant)

Transaction structure

Transtctions are stored in the blocks. Each transaction has the following fields:

  • Transaction hash - The unique identifier of the transaction for the blockchain.
  • Block number - The number of the block for the blockchain.
  • From | To - The address of the sender and the receiver.
  • Value - The amount of ETH sent.
  • Fee - The amount of ETH paid to the miner for the transaction.
  • Gas limit and usage gas - The maximum amount of gas that can be used for the transaction.

Gas and fees | ethereum.org - Gas is the unit of computation on the Ethereum blockchain. Gas is used to pay for transactions. Gas is used to pay for smart contract execution. Gas is used to pay miners and validators...

Transaction fee = gas_price * usage_gas
The more people send transactions at the same time, the more gas price increases.

Additional terms

Blockchain Oracle - A blockchain oracle is a way to get data from the outside world into the blockchain. For example, if you want to build a decentralized application that uses the weather, you need a way to get the weather data into the blockchain. This is where a blockchain oracle comes in. It is a way to get data from the outside world into the blockchain. Chainlink is a popular blockchain oracle.

Dapp - A decentralized application. A dapp is an application that runs on a decentralized network. It is not controlled by a single entity but by the network. It is immutable.