Introduction to Blockchain

Blocks: Are known as nodes, or minors. Two blocks make a chain.

Ledger: A record of transactions that is not editable.

Components of Blockchain

Nodes: Members who want to join a blockchain. Blocks and nodes are the same.

Types: There are two types of nodes : partial nodes (less storage) and full nodes
(high storage).

Ledger: Stores all transactions.

Wallet: Stores cryptocurrency.

Types:

Hot Wallet: Connected to the internet. It has a higher risk of fraud.

Cold Wallet: Not connected to the internet. It has a lower risk of fraud.
Transactions reflect once it connects to the internet.

NONCE: A number that only occurs once.

Hash: The value of a certain transaction.

What is Blockchain?

Blockchain is a distributed database of records for all digital transactions or events that
have been executed and shared among participating parties.

It is a decentralized digital ledger.

Features of Blockchain
Decentralized: The blockchain network is decentralized , meaning no single node takes
control. A group of nodes creates and maintains the blockchain.

Immutable: A blockchain is considered immutable because it can't be altered or

modified. The ledger can't be modified, edited, changed, or deleted by any user in the
network.

Security: Each record is individually encrypted, which enhances security. There is no

central authority. It is not possible to simply add, modify, or remove data.

Consensus: This is a decision-making method that allows a group of network nodes to

quickly and effectively reach an agreement , ensuring the system's smooth functioning.
Every blockchain has a consensus system that enables nodes to make quick and
unbiased decisions.

Transparency: The blockchain network is transparent because many blocks have a

complete copy of the entire blockchain. This makes fraud impossible.
Distributed Ledger: All network participants have a copy of the ledger for complete
transparency. If one node crashes or stops working, there will be no harm to the
blockchain because copies are available on other nodes.

Components of Blockchain

Node: Nodes are network participants and their devices. They keep track of the
distributed ledger and serve as communication hubs. A block is broadcast to all network
nodes when a miner wants to add a new block.

Full Node: A full node has a complete copy of the ledger, with all transaction
details. It has more storage and can validate and verify new nodes.

Partial Node: A partial node has only the heading of the ledger because it has
less storage.

Ledger: A ledger stores all transactions. A transaction refers to a contract, transfer of an

asset, or an agreement between parties. Assets are typically cash or property.

Wallet: A digital wallet that allows users to store cryptocurrency. Every node has a
wallet. Privacy is maintained using a public/private key pair. There is no need for
currency conversion because the currency is universally accepted.

Hot Wallet: Used for online, day-to-day transactions and is connected to the
internet. Hackers can attack these wallets. An example is a software wallet.

Cold Wallet: Not connected to the internet, making it very safe from hackers. An
example is a paper wallet. Transactions get reflected in the network once the
wallet connects to the internet.

NONCE: An acronym for "Number only used once". It is a 32-bit number added to a
hash or encrypted block that is generated randomly to create a new block or validate a
transaction. It is used to make transactions more secure.

Hash: Data is mapped to a fixed size using a hashing technique. The hash value of one
transaction is the input for another.

Types of Blockchain
Based on permission:

Permissionless Blockchain: Anyone can participate without special permissions or

approvals. Anyone can join the network, validate transactions, and contribute. All
transactions are recorded on a public ledger.

Permissioned Blockchain: Restricts access and participation to a select group of

authorized users. It is governed by an organization or a central authority.
Transactions and data are often more private.

Based on structure:
Public Blockchain: These are open and decentralized. Anyone with a computer and
internet can participate. All computers in the network hold a copy of the other nodes or
blocks. An advantage is that it is easy to detect fraud.

Private Blockchain: Not as decentralized as public blockchains. Only selected nodes can
participate, making it more secure. Transactions are open to some authorized users only.
These blockchains operate in a closed network. A disadvantage is that it is difficult to
detect fraud.

Hybrid Blockchain: A mix of private and public blockchains where part of it is

controlled by a single organization. A block enters as a public blockchain but is
validated and verified as a private blockchain. It has less transparency.

Consortium Blockchain: A creative approach to solving organizational needs. It is also a

combination of private and public blockchains. The block enters publicly, but its
validation is done by a group of organizations.

Public vs. Private Blockchain

Feature Public Blockchain Private Blockchain

Participation Anyone can read, write, and Reading, writing, and

participate. It is a permissionless participation are done upon
blockchain. invitation. It is a
permissioned blockchain.

Nodes Nodes do not know each other. Nodes are known to each
other.
Transaction Transactions per second are Transactions per second are
Speed lower. higher.

Security More secure, as it is nearly Prone to more hacks and data

impossible for "bad actors" to manipulation, as it is easy for
attack the system and gain control bad actors to endanger the
over the consensus network. entire network.

Energy Consumes more energy and Consumes a lesser amount of

Consumption power, as it requires a significant energy and power.
amount of resources to function
and achieve consensus.

Consensus Proof of work, proof of stake, Raft, proof of elapsed time.

Algorithms proof of burn.

Examples Bitcoin, Litecoin, Ethereum. EOS, R3, Corda.

Block in a Blockchain

A block contains:

Header: Used to identify a particular block in the blockchain. It has a hash that is
changed periodically by minors by changing the NONCE value.

Previous block address or hash: Used to connect to the previous block using its hash.

Timestamp: A system that verifies the data and assigns a type or date of creation for
digital documents. It is a string of characters that uniquely identifies an event and
indicates when it was created.

NONCE: A 32-bit number that needs to be solved as a cryptographic puzzle by minors

to enter the blockchain.

Merkle Root: A data structure frame of different blocks of data. It stores all transactions
in a block by producing a digital fingerprint of the entire transaction. It allows the user
to verify whether a transaction can be included in a block or not.

Cryptocurrency
There are three types of cryptocurrency: altcoin, bitcoin, and token.

Altcoin: A combination of the words "alternative" and "coins," referring to any

cryptocurrency other than Bitcoin. They are peer-to-peer digital currencies that involve a
mining process. Altcoins have their own independent blockchain and are created by a
forking process.

Tokens: Programmable assets that are not considered virtual or digital currency. They
are designed to serve unique contracts in various ecosystems. Tokens do not have their
own native blockchain; they exist on an existing blockchain infrastructure.

Utility Tokens: User tokens that grant access to specific services.

Security Tokens: Work just like traditional securities.

Bitcoin vs. Altcoin

Feature Altcoin Bitcoin

Definition Any cryptocurrency other than The first decentralized digital

Bitcoin. currency and store of value.

Origin Emerged and continue to be Introduced in 2009.

developed after Bitcoin.
Purpose Enhancing privacy, smart A digital currency known as
contracts. "digital gold".

Blockchain Operates on an existing Operates on its own

blockchain. blockchain.
Feature Altcoin Bitcoin

Technology Many altcoins are more Bitcoin was created before

technologically advanced than altcoins and lacks some of their
Bitcoin. features.

Transaction Many altcoins have a faster Transaction speed is measured

Speed transaction speed and lower fees in minutes per block.
than Bitcoin.

Scalability High scalability. Low scalability.

Consensus Proof of work, proof of stake. Proof of work.

Algorithms

Coins vs. Tokens

Feature Coins Tokens

Definition Virtual or digital currency. Programmable assets used for a

unique contract or agreement.

Usage Used for payments, to buy Used for specific services or

specific services or products, and products that are
to change money. programmable assets.

Value The value is determined by The value is determined by the

supply and demand. infrastructure of the assets or
services.

Functionality Limited to currency payment Can have a variety of

exchanges and transactions. functionalities, depending on
the application.
Example Bitcoin, Ethereum. Any digital asset.

Hot Wallet vs. Cold Wallet

Feature Hot Wallet Cold Wallet
Security Less secure, as the cryptocurrency is More secure, as they are
stored on an online platform not connected to the
connected to the internet. internet.

Storage Stores all cryptocurrencies. Stores cryptocurrency

selected by a reputed
agency.
Accessibility Suitable for trading, as it is accessible Not suitable for trading,
for instant exchange. as it is not as fast for
exchange.
Feature Hot Wallet Cold Wallet

Cryptocurrency The cryptocurrency is universally The cryptocurrency is

accepted. not universally accepted.

Example Any online wallet. Paper wallet, hardware

wallet.

UTXO Model (Unspent Transaction Output)

UTXO refers to those outputs that are yet to be unlocked by an input.

Once an output is unlocked, it is removed from the circulating supply.

A new output takes its place. The sum of unlocked outputs must always equal the sum
of the values of newly created outputs.

Components of a Transaction

Transaction version number: Specifies the type of transaction.

Input: Consists of a pointer and an unlocking key. The pointer points to the previous
transaction output. The unlocking key is used to unlock the previous output.

Output: Consists of a cryptographic lock and a value.

Locktime: Specifies whether a transaction can be included in a block right away or after
some time.

Forking

A fork refers to changes in the blockchain protocol, resulting in two paths. One path
follows the old rules, and the other follows the new rules. Forks can occur for various
reasons, such as adding new features or resolving disagreements within the community.

Hard Fork: A permanent change to the blockchain protocols that is not backward
compatible. This means that nodes running the old version of the system will no longer
be accepted by the new version. A hard fork requires a permanent split and new
consensus.
Soft Fork: A backward-compatible update to the blockchain. Nodes that have not been
upgraded can still recognize and interact with the new version. A soft fork makes the
existing rules tighter.

Double Spending

Double spending is when the same digital currency is spent twice. It is a technical flaw
that allows a user to duplicate money. This issue can occur if there is an alteration in the
network, and the currency and its copies are only used and not the original. The
problem is that miners do not confirm the transaction.

How to handle double-spending: The validation of a transaction

is done by the maximum number of nodes. The confirmed
transactions get a timestamp, making them irreversible.