Blockchain, Part I: Introduction and Cryptocurrency

Blockchain, Part I: Introduction and Cryptocurrency


Petros Koutoupis
Mon, 04/09/2018 – 10:45

It seems nearly impossible these days to open a news
feed discussing anything technology- or finance-related and not
see a headline or two covering bitcoin and its underlying framework,
blockchain. But why? What makes both bitcoin and blockchain so
exciting? What do they provide? Why is everyone talking about this? And,
what does the future hold?

In this two-part series, I introduce this
now-trending technology, describe how it works and provide instructions
for deploying your very own private blockchain network.

Bitcoin and Cryptocurrency

The concept of cryptocurrency isn’t anything new, although with the
prevalence of
the headlines alluded to above, one might think otherwise. Invented
and released in 2009 by an unknown party under the name Satoshi
Nakamoto, bitcoin is one such kind of cryptocurrency in that it provides
a decentralized method for engaging in digital transactions. It is
also a global technology, which is a fancy way of saying that it’s
a worldwide payment system. With the technology being decentralized,
not one single entity is considered to have ownership or the
ability to impose regulations on the technology.

But, what does that truly mean? Transactions are secure. This makes them more
difficult to track and, therefore, difficult to tax.
This is because these transactions are strictly peer-to-peer,
without an intermediary in between. Sounds too good to be true,
right? Well, it is that good.

Although transactions are limited to the two parties involved, they do,
however, need to be validated across a network of independently functioning
nodes, called a blockchain. Using cryptography and a distributed public
ledger, transactions are verified.

Now, aside from making secure and more-difficult-to-trace transactions,
what is the real appeal to these cryptocurrency platforms? In the case of
bitcoin, a “bitcoin” is generated as a reward through the process of
“mining”. And if you fast-forward to the present, bitcoin has earned
monetary value in that it can be used to purchase both goods and services,
worldwide. Remember, this is a digital currency, which means no physical
“coins” exist. You must keep and maintain your own cryptocurrency
wallet and spend the money accrued with retailers and service providers
that accept bitcoin (or any other type of cryptocurrency) as a method
of payment.

All hype aside, predicting the price of cryptocurrency is a fool’s
errand, and there’s not a single variable driving its worth. One thing
to note, however, is that cryptocurrency is not in any way a monetary
investment in a real currency. Instead, buying into cryptocurrency is
an investment into a possible future where it can be exchanged for goods
and services—and that future may be arriving sooner than expected.

Now, this doesn’t mean cryptocurrency has no cash value. In
fact, it does. As of the day I am writing this (January 27, 2018), a single
bitcoin is $11,368.56
USD. This value is extremely volatile, and who knows what direction
it will take tomorrow. One thing influencing the value of a bitcoin
is the rate of adoption. More people using the technology results
in more transactions being verified by the people-owned nodes forming
the underlying blockchain. In turn, the owners of the verification
systems earn their rewards, thereby increasing the value of the
technology. It’s simple: verify more transactions, and earn more money. Sure,
there is a bit more to it, but that’s
the general idea.

The owners of the verification systems are referred to as “miners”.
Miners provide a service of record keeping. Such a service requires a good
amount of processing power to handle the cryptographic computations. The
purpose of the miner is to keep the underlying blockchain consistent,
complete and unaltered. A miner repeatedly verifies and collects
broadcasted transactions into groups of transactions referred to as
blocks. Using an SHA-256 algorithm (Secure Hash Algorithm 256-bit
hash), each new block contains a cryptographic hash of the block prior
to it, establishing a link for forming the chain of blocks, hence the
name, blockchain.

Figure 1. An Example of How Blocks of Data Are “Chained” to One

A Global “Crisis”

With the rise of cryptocurrency and the rise of miners competing to
earn their fair share of the digital currency, we are now facing
a dilemma—a global shortage of high-end PC graphics
adapters. Even previously-used adapters are resold at a much higher
price than newly boxed versions. But why is that? Using such high-end
cards with enough onboard memory and dedicated processing capabilities
easily can yield several dollars in cryptocurrency per day. Remember,
mining requires the processing of memory-hungry algorithms. And as
cryptocurrency prices continue to increase, albeit at a rapid rate, the
worth of the digital currency awarded to miners also increases. This
shortage of graphics adapters has become an increasing bottleneck for
existing miners looking to expand their operations or for new miners to
get in on the action. Hopefully, graphic card vendors will address this
shortage sooner rather than later.

Comparing Blockchain Technologies

Multiple platforms exist for crypto-trading. You may come across
articles discussing bitcoin and comparing that currency to others like ethereum
or litecoin. Initially, those articles can lead to confusion between the
two different types of digital coins: 1) cryptocurrencies and 2)
tokens. The key things to remember are the following:

  • A bitcoin or litecoin or any other form of cryptocurrency actively
    competes against existing money and gold in the hopes of replacing
    them as an accepted form of global currency. As mentioned previously, the
    technology promises a non-regulated and globally accessible currency—one that contains the same stable value regardless of location. This
    concept definitely could appeal to those living in unstable countries
    with unstable currencies.

  • And ethereum? Well, it deals in tokens. It works on the idea of
    contracts. Ethereum is a platform that allows its users to write
    conditional digital “smart contracts”, showing proof of a transaction
    that never can be deleted.

In the modern world, a traditionally written contract will outline the
terms of a relationship, usually enforceable by law. A smart contract will
enforce a relationship using cryptographic code—that is, by executing the
conditions defined by its creators using a program. What makes ethereum
more interesting is that unlike bitcoin (or litecoin for that matter),
the platform does not limit itself to the currency use case.

Much like bitcoin, when a transaction takes place utilizing one or more
of these contracts, transaction fees are charged to source the computation
power required. The more computational power needed, the higher the fee.

What Is Blockchain?

To understand this cryptocurrency phenomenon and its explosive growth in
popularity, you need to understand the technology supporting it:
the blockchain. As mentioned previously, a blockchain
consists of a continuously growing list of records captured in the form
of blocks. Using cryptography, each new block is linked and secured to
an existing chain of blocks.

Each block will contain a hash pointer to the previous block within the
chain, a timestamp and transactional data. By design, the blockchain
is resistant to any sort of modification of data. This is because a
blockchain provides an open and distributed ledger to record transactions
between two interested parties efficiently,
reliably and permanently.

Once data has been recorded, the data in a given block cannot
be altered without altering all subsequent blocks.

I guess you can think of this as a distributed “database” where
its contents are duplicated hundreds, if not thousands, of times
across a network of computers. This method of replication emphasizes the
decentralized aspect of the technology. Without a centralized version or a
single “master” copy, this database is public and, therefore, can
be verified easily without risk or fear of hacking or corruption. Simultaneously
hosted by millions of computing nodes, the contents of this database are
accessible to anyone on the internet. As an added benefit, the distributed
and decentralized model reassures its users that no single point of
failure exists. Imagine that one or more of these computing nodes are
either inaccessible or experiencing some sort of internal failures or
are even producing corrupted data. The blockchain is resilient in that
it will continue to make available the requested data contents and in
their proper (that is, uncorrupted) format. This is because of a technique
commonly referred to as the Byzantine Fault Tolerance method.

Byzantine Fault Tolerance

Systems fail, and they can fail for multiple reasons (such as hardware,
software, power, networking connectivity and others). This is a fact. Also,
not all failures are easily detectable (even through traditional
fault-tolerance mechanisms) nor will they always appear the same to the
rest of the systems in the networked cluster. Again, imagine a large
network consisting of hundreds, if not thousands, of nodes. To handle
such unpredictable conditions, one must employ a voting system to ensure
that the cluster will tolerate the failure or misbehavior.

A Byzantine fault is defined by any fault showcasing different types of
symptoms to different observers (that is, distributed computing systems). A
Byzantine failure is the loss of a system service due to a Byzantine
fault in an environment where a consensus must reached in order to
perform that one service or operation.

The purpose of Byzantine Fault Tolerance (BFT) is to defend the
distributed platform against such Byzantine failures. Failing components
of the system will not prevent the remaining components from reaching
an agreement among themselves, where such an agreement is required to
perform an operation. Correctly functioning components of a BFT system
will continue to provide uninterrupted service, assuming that not too
many faults exist.

The name of this mechanism is derived from the Byzantine Generals’
Problem (BGP). The BGP highlights an agreement problem, where there is
a disagreement with all participating members. Imagine a scenario where
several divisions of the Byzantine army are camped outside a fortified
city. Each division has its own general, and the only way the generals are able
to communicate with each other is through the use of messengers. The
generals need to decide on a common plan of action. The problem is,
some of the generals may and very well could be traitors. With one
traitor in their midst, can the non-traitors decide on a common plan?

In a BFT environment, the answer to this question is yes. In a group
of three, one traitor makes it impossible not to reach a majority
consensus. For instance, if one general says “attack” while the other
two say to “retreat”, it is easy to determine who the traitor of the
group is. It is also possible to reach some sort of agreement across
the non-traitors. Now, apply this concept to a distributed network of
computing nodes. For example, when f number of nodes
goes Byzantine, 2f + 1 nodes will not tolerate the
misbehavior. All you need is 1 properly functioning
node more than the potentially faulty nodes.

Figure 2. The Byzantine Generals’ Problem illustrated

Now, why am I talking about this? The BFT is at the core of a
blockchain’s resiliency. If a consensus cannot be made to handle a
transaction, the blockchain itself is no good.

The Network

A network consisting of computing nodes is what makes up the blockchain. A
node gets an identical copy of the blockchain as soon as it joins the
network. Each node is considered to be an administrator of the blockchain
and not in any more control over the other nodes within the cluster—again, the result of being decentralized.

Figure 3. An Example of a
Decentralized Blockchain Network

This method of computing is what lends the blockchain its
robustness. Aside from updating the blockchain, each node can and will
act independently from the other regardless of how it was accessed. And
when it needs to append a new block to the chain, it will broadcast the
update to the rest of the nodes (updating the public ledger).

Whatever the user-driven event, it is considered to be a function of the
network as a whole. It is the global network that manages the application,
and it will operate on a user-to-user or peer-to-peer basis. Each node,
when accessed independently, is tasked with confirming the requested
transaction (such as mining). Already alluded to previously, it is this core
concept that makes the blockchain that much more secure. The blockchain
technology eliminates the risks (and vulnerabilities) introduced with
data being held (or managed) centrally and not replicated across the
network. Another way to think of it is this: instead of having a single entity
validate the transaction, you now have multiple entities validating the
transaction after reaching a consensus. They act as witnesses, and not
one single entity has more authority over the other. This leaves no room
for ambiguity, and if one or more nodes misrepresents the original data,
the BFT model will address that.

Almost everyone reading this is familiar with the constant security
problems running rampant on the internet. We personally attempt to protect
both our identity and our assets online by relying on the traditional
“user name” and “password” systems. Blockchain takes this a
step further and differs in that its security stems from its use of
encryption technologies. The authentication “problem” is solved with
the generation of “keys”. A user will create a public key (a long and
randomly generated numeric string) and a private key (which acts like
a password). The public key serves as the user’s address within the
blockchain, and any transaction involving that address will be recorded
as belonging to that address. The private key gives
its owner access to his or her digital assets. The combination of both public
and private keys provide a digital signature. The only concern here is
taking the appropriate measures to protect private keys.

Putting the Pieces Together

By now, you should have more of a complete picture of how all of these
components tie together.

Figure 4. The General
Handling of a Transaction across a Blockchain Network

For example, let’s say there’s a bitcoin transaction (or it could
something else entirely different), but
imagine someone in the network is requesting the transaction. This requested
transaction is then broadcasted across a peer-to-peer network of
computing nodes. Using cryptographic algorithms, the network of nodes
validates the user’s status and the transaction. Once verified, the
transaction is combined with other transactions, creating a new block
of data for the public ledger. The new block of data is then appended
to the existing blockchain and is done in a way that makes it permanent and
unalterable. Then the transaction is complete. Using timestamping
schemes, all transactions are serialized.

What Makes Blockchain Important?

Much like TCP/IP, the blockchain is a foundation technology. As TCP/IP
enabled the internet by the 1990s, you can expect wonderful new beginnings
with the blockchain. It is still a bit too early to see how it will
evolve. This revolutionary technology has enabled organizations to
explore what it can and will mean for their businesses. Many of these
same organizations already have begun the exploration, although it
primarily has been focused around financial services. The possibilities
are enormous, and it seems that any industry dealing with any sort of
transaction-based model will be disrupted by the technology.


This article covers the rise and interest in cryptocurrencies and begins to dive
into the underlying blockchain technology that enables it. In the next
part of this series, using open-source tools, I start to describe how
to build your very own private blockchain network. This private deployment
will allow you to dig deeper into the details highlighted here. The
technology may be centered around cryptocurrency today, but I also
look at various industries the blockchain can help to redefine and
the potential for a promising future leveraging the technology.

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