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- Herausgeber: Packt Publishing
- Kategorie: Wissenschaft und neue Technologien
- Sprache: Englisch
Ethereum is a blockchain-based, decentralized computing platform that allows running smart contracts. This book provides a basic overview of how Ethereum works, its ecosystem, mining process, and the consensus mechanism. It also demonstrates a step-by-step approach for building decentralized applications.
This book begins with the very basics of Blockchain technology. Then it dives deep into the Ethereum architecture, framework and tools in its ecosystem. It also provides you an overview of ongoing research on Ethereum, for example, Layer 1 and 2 scaling solution, Stablecoin, ICO/STO/IEO, etc. Next, it explains Solidity language in detail, and provides step-by-step instructions for designing, developing, testing, deploying, and monitoring decentralized applications.
In addition, you’ll learn how to use Truffle, Remix, Infura, Metamask, and many other Ethereum technologies. It’ll also help you develop your own cryptocurrency by creating ERC20, and ERC721 smart contracts from scratch. Finally, we explain private blockchains, and you learn how to interact with smart contracts through wallets.
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Seitenzahl: 502
Veröffentlichungsjahr: 2019
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Learn Ethereum
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Contributors
About the authors
Xun (Brian) Wu has over 17 years of extensive hands-on experience in design and development with blockchain, big data, the cloud, UIs, and system infrastructure. Brian is a co-author of BlockchainQuick Start Guide, Hyperledger Cookbook, Security Tokens and Stablecoins Quick Start Guide, Blockchain By Example, and Seven NoSQL Databases in a Week, and is a technical reviewer for more than 50 books for Packt. He owns several patents in the blockchain area. He holds a master's degree in computer science from NJIT. He lives in New Jersey with his two beautiful daughters, Bridget and Charlotte.
Zhihong Zou has more than 20 years of software architecture, design, and development experience in the telecommunication and healthcare industries. As a seasoned enterprise and solution architect, and a thought leader in blockchain, business process management, big data, AI, and machine learning, he has leveraged emerging technologies to solve complex real-world business problems. He holds a master's degree in computational mathematics and a master's degree in computer science. He has published several papers on numerical computation in renowned academic journals.
Dongying Song has more than four years of extensive hands-on experience in blockchain, Ethereum, big data, machine learning, and data science. As an experienced software engineer and data scientist, she has worked for a top-tier bank and pharmaceutical companies. Dongying holds a master's degree in statistics from Columbia University and majored in mathematics during her undergraduate years. Her recent activities have focused on blockchain, Ethereum, and smart contract developments.
About the reviewers
Voith Mascarenhas is a software engineer by profession who is skilled in the Python programming language. He discovered Ethereum in early 2017 through his colleagues. Fascinated by the complexity of Ethereum and its promise for decentralized governance, he has made it his new hobby project. He has been contributing to Ethereum's Python ecosystem ever since discovering it and can also be found helping beginners in public chat groups. He recommends this book to any software engineer planning to dive deep into Ethereum.
Christoph Burgdorf works as a software engineer at Ethereum. He is part of a team that develops and maintains many different projects of the Python Ethereum ecosystem. His main focus is on the Trinity client, a Python node for Ethereum 1 and 2. Before joining Ethereum, Christoph spent several years traveling the world as the co-founder of thoughtram to perform training on Angular, a web framework by Google to which he also contributed. When he's not writing code, Christoph likes spending time with his family, going camping, cycling, and traveling the world.
Sumit Chauhan is a speaker, advisor, and a CEO with more than 19 years of experience in delivering enterprise solutions focused on global growth and digital transformations with emerging technologies such as blockchain and AI. He has worked in various technical roles for different technology companies across the globe. He is currently a co-founder of Datopic Technologies, which works on building decentralized white label products with big data, machine learning, and blockchain technologies for cybersecurity, Internet of Things, and FinTech companies.
NikolaTchouparovis a co-founder and CEO at Moneyfold Ltd in the UK, which is the world's first regulation-compliant stablecoin provider. He has been engaged in the blockchain and cryptocurrency space since 2013. In his previous career, Nikola implemented trading and risk management systems at banks around the world.
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Table of Contents
Title Page
Copyright and Credits
Learn Ethereum
About Packt
Why subscribe?
Contributors
About the authors
About the reviewers
Packt is searching for authors like you
Preface
Who this book is for
What this book covers
To get the most out of this book
Download the example code files
Download the color images
Conventions used
Get in touch
Reviews
Section 1: Blockchain and Ethereum Basics
Blockchain and Cryptocurrency
Technical Requirements
Introducing blockchain technology
Decentralized P2P network
How does blockchain work?
Rehashing cryptography
Public key cryptography
Cryptographic hash function
Digital signature
Anatomizing a blockchain consensus mechanism
What is consensus?
Proof-of-work
How PoW works
Targets and difficulty
Incentives and rewards
Double-spend issues
Advantages and disadvantages
Proof-of-stake
Forking
Hard fork
Soft fork
Understanding Bitcoin and cryptocurrency
Bitcoin basics
What is a wallet?
Transactions, UTXO, and account balances
Genesis block and coin supply
How does Bitcoin payment work?
Bitcoin transaction and block structure
Transaction validation and block verification
Limitations in Bitcoin
Altcoins
Ushering in the world of Ethereum
Smart contract
Ethereum Virtual Machine
Account
Summary
Ethereum Architecture and Ecosystem
Technical Requirements
Introducing Ethereum architecture
Ethereum – the world computer
The world of decentralization
Diving deep into Ethereum
Account
Two types of accounts
Externally owned account
Contract account
Transactions and messages
Smart contract
Ether and gas
The Ethereum Virtual Machine
Address and wallet
Addresses in Ethereum
Ethereum wallet
Wallet tools
Understanding mining in Ethereum
Mining and consensus protocol
Ethereum transaction and block structure
Transaction validation and block verification
Shift to proof-of-stake
Working with tools and technologies in Ethereum ecosystem
Ethereum client
The Web3 Server API
DApp development tools
Summary
Deep Research on Ethereum
Technical Requirements
Understanding challenges in distributed systems
The CAP theorem
Horizontal scaling versus vertical scaling
Scaling Ethereum
Blockchain scalability trilemma
Ethereum scaling solutions
Block size
Altcoins
On-chain solutions
Off-chain solutions
ZK-SNARK
State channel with Raiden
Ethereum side chain with Plasma
Ethereum sharding and Casper
PoS consensus in Ethereum
Following up on EVM and lower-level protocol improvements
Implementing Ethereum 2.0 roadmap
Introducing cryptoassets and Ethereum token standards
Initial coin offerings
STO and IEO
Ethereum token standards
Fungible and non-fungible tokens
ERC-20
ERC-721
Stablecoin
Dai stablecoin
Making sense of cryptoeconomics
Working with decentralized data and content storage
Swarm
IPFS
BigchainDB
Decentralized messaging with Whisper
Summary
Section 2: Blockchain Development Cycle
Solidity Fundamentals
Technical Requirements
Introducing Solidity
Tools for the Solidity development environment
Browser-based IDEs
Standalone IDE with Solidity plugins
Command-line development management tools
Learning the fundamental programming structure in Solidity
The layout of a Solidity source file
Pragma
Comments
Import
Structure of a contract
State variables
Built-in data types
User-defined data type
Functions
Input parameters
Output parameters
Access modifiers
The pure, view, and payable functions
Constructor and destructor functions
Fallback function
Function overloading
Function modifiers
Events
Global variables, contextual variables, and functions
Understanding inheritance, abstract contracts, and interfaces
Interface
Abstract contract
Inheritance
Multiple inheritance and the diamond problem
Function overriding
Examining smart contract execution under the hood
Mastering advanced programming concepts in Solidity
Smart contract security
Keep contracts simple and modular
Use the checks-effects-interactions pattern
DoS with block gas limit
Handle errors in external calls
Best practices in smart contracts
Access restriction
State machine
Writing upgradable smart contracts
Contract proxy and delegate
Eternal storage
Economic consideration of smart contract execution
Putting it all together – rental property leasing
Summary
Developing Your Own Cryptocurrency
Technical Requirements
Understanding token standards
Setting up an Ethereum development environment
Working with Truffle
Creating an ERC-20 token
Creating basic token information
Defining and implementing the ERC-20 interface
Assigning an admin role
Working with the whitelist function
Locking and unlocking an account
The mint and burn tokens
Creating ERC 721 token – the DigitalArt token
Designing the decentralized digital art marketplace
Setting up the DigitalArtERC721Token project
Creating the basic token information
Defining and implementing the ERC-721 standard
Defining the art and art transaction struct
Creating a non-fungible digital art token
Implementing the buyArt() function
Implementing the resellArt() function
Implementing the findArt() function
Implementing the findMyArts() function
Implementing the findAllPendingArt() function
Getting all art transactions through getArtAllTxn()
Summary
Section 3: Ethereum Implementations
Smart Contract Development and Test Fundamentals
Technical Requirements
Understanding Remix development fundamentals
Working with the Solidity compiler
Analysis
Testing
Deploying and running transactions
Debugging
Understanding development using Truffle and unit testing
The Truffle console and development features
Running a Truffle migration
Truffle unit testing
Truffle Box
Security testing
Static and dynamic analysis
MythX
Securify
Working with a linter
Working with solhint
Summary
Writing UI for the DApps
Technical requirements
Knowing about DApps
Working with Web3 JavaScript API
Setting up a DApp development environment
Installing Ganache desktop
Creating a development workspace
Setting up the project for our DApp
Deploying a smart contract
Installing MetaMask and connecting to Ganache
Setting MetaMask Ganache accounts
Building frontend UI components
Setting up project dependencies
Getting the instance of a deployed contract
Building a navigation bar
The ART GALLERY page
The PUBLISH YOUR ARTS page
The MY WALLET INFO page
Running the decentralized digital art market DApp
Publishing your art (the first account)
My wallet info (the first account)
Publishing your art (the second account)
My wallet info (the second account)
Buying art (the second account)
Reselling art
Summary
Ethereum Tools and Frameworks
Technical requirements
Understanding the Ethereum development tools and frameworks
Working with Infura
Working with the Infura Ethereum API
Using Remix with Infura
The Ethereum client API
Working with Web3j
Ethereum storage
Knowing the IPFS protocol
Installing IPFS
Starting an IPFS node
Running an IPFS example
Publishing a simple page in the command line
Publishing and querying IPFS via Infura
Working with Swarm
Installing Swarm
Installing Geth
Running an example of Swarm
Ethereum messages – Whisper
Whisper protocol
Whisper envelopes
Whisper message
Whisper example
Popular smart contract libraries
Working with OpenZeppelin
Setting up a dev environment
Access control
Math
Token
Utils
Summary
Section 4: Production and Deployment
Creating an Ethereum Private Chain
Technical requirements
Understanding a private and permissioned blockchain
Setting up a local private Ethereum blockchain
Private blockchains without mining
Setting up the environment
Configuring the custom genesis file
Running Geth
Private blockchains with mining
Setting up an environment
Configuring the custom genesis file
Running Geth
Creating a new account
Mining on a local private network
Using optional flags with new chains
Commands
Ethereum options
Developer chain options
API and console options
Networking options
Transaction pool options
Introducing the popular private blockchains in the industry
Hyperledger
Hyperledger Fabric
Hyperledger Sawtooth
Corda
Quorum
Private blockchains use cases
Financial services
Payments
Audit and assurance
Healthcare
Medical records
Medical costs
Drugs
Food supply chain
Summary
Deployment of Your Smart Contract
Technical requirements
Deploying smart contracts with testnet
Deploying a smart contract to the Goerli testnet with MyCrypto
Creating a MetaMask account
Getting test ether
Deploying the smart contract
Viewing deployed smart contracts on Etherscan
Interacting with the deployed smart contract
Deploying a smart contract to the Ropsten testnet with MyEtherWallet
Accessing or creating a new wallet on MyEtherWallet
Getting test ether
Deploying the smart contract
Monitoring smart contracts
Ethereum developer APIs
Further reading on uncle nodes
Summary
Building Ethereum Wallets
Technical requirements
Understanding the wallet technology
Understanding non-deterministic and deterministic wallets
Mnemonic code words (BIP-39)
Stretching mnemonic code words to the seed of the deterministic wallet
HD wallets (BIP-32)
Deriving a tree of keypairs
Deriving wallet structure
HD wallet path
Multipurpose HD wallets (BIP-43)
Multi-currency and multi-account wallets (BIP-44)
Generating a private key in Ethereum
Creating an Ethereum wallet
Creating a non-deterministic wallet
Viewing the Keystore file generated by the geth command
Creating a non-deterministic wallet with MyCrypto
Creating a non-deterministic wallet with MyEtherWallet
Creating an HD wallet
Working with third-party Ethereum wallets
Wallets on different platforms
Multi-signature wallets
Smart contract wallets
Hot and cold wallets
Transferring funds between wallets
Summary
Section 5: Conclusion
Conclusion
Technical requirements
Facing the challenges of Ethereum and blockchain
Consensus protocol and scalability
UI/UX, usability, and design thinking
Ethereum governance
Government regulations
Mainstream adoption
A few more words about privacy
Glancing over the Ethereum ecosystem
Tools and infrastructure
Decentralized applications
AML and KYC
Emerging technology fusion – blockchain, AI/ML, and IoT
Internet of blockchains
Blockchain meets AI and ML
Smart things on a decentralized network
Meeting the future of Ethereum
Summary
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Preface
Ethereum is a blockchain and decentralized computing platform that allows the execution of smart contracts.
This book provides a basic overview of the Ethereum ecosystem, the concept behind Ethereum, and the mechanism of Ethereum, and demonstrates a step-by-step approach in building decentralized applications. It offers a quick guide, allows a reader who does not have in-depth or systematic knowledge on the topic to master the following skills.
This book begins with the very basics of Ethereum, blockchain, the Solidity language, and cryptocurrency. The book will simplify cryptography for you and then demonstrate how it can be used to secure ether, cryptographic data structures, advanced encryption standard (AES), hashes, private keys, and more. The book will then demonstrate how mining works and how miners make their profits. After this, the book will cover concepts such as proof of work, proof of stake, and smart contracts. The book will cover smart contracts in details, including concepts such as the Solidity programming language, token standards, and more. The book will cover how to build UIs for applications in Node.js and web3.js, explore Ethereum wallets, and look at building real-time scalable Ethereum applications. In addition, the book covers use cases highlighting the potential applications of Ethereum across sectors such as banking, financial services, healthcare, insurance, and real estate. By reviewing various Ethereum tools and frameworks with examples, readers will learn Truffle, Remix, MetaMask, IPFS, SWARM, Infura, Whisper, OpenZeppelin, and many other Ethereum technologies.
By the end of this book, you will learn about Ethereum decentralized application development, testing, deployment, developer tools, frameworks, more advanced blockchain concepts.
Who this book is for
This book appeals to all those developers who want to go beyond the theory and possibilities of cryptocurrencies, blockchain, and Ethereum. Those who wish to build secure, transactional, and third-party independent applications will benefit from the practical examples in the book.
What this book covers
Chapter 1, Blockchain and Cryptocurrency, covers the basics of blockchain, discusses how blockchain is disrupting existing technology, how cryptocurrency came into the picture, and how the Ethereum consensus mechanism works. We will also learn how cryptography makes the Ethereum blockchain secure. By the end of the chapter, you should understand Ethereum accounts, forks, and the concept of mining.
Chapter 2, Ethereum Architecture and Ecosystem, describes the architecture of Ethereum and helps you to understand the Ethereum Virtual Machine (EVM), Gas, accounts, and more. It also covers the basic concepts of Ether mining. We look at initial coin offerings (ICOs) and the Ethereum token economy. We will also explore various tools and technologies in the Ethereum ecosystem.
Chapter 3, Deep Research on Ethereum, teaches you about ongoing research on the Ethereum platform in the field of ICOs, sharding EVM improvements, economics, low-level protocol improvements, and decentralized storage.
Chapter 4, Solidity Fundamentals, deals with the basic features of the Solidity programing language. We cover Solidity's development tools and learn about various Solidity language fundamentals, including the structure of contracts, contract patterns, and exception handling. We cover smart contract security and best practices.
Chapter 5, Developing Your Own Cryptocurrency, teaches you how to write your own cryptocurrency using smart contracts. We look at smart contract open source libraries and review the ERC 20 token standard. Finally, we develop our first cryptocurrency token.
Chapter 6, Smart Contract Development and Test Fundamentals, shows you how to use Remix to develop and debug smart contracts. We explore various options for the Truffle suite tool. We cover smart contract unit tests by using these development tools.
Chapter 7, Writing UIs for DApps, shows you various methods to deploy smart contracts. There will be examples to demonstrate everything. We look at the web3.js API and write client-side Node.js code to call smart contracts.
Chapter 8, Ethereum Tools and Frameworks, covers the tracking of data inside smart contracts.
Chapter 9, Creating an Ethereum Private Chain, explains the difference between public and private blockchains. It covers how to set up private blockchains on Ethereum, including the options flags we can use with new chains. It also presents private blockchains in production usages.
Chapter 10, Deployment of Your Smart Contract, shows you how to deploy smart contracts to various blockchain environments.
Chapter 11, Building Ethereum Wallets, looks at the concepts of Ethereum wallets. Then, we create a hierarchical deterministic (HD) wallet. We also discuss popular third-party Ethereum wallets.
Chapter 12, Conclusion, is a summary of the entire book and the Ethereum blockchain technologies covered therein.
To get the most out of this book
You need to have some basic knowledge of Ethereum frameworks such as Truffle. Knowledge of JavaScript will also be useful.
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Section 1: Blockchain and Ethereum Basics
Since its inception, blockchain has fundamentally changed how people can transfer values such as ether and establish trust between parties without any intermediary. In this section, we will learn all about blockchain. We will also learn about the architecture and ecosystem that Ethereum functions on.
This section comprises of the following chapters:
Chapter 1
,
Blockchain and Cryptocurrency
Chapter 2
,
Ethereum Architecture and Ecosystem
Chapter 3
,
Deep Research on Ethereum
Blockchain and Cryptocurrency
It is a common belief that the bankruptcy filed by Lehman Brothers, a Wall Street banking giant, on September 15, 2008, triggered the global financial crisis in 2008-2009. Excessive risk exposure in subprime mortgage and financial derivatives by large banks almost brought down global financial systems. The crisis was the ultimate consequence of a fundamental breakdown of trust in the relationship between customers and the financial institutions that should have been serving them.
Shortly after that, Satoshi Nakamoto, a mysterious and anonymous entity, published a whitepaper on October 31, 2008, called Bitcoin: A Peer-to-Peer Electronic Cash System, which is considered the origin of Bitcoin and all cryptocurrencies. Satoshi proposed a completely decentralized approach for Peer-to-Peer (P2P) payment without central banks or intermediaries. He outlined the principles and functions of what would be developed and introduced as Bitcoin in the following year.
The technologies behind his invention are called blockchain and have since evolved well beyond Bitcoin and digital payment. It is now a suite of technologies, forming the foundation of distributed ledgers and cryptocurrency. No one knows who or what Satoshi is, if it is one individual or a group, but its paper is profoundly changing money, digital- and cryptocurrencies, business, and the world.
The purpose of this book is to help you to understand blockchain technologies, introduce you to the tools and technologies in the Ethereum ecosystem, and get you started with developing smart contracts and end-to-end decentralized applications. We will start with basic concepts in Bitcoin, Ethereum, cryptocurrency, and blockchain. In this chapter, we will cover the following topics:
Introducing blockchain technology
Rehashing cryptography
Anatomizing the blockchain consensus mechanism
Understanding Bitcoin and cryptocurrency
Ushering in the world of Ethereum
Technical Requirements
For all the source code of this book, please refer the following GitHub link: github.com/Packt-Publishing/Learn-Ethereum.
Introducing blockchain technology
You might have heard the parable of the blind men and an elephant. It is a folk tale about each of six blind men's individual descriptions of the same elephant based on their own touch and feel of the animal. It highlights the fact that different perspectives may lead to distinct viewpoints, emphasizing the limits of perception and the importance of a complete context.
When Satoshi invented Bitcoin, the fundamental concept in its vision was to build a blockchain, a shared public ledger (longest proof-of-work (PoW) chain), that verifies and records immutably all transactions through a decentralized computer network (P2P network) and aconsensus mechanismwith computational proof. Satoshi came up with an elegant solution solving thedouble-spendproblem of electronic monies. A double-spend is an attack when someone tries to spend money through a transaction that isn't actually available anymore as the money was already spent before.
Blockchain is a new elephant in the digital world. To most of the public, blockchain is nothing but an obscure pseudonym for all cryptocurrencies, including Bitcoin, Ethereum, and more. So, what is blockchain? What does a blockchain look like? How does it work? Where can we use blockchain? Do you need a blockchain? Although there are many ways to describe a blockchain, mainly from different perspectives, there is no universal definition of a blockchain.
On the contrary, there are prevalent debates over the essential attributes or qualities of a blockchain. It is perceived as a new architecture with existing technologies, the next generation of the internet and web, a future database and distributed shared ledger, the new Napster (a P2P file-sharing system used in the 90s) with a pure decentralized P2P network, a cryptocurrency, or a trustless secure transaction system, and so on. It is all of them. Only by combining all of them can we understand the whole picture of blockchain technologies and get a sense of the true potential of blockchain.
The following diagram illustrates different viewpoints of blockchain technology:
So, what is a blockchain anyway? Think of blockchain as a new architecture paradigm and a new trust protocol. It is a computer science primitive forming the foundation of most cryptocurrencies and decentralized applications. It is a P2P transaction model that can enable two parties to transact in a way that is tamper-resistant and cryptographically proven. As the technology behind Bitcoin and other cryptocurrencies, blockchain is an open, distributed ledger that can be simultaneously used and shared within a large decentralized, publicly accessible network.
In essence, blockchain is a distributed shared ledger technology supported by three pillars, as shown in the following screenshot; these are P2P networks, cryptography, and a consensus mechanism:
To understand how blockchain works, let's start with the fundamental concepts and key building blocks of blockchain technologies. Then, we'll discuss the key differences between centralized, distributed, and decentralized systems. We will then dive into the blockchain data structure and discuss how transactions, blocks, and chains are maintained and how the network reaches a consensus on the state of the chain, as well as how to secure the blockchain with cryptographic technologies.
Following is a list of the key building blocks of blockchain technologies:
Transactions
: A transaction is a value transfer between two parties. It could be a transfer of money, tangible assets, or cryptocurrency. Transactions are broadcasted to the blockchain network. They are validated and verified by all nodes and collected into blocks. Once the block reaches a certain depth—in Bitcoin, this is 6 blocks—
those transactions in the block can be considered irreversible.
Block
: All verified transaction records are collected into a data structure called a block. It has a header and body part, where the header contains a
cryptographic hash of the previous block, a timestamp, and a Merkle tree root hash of all transactions in the block. The body is the container of transaction data.
The chain of block (blockchain)
: A blockchain is a linked list of a chain of blocks.
Blocks are linked together using a cryptography hash as the pointer to the previous block.
Decentralized P2P network
: It is a P2P network in which interconnected nodes share resources amongst each other without the use of a central authority or some sort of intermediary.
Consensus protocol
:
The consensus protocol in blockchain is a set of rules that all network nodes will enforce when considering the validity of a block and its transactions. The consensus mechanism is the process used by the network nodes to achieve agreement on the network state. It is a fault-tolerant mechanism to ensure the reliability and integrity of the network.
Mining
: Mining is the process by which network nodes in blockchain systems add new blocks to the blockchain and get rewarded with crypto-incentives.
Decentralized P2P network
To explain how blockchain works, let's look at what steps are involved with the existing business model for completing a simple payment transaction.
A customer, Alice, needs to pay $10 to Bob, who happens to have an account in the same bank as Alice. She can make the payment either by visiting a bank branch or using the web. Let's say she tries to do that online through the bank's web portal. She will need to authenticate herself using her username and password and then put the transfer order in and wait for the bank system to confirm whether the transaction is completed.
As shown in the following diagram, in order to support such online banking activities in the traditional world, the bank has to establish an identity and access management system and authenticate Alice's login credentials. Behind the scenes, the bank needs to develop a bank web portal and a backend system to verify whether Alice has the right account with the bank and has enough money to pay Bob to transfer $10 out of Alice's account, and put $10 in Bob's account. The bank has to maintain a ledger to record the details of the transaction in a database and show the balance each person has.
The following diagram shows a centralized bank system model:
As the business grows, customers' needs change too. The traditional brick and mortar business model is being replaced by the digital banking and commerce model. This requires technology changes in the bank system too. Banks nowadays deploy a distributed system model to serve the ever-growing needs of their customers.
The following diagram shows the distributed bank system model:
The fundamental issue with the preceding centralized or distributed system model is a single point of failure. Failure could come from malicious network attacks, system failures, or security and privacy breaches; it could come from business failures in the bank itself, which can cause millions of people to lose their homes due to the bankruptcy of big banks during a global financial crisis. It could happen due to currency failure itself, such as the currency collapse in Venezuela, where the lifetime savings of average citizens suddenly became worthless overnight. Also, the payment may be blocked due to government censorship.
Satoshi Nakamoto believed that the root problem with traditional fiat currency is all the trust required to make it work. Citizens have to trust the central bank not to devalue the currency. Consumers have to trust the bank to manage their money. But history has shown again and again that trust is often breached.
Satoshidesigned an elegant decentralized P2P electronic cash system, and the technology behind that, blockchain, is the solution, where transactions are maintained in a distributed shared ledger and replicated across a global P2P network; security and privacy are ensured with cryptographic technologies, and transaction integrity is achieved through a consensus mechanism.
The following diagram shows a decentralized bank system model:
As new transactions are made, they are broadcasted to all network nodes, and over time all transactions that have occurred are sequenced together in the public ledger and made available in all replicated network nodes, as shown in the following diagram:
Now that we understand the between centralized and decentralized models, let's how blockchain works.
How does blockchain work?
Using the previous example, as shown in the following diagram, let's assume Alice wants to buy something from Bob and she agrees to pay Bob $10 or 10 Bitcoins (BTC):
Let's walk through the high-level processes step-by-step, demonstrating how the blockchain works:
Create blockchain transactions:
A transaction is a value transfer between two parties
. When Alice sends
$
10 or 10 BTC to Bob, it will create a transaction with one or more inputs and two or more outputs, where the inputs reflect Alice's account, and the outputs reflect which account(s) Alice intends to transfer to. The transaction is then digitally signed with Alice's private key and broadcasted to the P2P network. The receiver will use the digital signature to verify the ownership of Alice's funds. We will discuss digital signatures and cryptographic hash functions in detail in later sections.
Validate the transactions and add to the transaction pool:
Once the transaction is submitted to the blockchain network, the bookkeeper node (usually a full node in a P2P network that receives the transactions) will validate it according to the business and technical rules defined by the blockchain network. If the transaction is valid, the bookkeeper will add it to the transaction pool and relay the transaction to the peers in the network.
Create the candidate blocks:
Transactions in the transaction pool are collected into the block periodically. In a Bitcoin network, every 10 minutes, a subset of network nodes, called
mining nodes
or miners, will collect all valid transactions from the transaction pool and create the candidate blocks. The following diagram shows the structure of a candidate block:
As illustrated in the preceding diagram, the high-level processes are as follows:
The candidate block
packages recent valid transactions into the block structure based on block specifications.
For each transaction in the package, it creates a cryptographic hash of the transaction data, recursively calculates the hash out of existing hashes, and creates a Merkle root of all transactions, as depicted in the following diagram:
The miner node looks for the latest block on the blockchain and adds its hash to the block header of the candidate block as the reference from the candidate block it intends to link to.
Mine the new block:
Once the candidate block is created, the race starts for the chance to add new blocks and win the rewards. The process for such a race is called
mining
. The winning of the race is determined by the consensus mechanism. We will discuss different consensus mechanisms in later sections.
In blockchain systems such as Bitcoin or Ethereum, the PoW consensus mechanism is applied to mining.
Miners will keep trying to find a random number, the nonce in the block header structure, until the hash meets certain challenging conditions. For example, one such challenging condition is,
the resulting block hash is smaller than a target number
, or in some cases,
the hash has a few leading zeros
. In practice, every random number has the same chance to win the race, so practically, you can just start a loop through from 1 to 2
32
until it finds such a nonce. It requires huge CPU hashing power to find such a nonce. The challenging condition, called
difficulty
, can be adjusted based on the target number or bits in the block header structure.
The difficulty in winning the race grows expon
entially
the smaller the target number is or the fewer bits are in the block header structure.
Add a new block to the blockchain
: The first winning node will announce the new block to the rest of the network for verification. Once the block is verified and approved by the majority of the network miners, it will be accepted and becomes the new tip of the chain. Since all blocks are chained together by linking the hash to the previous block, any tampering with the ledger becomes impossible since it will require
PoW
on all previous transitions.
All miners have the chance to solve the puzzle, but only the winning miner has the authority to add the block to the chains and claim the bounty. Once the new block is added to the blockchain, all in-progress miners will stop their mining efforts on the newly added block and start the race again on a new block.
The following diagram summarizes the step-by-step process when new transactions are submitted to the blockchain network:
Now you know how works. Cryptography plays a critical role in maintaining the transaction state in the blockchain and ensuring immutability. Cryptography is not new. In the next section, we will go over some key concepts in cryptography.
Rehashing cryptography
Cryptography is the study of secure communication techniques that prevent third parties or the public from reading private messages and allow only the intended recipient of a message to view its contents. It is the cornerstone of information security, which serves as the basis for delivering secure business applications and services. Modern cryptography concerns itself with the following five objectives of information security:
Confidentiality
: This is the concept of preventing sensitive data from being accessible by any unauthorized entities.
Integrity
: This means protecting sensitive data from unauthorized changes during transit from one party to another party.
Authentication
: This is the process of ensuring that user identity is truly what the user claims it to be, whether the user is human or a system.
Authorization
: This is the concept of determining what actions an authenticated user is allowed to perform.
Non-repudiation
: When a user performs an action on data, the action must be bound with the user so that it can't deny performing such actions.
Cryptography deals with the design of algorithms for encryption and decryption, which are intended to ensure the secrecy and the authenticity of the messages or transactions. Let's start with some key elements in modern cryptography:
Encryption
: This is the process of converting plain text or data into an unintelligent form, typically using a mathematical algorithm.
Decryption
: This is the process of reversing encryption—converting an encrypted message back into its original text and data.
Hash
: This is the process of converting any data block (arbitrary size or message) into a fixed-length hash code. A cryptographic hash function is a deterministic mathematical function performing such a conversion using cryptography, and it always maps to the same result for a given data block.
Cryptography is a key cornerstone of blockchain technology, along with the consensus mechanism and decentralization. It is used in many different forms, including, for example, wallets (for proof of cryptocurrency ownership), transactions (for PoW consensus), and P2P communication. In this section, we will go over key blockchain-related cryptography topics, including public-key cryptography, digital signatures, cryptographic hashing, and Merkle trees.
Public key cryptography
Public-key cryptography is a form of cryptographic function in which encryption and decryption are performed using two different keys—one public and one private key. They are generated in pairs. It is also calledasymmetric cryptography. The public key can be shared with the public, but the private key is meant to be a secret code only known by its owner.
The keys are used in tandem too. Either of the two keys can be used in encryption, with the other one used for decryption. It is computationally improbable to determine the private key given only knowledge of the cryptographic algorithm and the public key.
Public key cryptography is most used in three ways, to:
Secure the message transmission between two parties and ensure the confidentiality of messages or data.
Authenticate the sender and ensure the message is indeed sent from the sender.
Combine with the cryptographic hashing function and provide a digital signature on a document before sending it to the receiver.
We will go over the first two here and discuss digital signatures in the following section:
Public key cryptography for confidentiality:
In this case, as depicted in the following diagram, the digital signature is used to encipher messages between two parties during transmission. The sender (
Alice
) uses the receiver's public key to encrypt a message, and the receiver (
Bob
), who holds their own private key in secrecy, can decrypt the messages using their private key:
Public key cryptography for authentication:
In this case, as shown in the following diagram, the signature is used to authenticate the sender's
message.
The sender uses its own private key to encrypt a message before sending it to the intended parties. The receiver can use the sender's public key to confirm the message's authenticity and decrypt it. The combination of this approach with the message's cryptographic hashing function provides a digital signature, which we will discuss in the next section:
Public key cryptography is an essential technology underpinning wallets and transactions in the blockchain. We will discuss the Bitcoin wallet in the Understanding Bitcoin and cryptocurrency section.
Cryptographic hash function
A cryptographic hash function is an algorithm used to randomly convert a string of binary data into a condensed representation of a message—a message digest. Its output is called a hash value, digital fingerprint, digest, or checksum. It is deterministic and always results in the same hash value for a given message. It is capable of taking any size of data block and producing a fixed-size hash value that uniquely identifies the original data block. It is a one-way, irreversible function; the only way to recreate the input data is to try a brute-force approach with all possible values to see whether there is a match, which is almost computationally infeasible.
Cryptographic functions have been widely used in blockchain technology, including the following:
Merkle trees
: As we showed earlier, when a miner node pulls transactions from the transaction pool, it packages them in a block, where the block header has a field referencing the Merkle root of all transactions.
Block chaining
: Blocks in the blockchain are chained together with a reference to the previous block using a cryptographic hash.
PoW
: The PoW consensus algorithm itself is a game in solving a cryptographic hash function. We will discuss it in more detail in the
Understanding the blockchain consensus mechanism
section.
Digital signature
A digital signature is a set of algorithms for determining the authenticity and integrity of digital messages or documents. It assures the recipient that the message was indeed created by the expected sender and that the message was not altered during transmission. The sender cannot deny having sent the message.
When Alice sends a document to Bob, she will follow certain steps to digitally sign the document, as shown in the following diagram:
These steps are as follows:
Calculate the message digest of the document Alice wants to send to Bob with a cryptographic hash function, usually MD5 or any SHA algorithm.
Encrypt the message digest with Alice's private key, append the encrypted message digest to the original document, and send the combined message out.
Once Bob receives the combined message from Alice, he will separate the encrypted message digest from the document itself. Bob will use Alice's public key to decrypt the encrypted message digest.
At the same time, Bob will calculate the message digest of the received document and compare the resulting message digest with the decrypted message digest to see whether there is a match. If yes, Bob is assured that the document originated from Alice without any tampering.
In blockchain, a digital signature is a way to prove ownership of the underlying cryptocurrency or electronic coin. When Alice needs to pay Bob 10 BTC, she will digitally sign a hash of the previous transaction, which can prove that Alice has ownership of the 10 BTC.
In summary, cryptography is one of three foundational pillars in blockchain technology. Public key cryptography is the basis for blockchain wallets and transactions, and the cryptographic hash function is a key element underpinning the PoW consensus mechanism. A digital signature is used as proof of ownership of the underline electronic coins or cryptocurrency.
In the next section, we will introduce and look at a blockchain consensus mechanism in detail and discuss how cryptography technologies are leveraged to reach consensus among decentralized parties.
Anatomizing a blockchain consensus mechanism
A fundamental problem in large-scale distributed systems is how to achieve overall system reliability in the presence of failures. Systems need to be fault-tolerant. This requires a process for distributed, often heterogeneous systems to reach a consensus and agree on the network state, whether it is a database commit or an action to take. In this section, we will discuss two types of consensus algorithms, PoW and proof-of-stake (PoS).
What is consensus?
Consensus in a blockchain is the process by which a network of mutually distrusted nodes reaches an agreement on the global state of the chain of blocks. In blockchain, transactions or data are shared and distributed across the network. Every node has the same copy of the blockchain data. Consensus allows all of the network nodes to follow the same rules to validate transactions and add new blocks to the chain, and therefore allows it to maintain uniformity in all of the copies of a blockchain.
Sometimes, it is also called a consensus mechanism or consensus algorithm. A consensus mechanism focuses on the process and approach of how to reach an agreement. A consensus algorithm is a formal procedure or computer program for solving a consensus problem, based on conducting a sequence of specified actions. It is designed to achieve reliability in a network involving multiple nodes. Consensus algorithms ensure that the next block in a blockchain is fully validated and secured. Multiple kinds of consensus algorithms currently exist, each with different fundamental processes. Different blockchain platforms may implement different consensus mechanism. In this section, we will focus on the following two popular algorithms, show how they work, and discuss the pros and cons of each mechanism:
PoW
:
This consensus algorithm was introduced by Satoshi and commonly adopted by many other blockchains, including Ethereum. The
PoW
is the mining process with the purpose of finding an answer to a cryptographic hashing problem. To do so,
the miner has to follow the block selection rules to locate the previous block and use the hash from the previous block header, together with the Merkle root of current transactions in the new block, t
o solve the hashing problem. It requires considerable computations and hashing power. In Bitcoin, block selection rules that specify the longest chain wins.
PoS
: This consensus algorithm aims to select miners based on the various combinations of random selection based on the miners' wealth or age (the stake). Instead of miners competing to solve energy consuming cryptographic hash functions, the network will instead use a pool of
validators
. Validators are nodes that are willing to
stake
their cryptocurrency on the blocks of transactions that they claim should be added to the public blockchain.
Proof-of-work
Proof-of-work, also referred to as PoW, is the most popular consensus algorithm used by blockchain and cryptocurrencies such as Bitcoin and Ethereum, each one with its own differences. We will talk about the specific implementation of PoW in Bitcoin and Ethereum in later sections.
How PoW works
In general, PoW is like a race between miners to solve a cryptographic puzzle ; upon solving the puzzle, they win the chance to add the block to the chain and get rewarded. As shown in the following screenshot, miners collect all pending transactions from the decentralized network and compete with each other to solve the puzzle. Whoever solves the puzzle will generate a block and push that block into the network for verification from other nodes, after which, the other nodes can add that block to their own copy of the blockchain:
The cryptographic puzzle that miners race to solve is identifying the value of the nonce. A nonce is an attribute in the block header structure. In the beginning, each miner guesses a number to start with, checking whether the resulting hash value is less than the blockchain specific target. Bitcoin uses the SHA-256 algorithm for this. SHA-256 outputs a fixed-length number. Every number between 0 to 232 has the same chance to solve the puzzle, therefore a practical approach is to loop through from 0 to 232 until a number can meet the criteria, as shown in the following diagram:
Once a miner finds the nonce, the results, including the previous block's hash value; the collection of transactions; the Merkle root of all transactions in the block; and the nonce are broadcasted to the network for verification. Upon being notified, the other nodes from the network automatically check whether the results are valid. If the results are valid, they add the block to their copies of the blockchain, stop the mining work in hand, and move on to the next block.
Targets and difficulty
A target is a blockchain-specific 256-bit number that the network sets up for all miners. The SHA-256 hash of a block's header—the nonce plus the rest of the block header—must be lower than or equal to the current target for the block to be accepted by the network.
The difficulty of a cryptographic puzzle depends on the number of leading zeros in the target. The lower the target, the more difficult it is to generate a block. Adding leading zeros in the target number will increase the difficulty of finding such a nonce exponentially. As you can imagine, the higher the difficulty setting, the more difficult it will be to evaluate the nonce. Adding one leading zero in the target will reduce by 50% the chance of finding the nonce. The difficulty is decided by the blockchain network itself. The basic rule of thumb is to set the difficulty proportionally to the total effort on the network. If the number of miner nodes doubles, the difficulty will also double. The difficulty is periodically adjusted to keep the block time around the target time. In Bitcoin, it is 10 minutes.
Incentives and rewards
The winner of the cryptographic puzzle needs to expend huge energy and crucial CPU time to find the nonce and win the chance to create new blocks in the blockchain. The reward for such actions depends on the blockchain itself. In a Bitcoin blockchain, the winner will be rewarded with Bitcoin, the cryptocurrency in the Bitcoin blockchain.
The PoW consensus is a simple and yet reliable mechanism to maintain the state of the blockchain. It is simple to implement. It is a democratic lottery-based system that lets you participate in the game of mining and get the rewards, where every node can join and higher CPU power may not translate into higher rewards. Currently, the winning miner is rewarded with 12.5 BTC for each block created in the Bitcoin blockchain.
Double-spend issues
Satoshi's original intention in using a PoW mechanism is to solve double-spend issues and ensure the integrity of the global state of the Bitcoin blockchain network. Let's say Alice sends 10 BTC to Bob, and at the same time or later on she pays Catherine the same 10 BTC. We could end up with the following three situations:
The first transaction goes through the PoW and is added to the blockchain when the second transaction is submitted. In this case, the second one will be rejected when miners pull it from the transaction pool and validate it against all parent blocks.
Both transactions are submitted simultaneously and both go into the unconfirmed pool of transactions. In this case, only the first transaction gets a confirmation and will be added in the next block. Her second transaction will not be confirmed as per validation rules.
Both get confirmed and are added into competing blocks. This happens when miners take both transactions from the pool and put them into competing blocks. The competing blocks form a temporary fork on the blockchain. Whichever transaction gets into the longest chain will be considered valid and spent, and the other one within the block on the short chain will be recycled. When it is reprocessed, it will be rejected since it is already spent. In this case, it may take a few blocks to get the other one recognized as the double-spent one.
Advantages and disadvantages
However, there are a few drawbacks with the PoW algorithm, thanks to the economic cost of maintaining the blockchain network safety:
Energy consumption:
PoW
consensus, which uses a network of powerful computers to secure the network, is extremely expensive and energy-intensive. Miners need to use specialized hardware with high computing capacity in order to perform mining and get rewards. A large amount of electricity is required to run these mining nodes continuously. Some people also claim these cryptographic hash calculations are useless as they can't produce any business value. At the end of 2018, the Bitcoin network across the Globe used more power than Denmark.
Vulnerability:
PoW consensus is vulnerable to 51% attacks, which means, in theory, dishonest miners could gain a majority of hashing power and manipulate the blockchain to their advantage.
Centralization:
Winning a mining game requires specified and expensive hardware, typically an ASIC type of machine. Expenses grow unmanageable, and mining becomes possible only for a small number of sophisticated miners. The consequence of this is a gradual increase in the centralization of the system, as it becomes a game of riches.
On the flip side, it requires huge computing power and electricity to take over the PoW-based blockchain. Therefore, PoW is perceived as an effective way to prevent Denial-of-Service (DoS) and Distributed Denial-of-Service (DDoS) attacks on the blockchain.
Proof-of-stake
As opposed to PoW consensus, where miners are rewarded for solving cryptographic puzzles, in the PoS consensus algorithm, a pool of selected validators take turns proposing new blocks. The validator is chosen in a deterministic way, depending on its wealth, also defined as a stake. Anyone who deposits their coins as a stake can become a validator. The chance to participate may be proportional to the stakes they put in. Let's say, Alice, Bob, Catherine, and David put in 40 Ether, 30 Ether, 20 Ether, and 10 Ether stakes to participate respectively; they will get a 40%, 30%, 20%, and 10% chance of being selected as the block creator.
The following is how it works in the PoS consensus mechanism. As shown in the following diagram, the blockchain keeps track of a set of validators, sometimes also called block creators or forgers. At any time, whenever new blocks need to be created, the blockchain randomly selects a validator. The selected validator verifies the transactions and proposes new blocks for all validators to agree on. New blocks are then voted on by all current validators. Voting power is based on the stake the validator puts in. Whoever proposes invalid transactions or blocks or votes maliciously, which means they intentionally compromise the integrity of the chain, may lose their stakes. Upon the new blocks being accepted, the block creator can collect the transaction fee as the reward for the work of creating new blocks:
