Blockchain

Core Concepts

Core Concepts

1. Decentralization and Distribution

• Decentralization: There is no central authority (like a bank or government) that controls the network. Control is distributed among all participants (nodes).
• Distributed Ledger: Every participant (node) in the network has a copy of the full ledger. This provides transparency and redundancy. If one node goes down, the network continues to operate.

2. Blocks and Chains

• Block: A container for a set of transactions. Each block includes a reference to the previous block.
• Chain: The blocks are linked together in chronological order, forming a chain. This link is a cryptographic hash of the previous block's header.

3. Cryptography in Blockchain

• Hashing: A cryptographic hash function (like SHA-256) takes an input of any size and produces a fixed-size output (a hash). It's a one-way function, meaning it's practically impossible to reverse. Any small change in the input data results in a completely different hash. This is what makes the chain immutable.
• Public-Key Cryptography: Used for transactions.
  • Private Key: A secret key known only to the owner, used to sign transactions. It's like your password.
  • Public Key (Address): Derived from the private key, it's a public address that can be shared with others to receive funds. It's like your bank account number.
  • Digital Signature: Proves ownership of the private key without revealing it.

4. Consensus Mechanisms The protocol by which the nodes in the network agree on the current state of the ledger. It ensures that a new block can be added to the chain.

• Proof of Work (PoW): Used by Bitcoin. Nodes (miners) compete to solve a complex mathematical puzzle. The first one to solve it gets to add the next block to the chain and is rewarded. This process is energy-intensive.
• Proof of Stake (PoS): Used by Ethereum and others. Validators are chosen to create a new block based on the number of coins they hold and are willing to "stake" as collateral. It is much more energy-efficient than PoW.
• Other Mechanisms: Delegated Proof of Stake (DPoS), Proof of Authority (PoA), etc.

5. Smart Contracts Self-executing contracts with the terms of the agreement directly written into code. They run on the blockchain and are automatically enforced when predefined conditions are met. This allows for complex, trustless applications to be built on top of a blockchain (e.g., Decentralized Finance - DeFi). Ethereum was the first major platform to popularize smart contracts.

Examples & Use Cases

Examples & Use Cases

A Simple Transaction

1. Alice wants to send 1 Bitcoin to Bob.
2. She creates a transaction message detailing the amount, Bob's public address (the recipient), and her public address (the source).
3. She signs this transaction with her private key, creating a digital signature.
4. She broadcasts this transaction to the network.
5. Nodes in the network verify the transaction using Alice's public key to confirm the signature is valid and that she has enough funds.
6. A miner includes this transaction in a new block they are working on.
7. Once the miner solves the Proof of Work puzzle, the new block is added to the blockchain, and the transaction is permanently recorded.

Supply Chain Management A product (like organic coffee) can be tracked on a blockchain from farm to shelf. Each step (harvesting, processing, shipping, retail) is recorded as a transaction. Consumers can then scan a QR code on the product to see its entire journey, ensuring authenticity and ethical sourcing. This is possible because the blockchain record cannot be altered.

Practice Questions

Practice Questions

1. MCQ: What is the primary purpose of hashing in a blockchain? A) To encrypt messages for privacy. B) To ensure the integrity of the data and link the blocks together immutably. C) To speed up transactions. D) To identify users on the network.

2. Short Answer: Explain the difference between a centralized and a decentralized network in one or two sentences.

3. Scenario: Why is a consensus mechanism like Proof of Work or Proof of Stake necessary for a public blockchain? What problem does it solve?

Quick Summary

Quick Summary

• Blockchain is a decentralized, distributed, and immutable digital ledger.
• It consists of blocks of transactions linked together in a chain using cryptographic hashes.
• Decentralization means no single entity is in control.
• Public-key cryptography (private and public keys) is used to secure and sign transactions.
• Consensus mechanisms (like Proof of Work or Proof of Stake) are rules for how nodes agree on the state of the ledger and add new blocks.
• Smart Contracts are self-executing programs that run on the blockchain, enabling decentralized applications (DApps).