Understanding Blockchain Technology First Principles
The Blockchain Sector 2023-03-25
The word blockchain has become synonymous with the entire crypto industry and describes a sector that includes cryptocurrencies, smart contract platforms, decentralized networks, tokens, and decentralized finance.
Before Bitcoin, blockchain was simply a way to store data, similar to a database where key-value pairs are stored. A blockchain was a series of blocks of data stored in chronological order. For example, Bitcoin creates one block every 10 minutes approximately, and each block contains transactional data such as Alice sending Bob X amount of Bitcoin. After 10 more minutes, that block is finalized, and a new block is created with the next set of transactions.
These blocks are interlinked with cryptography, with each block containing a hash, or a summary of the underlying block. Over time, this creates an interlinked chain of blocks, and if you want to change data in a block from an hour ago, you have to change the data in every block on top of that because the summaries change and the summary of the summary changes. This creates an immutable, chronologically ordered data storage structure.
In our industry that data structure is duplicated across a decentralized peer-to-peer network of multiple computers known as nodes. These nodes communicate together, sharing transactional data and voting on the finalized block. When consensus is reached and more than 50% of the network agrees, the block is completed.
This is should be a trustless network that is quite different from what we use day-to-day with websites and mobile applications. With a website, a client (which is a web browser) communicates with a server, which sends back the code and data to render the web page. This server communication is different from a peer-to-peer network because all clients are treated equally, and there is no server or single entity that has authorization or special administrative powers over the network.
Ethereum took this one step further by creating an application layer, widely known as the EVM (Ethereum virtual machine). This is the smart contract platform, which allows users to execute their own code on this peer-to-peer network.
Transactional data is still stored in a blockchain, but it also stores state information that is persistent to the network. This allows users to create third-party tokens and other decentralized applications.
Compared to Bitcoin it is a completely different product because of this 3rd party application layer. Bitcoin is an elegantly simple distributed ledger, a pure cryptocurrency with unrivalled censorship resistance. Ethereum should be seen more like a world computer that enables developers to create immutable, permissionless applications and host them on a decentralized network.
Recently I’ve been writing up my notes on the Solidity snippets Github Repo and will be adding more over the coming weeks.
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Disclaimer: Not a financial advisor, not financial advice. The content I create is to document my journey and for educational and entertainment purposes only. It is not under any circumstances investment advice. I am not an investment or trading professional and am learning myself while still making plenty of mistakes along the way. Any code published is experimental and not production ready to be used for financial transactions. Do your own research and do not play with funds you do not want to lose.