Lecture 4 - Blockchain Flashcards
What is a Blockchain?
A unique type of computerised ledger relies on cryptopgrahic techniques and new methods for consensus to capture and secure the data
- Money transactions
- Medical records
- Buying and selling goods
- Insurance policies
What is so special about blockchain?
- Distributed
- Consensus mechanism
- Encrypted
- Immutable
What is a ledger?
A ledger is a book or collection of accounts in which account transactions are recorded
Where is this ledger?
In a central location? Central banks, governments
Why is it controversial to have the ledger in a central location?
- Attack vulnerability
- Single point of contact
- Rely on middle-men
- Operational inefficiency
Types of ledgers
- Centralised ledger
- Decentralised ledger
- Distributed yet centralised
- Distributed ledger
Types of ledgers (control perspective)
- Centralised: One entity controls the entire system
- Decentralised: Multiple entities control the system
Types of ledgers (Location perspective)
- Centralised: ledgers exist at the same location
- Distributed: ledgers exist at different locations
Types of ledgers (Distributed yet centralised)
Distributed servers but controlled by a single authority
- Cloud service providers
Distributed Ledger Technology
- Distributed ledger technology
Everyone in the peer-to-peer network have an identical copy of the ledger - No single entity is the authority of the system
- System is widely distributed among entities in the network
- Blockchain
One type of DLT
Based on a P2P network
What is so special about blockchain?
Self-regulating system
- In a centralised system: administrator has the authority to update and maintain the database
- In blockchain, everyone in the network can:
Read the chain, make legitimate changes in the chain, write a new block into the chain - Blockchain is a self-regulating system
Contributions by the participants, authentication and verification of the transactions
Distributed consensus
Risk of computers programmed to introduce false information
Satoshi Nakamto (2008) proposed a solution to this problem:
- All computers in a blockchain network use a system of distributed consensus to agree upon continually updated history of transactions in a ledger
- There is only one version of the transaction ledger in bitcoin since over a decade (The trust machine)
Consensus mechanisms
- Proof of work - complex problem that needs computation power to solve (miners) based on an algorithmically adjusted difficulty. E.g. Bitcoin, Ethereum
- Proof of stake - a lottery-like system randomly rewarded to those based on how much stake (currency) they commit (have). E.g. EOS, Cardano, Ouroboros
- Proof of Authority - slightly adjusted proof of stake, validators are selected based on their reputation. E.g. IBM Hyperledger
Proof of work
- Bitcoin’s breakthrough feature
- Participants (miners) competing to win rewards in Bitcoin in the presence of a computational cost
- Each miner collects a set of pending transactions (block: a list of ~2000 transactions)
- While simultaneously competing to find a randomly chosen string (~10 minutes to find)
- Once a miner finds the required string, they broadcast the string and the block (gets a reward of 6.25 BTC + fees)
- Fraud?
- Computationally infeasible
- Controversies
- Energy intensive
- Costly barriers of entry for miners
How to update the ledger?
The process of blockchain:
- Transaction
- Transaction broadcasted to the network
- Nodes / Peers validate the transaction
- Validated transaction added to a new block
- New block added to the blockchain
- New block distributed to all nodes
- Transaction complete
