Spenser Huang

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Understanding Blockchain by Melanie Swan — Chapter 1 Breakdown

This series is based on Blockchain by Melanie Swan. Each article is a chapter summary whose purpose is to supplement your understanding of the material. To get a more in-depth understanding of the material, read the book and support Melanie. You can find the book here!

Key Concepts

  • What is the relationship between blockchain, protocol, and currency?
  • What is the relationship between Bitcoin and the double-spend problem?
  • How do users use Bitcoin?
  • What are wallet services?
  • How is Bitcoin used in practical life?

Key Terms & Definitions

  • Protocol — a system of rules that explain the correct conduct and procedures to be followed in formal situations
  • Double-spend problem — an attack where the given set of coins is spent in more than one transaction
  • Byzantine Generals’ problem — a thought experiment meant to illustrate the pitfalls and design challenges of attempting to coordinate an action by communicating over an unreliable link
  • Public address — an identifier of alphanumeric characters that represents a possible destination for a digital currency payment
  • Private key —a secret number that allows digital currencies to be spent
  • eWallet — an online account with an external provider where bitcoins can be stored
  • Crypto-security — a component of communications security that deals with the creation and application of measures used to protect encryption systems and methods from enemy discovery, decryption, interception and tampering
  • Push technology — communication where the request for a given transaction is initiated by the publisher or central server
  • Pull technology — communication where the initial request for data originates from the client, and then is responded to by the server
  • Fiat —state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard

Chapter Notes

I. Technology Stack: Blockchain, Protocol, Currency

  • Bitcoin terminology can often be confusing since the word Bitcoin is used to refer to three things: the blockchain technology, the protocol on top of the blockchain, and the digital currency
  • Underlying blockchain technology (ledger database)
    - The decentralized public ledger that holds all transaction records on the network
    - Database that network nodes run and miners verify
  • Protocol (software)
    - The software that facilitates the transfer of money in the blockchain
  • Digital Currency (Bitcoin)
    - The currency system that is traded on exchanges and used in transactions
  • All cryptocurrencies are made up of these three parts: blockchain, protocol, and currency 
    - Some currencies, however, share a blockchain with other currencies (ex. Counterparty or XCP runs on the Bitcoin blockchain)
  • The following spreadsheet presents an overview of different cryptocurrency projects for comparison: http://bit.ly/crypto_2_0_comp

II. The Double-Spend & Byzantine Generals’ Computing Problems

  • Double-spend problem
    - Prior to blockchain technology, digital currencies could be copied and the same coin could then be used over and over
    - It was impossible to tell what coins weren’t already spent without the help of a third party (thus the introduction of services such as PayPal)
    - Third parties had to intervene and keep a centralized ledger to prevent the same coin from being spent twice
    - For more information, visit http://blogs.cornell.edu/info4220/2013/03/29/bitcoin-and-the-double-spending-problem/
  • Byzantine Generals’ problem
    - A problem that symbolizes the difficulty of having a coordinated conversation mechanism when the parties involved do not trust each other
    - For more information, visit: http://www.drdobbs.com/cpp/the-byzantine-generals-problem/206904396
  • Bitcoin solves the double-spend problem and the Byzantine Generals’ problem
    - Bitcoin combines peer to peer data-sharing tech with public-key cryptography to solve the double-spend problem
    - The blockchain is trust-less (users do not need to trust one another and no third party is needed), thus solving the Byzantine Generals’ problem
  • New blocks holding the most recent transactions are created sequentially and linked to the last published block
    - All information on the blockchain is public and can be inspected on sites such as www.blockchain.info

How a Cryptocurrency Works

  • Overview
    - Bitcoin is a different form of money and can be used to buy and sell items over the Internet
    - Users need an address, a private key, and a wallet to use Bitcoin
    - Other people need your wallet to send Bitcoins to you
    - Your private key (cryptographic secret) allows you to send Bitcoin to others
    - Wallet services help you manage you Bitcoin 
    - There is no centralized “account”, as long as you hold a private key, you hold Bitcoin
  • eWallet services and personal crypto-security
    - If you lose your private key, you lose all the Bitcoin associated with that key, there is no retrieval system 
    - Consumers need to understand personal crypto-security to properly protect their digital assets and to prevent becoming victims of theft
    - Coin mixing — mixing your coins with other transactions to make your transactions more anonymous — is a good strategy and can be done with services such as Helix by Gram and Dark Wallet
    - Blockchain is a push technology meaning that users only push pertinent information concerning the transaction when needed thus preventing too much personal information from existing online
    - Pull technologies, on the contrary, require central storage of consumer information and can attract hacking attacks
    - The lack of a third party also significantly reduces transaction fees
  • Merchant acceptance of Bitcoin
    - BitPay, Coinbase, and Coinify are some of the major Bitcoin merchant processors
    - Services that combine existing vendor processing software with Bitcoin processing software will most likely emerge in the future
    - Mobile payment functionality is also a focus to increase merchant acceptance

Summary: Blockchain 1.0 in Practical Use

  • Overview
    - Blockchain has the potential to become the “Internet of Money” and connect finances 
    - The introduction of alternative currencies reduce merchant payment fees drastically to below 1%
    - Users can send and receive funds immediately with the use of digital currencies
    - Blockchain 1.0 (currency) is starting to be extended into Blockchain 2.0 (contracts) to create programmable money
  • Relation to fiat currency
    - Currently, Bitcoin prices are volatile and has ranged considerably
    - Services such as Bitreserve have tried to stabilize Bitcoin prices by locking up deposits 
    - The market cap of Bitcoin exceeds that of a small country’s GDP at 86 billion USD (as of 10/12/2017) 
    - Money supply of Bitcoin is predetermined at 21 million
    - New coins are released every 10 minutes and will reach the 21 million unit cap by 2040 
    - Milli-bitcoins (mBTC) are 1/1000 of a Bitcoin and Satoshis are 1/10000000 of a Bitcoin
  • Regulatory status
    - Government regulation will influence whether or not the blockchain industry can grow into a mature service
    - Some countries have banned Bitcoin (Bolivia) but other have adopted it as an official currency (UK)
    - Countries are starting to realize that Bitcoin is different enough that it requires new legislation to regulate

Chapter Summary

  • Cryptocurrencies are made up of blockchain (public ledger), protocol (transaction software), and currency (coin)
  • Blockchain technology solves the double-spend problem and the Byzantine Generals’ problem
  • All transactions of the blockchain are public can be found online
  • To use Bitcoin, one needs an address (receive coins), a private key (send coins), and a wallet (manage coins)
  • Consumers must understand personal crypto-security to safely protect their digital assets
  • The elimination of a third party drastically reduces transaction fees, making it more attractive to merchants
  • Blockchain could one day become the “Internet of Money” and connect finances
  • Though volatile, the market cap of Bitcoin already far exceeds that of many countries
  • Government regulations play an important role in the acceptance of cryptocurrencies
  • Bitcoin will require new legislations to be properly regulated
Thank you for reading the article! 
You can learn more about me at www.spenserhuang.com
Feel free to leave a BTC tip at 3FoyrKXh1ap99iB1SDqc7vxmgsZTU62SEc 
Thank you, I’m looking forward to sharing more of my blockchain learning with you!

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