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

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  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

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  Protocol (software)- The software that facilitates the transfer of money in the blockchain

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  Digital Currency (Bitcoin)- The currency system that is traded on exchanges and used in transactions

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  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

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  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/

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  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

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  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

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  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

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  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

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  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

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  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

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  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

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  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

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  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.comFeel free to leave a BTC tip at 3FoyrKXh1ap99iB1SDqc7vxmgsZTU62SEc Thank you, I’m looking forward to sharing more of my blockchain learning with you!