Basic Operations and Beyond Bitcoin
Welcome Crypto Dummiez!
For those of you that are new here, if you know close to nothing about crypto and blockchain technology, then this substack is for you!
The goal is to educate everyone on the tech behind the crypto revolution to better understand how it’s changing the world as we know it.
This week will be a bit of a review over some of the basic operations within a blockchain, and the introduction of some new concepts you may have not heard of before.
With that being said, let’s get started!
Basic Operations
In a decentralized network, the basic operations are the responsibility of the peer participants on the network and their respective computational nodes. What does this mean? To summarize, the blockchain works because anonymous peers work together to make it work.
Some of the basic operations include:
Validating transactions
Gathering transactions for a block
Broadcasting valid transactions & blocks
Consensus on the next block creation
Chaining blocks together
Participants in the network have two major roles.
Those that initiate the transfer of assets/value by creating a transaction, and those that pick on added work or computation (these are the miners.) We have discussed briefly the role of miners on the blockchain in previous posts, today we will go into further detail.
To reiterate, miners on the network choose to take on added work + computation, and they are incentivized with the native currency of the blockchain to perform these tasks. This includes:
Verifying transactions
Broadcasting transactions
Competing to claim the right to create the next block
Reaching consensus by validating a block
Broadcasting newly created block
Confirming transactions
Transaction validation is carried out independently by miners on the network, and involves the verification of more than 20+ criteria including: size, syntax, validating input UTXO’s, ensuring referenced output UTXO’s are correct, and verifying that referenced input + output amount are matched sufficiently. Transactions deemed invalid are rejected by miners and are not broadcast on the network. Once a transaction is added, miners validate these transactions, valid transactions are then added to a pool of transactions. Miners select a set of transactions from the pool in order to create the next block.
Below is a quick diagram to help you understand the order of operations a little bit better.
To truly understand the basics of blockchain technology we have started from the bottom and focused primarily on operations that occur within the bitcoin blockchain, but apply to all public blockchains.
Let’s take it a step further and go beyond bitcoin.
Beyond Bitcoin
The bitcoin blockchain is open source, and the code used can be found on their GitHub (https://github.com/bitcoin/bitcoin) ←(link to BTC GitHub.)
Bitcoin introduced a completely new concept to the world, scripts for conditional transfer of values.
Then along came Vitalik Buterin, inventor of the second largest cryptocurrency network by market cap, Ethereum.
Ethereum took the scripting concept and extended it into full-blown execution framework (A.K.A. The Smart Contract.) The introduction of smart contracts allowed code execution for embedding business logic on the blockchain. A game changer for blockchain and its use cases. Ethereum transformed blockchain into computational framework. This opened up an entirely new world of decentralized opportunities.
Side Note: Ethereum and smart contracts will be covered in greater detail next week, don’t miss it!
Types of Blockchains
There are 3 standard types of blockchain:
Type 1: Deals with cryptocurrency + transfer of value (ex. Bitcoin)
Type 2: Supports cryptocurrency + a layer of business logic supported by code execution (ex. Ethereum)
Type 3: Supports software execution for business logic (ex. Linux foundation’s Hyperledger)
Different types of blockchains can support different use cases for the real world. Bitcoin introduced a decentralized model for transfer of value. Ethereum took this idea and brought it a step further, allowing the transfer of value on a decentralized model and creating a platform for business logic to be built on top of it. This paved the way for developers to introduce decentralized applications that would bring even more power to users, and opened up an entire world of decentralized opportunities.
Just as there are different types of blockchains, each can fall into one of three different categories:
Public - (ex. Bitcoin
Private - (ex. Hyperledger Fabric)
Permissioned - (ex. Ripple)
Public blockchains (like Bitcoin) Are open to the public and available for all users to participate.
Private blockchains (Hyperledger), are limited to select participants within an organization.
Permissioned blockchains (A.K.A. Consortium blockchains), are meant for consortium of collaborating parties to transact on a blockchain for ease of governance, provenance, and accountability. An example of this could be all of the auto companies that exist or all healthcare organizations.
Permissioned blockchains provide the benefits of a public blockchain while only allowing permissioned users to collaborate and transact on the network.
Note: Permissioned blockchains such as Hyperledger Fabric and Ripple will covered in greater detail moving forward. For now it is simply to understand the concepts of private and permissioned blockchains and provide you with some real world examples.
Today we went into further detail on the basic operations within a blockchain and the roles different participants have to play in order for the decentralized model to work.
We introduced some new concepts (Smart Contracts, Ethereum, Hyperledger), the different types of blockchains and their respective categories.
That’s all for this week Crypto Dummiez!
Next week we will dive deep into the Ethereum blockchain, smart contracts, and the world of decentralized opportunities that was made possible by the Ethereum virtual machine.
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