Blockchain For Dummies. Laurence Tiana

purposes, think of a hash as a digital fingerprint of data that is used to lock it in place within the blockchain.

      ❯❯ Network: The network is composed of “full nodes.” Think of them as the computer running an algorithm that is securing the network. Each node contains a complete record of all the transactions that were ever recorded in that blockchain.

      The nodes are located all over the world and can be operated by anyone. It’s difficult, expensive, and time-consuming to operate a full node, so people don’t do it for free. They’re incentivized to operate a node because they want to earn cryptocurrency. The underlying blockchain algorithm rewards them for their service. The reward is usually a token or cryptocurrency, like Bitcoin.

      

The terms Bitcoin and blockchain are often used interchangeably, but they’re not the same. Bitcoin has a blockchain. The Bitcoin blockchain is the underlying protocol that enables the secure transfer of Bitcoin. The term Bitcoin is the name of the cryptocurrency that powers the Bitcoin network. The blockchain is a class of software, and Bitcoin is a specific cryptocurrency.

Blockchain Applications

      Blockchain applications are built around the idea that network is the arbitrator. This type of system is an unforgiving and blind environment. Computer code becomes law, and rules are executed as they were written and interpreted by the network. Computers don’t have the same social biases and behaviors as humans do.

      The network can’t interpret intent (at least not yet). Insurance contracts arbitrated on a blockchain have been heavily investigated as a use case built around this idea.

      Another interesting thing that blockchains enable is impeccable record keeping. They can be used to create a clear timeline of who did what and when. Many industries and regulatory bodies spend countless hours trying to asses this problem. Blockchain-enabled record keeping will relieve some of the burdens that are created when we try to interpret the past.

The Blockchain Life Cycle

      Blockchains originated with the creation of Bitcoin. It demonstrated that a group of individuals who had never met could operate online within a system that was desensitized to cheat others that were cooperating on the network.

      The original Bitcoin network was built to secure the Bitcoin cryptocurrency. It has around 5,000 full nodes and is globally distributed. It’s primarily used to trade Bitcoin and exchange value, but the community saw the potential of doing a lot more with the network. Because of its size and time-tested security, it’s also being used to secure other smaller blockchains and blockchain applications.

      The Ethereum network is a second evolution of the blockchain concept. It takes the traditional blockchain structure and adds a programming language that is built inside of it. Like Bitcoin, it has over 5,000 full nodes and is globally distributed. Ethereum is primarily used to trade Ether, make smart contracts, and create decentralized autonomous organizations (DAOs). It’s also being used to secure blockchain applications and smaller blockchains.

      The Factom network is the third evolution in blockchain technology. It utilizes a lighter consensus system, incorporates voting, and stores a lot more information. It was built primarily to secure data and system. Factom operates with federated nodes and an unlimited number of auditing nodes. Its network is small, so it anchors itself into other distributed networks building bridges across the carries blockchains.

Consensus: The Driving Force of Blockchains

      Blockchains are powerful tools because they create honest systems that self-correct without the need of a third party to enforce the rules. They accomplish the enforcement of rules through their consensus algorithm.

      In the blockchain world, consensus is the process of developing an agreement among a group of commonly mistrusting shareholders. These are the full nodes on the network. The full nodes are validating transactions that are entered into the network to be recorded as part of the ledger.

Figure 1-2 shows the concept of how blockchains come to agreement.

       FIGURE 1-2: How blockchains work.

      Each blockchain has its own algorithms for creating agreement within its network on the entries being added. There are many different models for creating consensus because each blockchain is creating different kinds of entries. Some blockchains are trading value, others are storing data, and others are securing systems and contracts.

      Bitcoin, for example, is trading the value of its token between members on its network. The tokens have a market value, so the requirements related to performance, scalability, consistency, threat model, and failure model will be higher. Bitcoin operates under the assumption that a malicious attacker may want to corrupt the history of trades in order to steal tokens. Bitcoin prevents this from happening by using a consensus model called “proof of work” that solves the Byzantine general’s problem: “How do you know that the information you are looking at has not been changed internally or externally?” Because changing or manipulating data is almost always possible, the reliability of data is a big problem for computer science.

      Most blockchains operate under the premise that they will be attacked by outside forces or by users of the system. The expected threat and the degree of trust that the network has in the nodes that operate the blockchain will determine the type of consensus algorithm that they use to settle their ledger. For example, Bitcoin and Ethereum expect a very high degree of threat and use a strong consensus algorithm called proof of work. There is no trust in the network.

      On the other end of the spectrum, blockchains that are used to record financial transactions between known parties can use a lighter and faster consensus. Their need for high-speed transactions is more important. Proof of work is too slow and costly for them to operate because of the comparatively few participants within the network and immediate finality need for each transaction.

Blockchains in Use

      Hundreds of blockchains and blockchain applications are in existence today. The whole world has become obsessed with the ideas of moving money faster, incorporating and governing in a distributed network, and building secure applications and hardware.

      You can see many of these public blockchains by going to a cryptocurrency exchange.

Figure 1-3 shows the altcoin exchange for Poloniex (https://poloniex.com), a cryptocurrency trading platform.

       FIGURE 1-3: The altcoin exchange platform.

      Blockchains are moving beyond the trading value market and are being incorporated into all sorts of industries. Blockchains add a new trust layer that now makes working online secure in a way that was not possible beforehand.

       Current blockchain uses

      Most up-and-running blockchain applications revolve around moving money or other forms of value quickly and cheaply. This includes trading public company stock, paying employees in other countries, and exchanging one currency for another.

      Blockchains are also now being used as part of a software security stack. The U.S. Department of Homeland Security has been investigating blockchain software that secures Internet of Things (IoT) devices. The IoT world has some of the most to gain from this innovation, because it’s especially vulnerable to spoofing and other forms of hacking. IoT devices have also become more pervasive, and security has become more reliant on them. Hospital systems, self-driving cars, and safety systems are prime examples.

      DAOs are another interesting blockchain innovation. This type of blockchain application represents a new way to organize and incorporate companies online. DAOs have been used to organize and invest funds via the Ethereum network.

       Future blockchain applications

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