LEARN: BLOCKCHAIN 

Their goal was to resolve the issue of intellectual property rights. In their papers, Haber and Stornetta describe how to build a chronological chain of encrypted data to verify the authenticity of timestamps on digital documents.

It is generally accepted that blockchain technologies appeared in 1991. It was then that cryptographers Stuart Haber and Scott Stornetta published a paper entitled: “How to Timestamp a Digital Document,” which described the principle of modern blockchain.

Scientists took on two problems: insurance against changes to the document itself and the timestamp.

They saw the following applications for this technology: audit logs, telephone logs, criminal evidence, cryptographic certificates, system logs, photographs, notaries, stock trading, court records, etc.

The first participants in the transaction to transfer ten bitcoins were Satoshi Nakamoto and the American programmer Harold Finney. The first known purchase for bitcoins was the purchase of pizza for 10,000 BTC on May 22, 2010. The lucky owner of the pizza is programmer Laszlo Heinitz. Since then, the Bitcoin community has celebrated Bitcoin Pizza Day every year on May 22.

What is noteworthy is that in the list of references at the end of this document, under No. 3, the work of Haber and Stornetta, with which it all began, is indicated.

Modern blockchain appeared in 2009. And a year earlier, in 2008, a person or group of people under the name Satoshi Nakamoto published a document on the Bitcoin.org website: “Bitcoin: a peer-to-peer electronic cash system.” It describes the operating principle of the Bitcoin network. One of the main goals of creating the network was to eliminate third parties when making digital transactions.

HOW DOES BLOCKCHAIN WORK?

To understand how blockchain works, it’s worth using a simple analogy as an example. Let’s say several people decide to weigh themselves every day and record their readings in a database.

· each project participant can access any record in the database at any time.

As mentioned above, blockchain is a chain consisting of blocks. What is a “block”?

The results of weighing all participants for one period, for example, a day, can be combined into a block. All participants weigh themselves and enter readings into the blockchain software. Next, the program itself groups these records, which, as we know, are called transactions, into one block and writes it to the blockchain. A block is limited by the amount of information that can be written to it; the block size differs in different blockchains. The larger the size, the more transactions can be recorded in a block, and the network will work faster.

The block, relatively speaking, is divided into several sectors, in each of which certain information is recorded. Transactions are recorded in one of the sectors. And one more sector is reserved for the heading. The block’s system information is recorded in the header: creation time, hashes of the current and previous blocks.

A hash sum, hash code, or hash for short, is the result of a hash function. The hash function is based on the same cryptography mentioned above. It is a mathematical algorithm that can turn data of any size into a fixed-size array of bits.

Compare two hash sums:

The conditions are:

· after weighing, each participant shows his result to all other participants, that is, everyone must confirm that they agree with the weighing result for each of them;

· after this, the weight of each participant is entered into the database;

· entries entered into the database cannot be changed; if anyone is caught cheating or changing an entry already made, they will be expelled from the project;

Actually, what we have before us is a simple blockchain model. Entries in the blockchain can be any data. Measurement results, financial information, personal notes, e.g. blog, diary. Almost any information.

There are several important concepts that you need to know to have a good understanding of how blockchain works.

Let’s go back to the weighing example. Each record in the blockchain, in this case the result of weighing, is called a transaction.

This is how the hash function encoded the word “blockchain”. Interestingly, knowing only the hash sum, but without access to the hash function, no one will be able to convert this long and meaningless set of letters and numbers back into the word “blockchain”.

They are radically different, it is impossible to see any relationship between them. Although, in the first case it is the word “blockchain”, and in the second case it is the same word, but written with a capital letter – “Blockchain”. That is, even the slightest change in the input data completely changes the hash amount. This is called the avalanche effect. You can play around with creating hash sums on this service.

So what is all this and what is a block hash? Once all the data (transactions) is written to a block, it is passed through a hash function, which produces the hash sum of that block. It is written to the block header. The hash sum of the previous block is also recorded in the block header.

This is how the hash function works in a simple way. And even the most insignificant change in information in any of the existing blocks will entail a change in the hash of both the block itself in which the change occurred and all other hashes. This is the same avalanche effect.

In this case, all participants in the blockchain will notice these changes, and, most likely, will disagree with them. After all, everything that gets into the blockchain remains there forever, unchanged. This is one of the important principles of blockchain.

The question may arise, what is recorded as the hash of the previous block in the very first block of the blockchain? The answer is simple: nothing, just the hash of this particular block. By the way, the very first block in the block chain is called a genesis block.

Let’s summarize the properties of the hash sum:

· it is unique for each data array and will always be the same for each of them;

· with the slightest change in the incoming information, the hash changes completely;

· the hash sum is irreversible, that is, at the current level of technological development, it is impossible to extract the original information from it.

The time is quite symbolic – the global economic crisis has arrived. Global GDP showed negative dynamics for the first time since World War II. Confidence in the traditional financial system began to decline. Probably, the crisis has become fertile ground for the growth of interest in Bitcoin.

If we consider blockchain as a technology that has become a launching pad for the spread of a decentralized financial system, then 2008-2009 can be considered the starting point. It was then that Satoshi Nakamoto launched a global project called Bitcoin.

In the public consciousness, the concepts of blockchain and Bitcoin were equivalent. But they began to separate when this technology began to be used to create other cryptocurrencies, as well as in financial technologies.

For example, Ethereum appeared in 2013. The role of Vitalik Buterin, the founder of this blockchain, cannot be overestimated. He is not only a person who set a new impetus in the development of the crypto industry, but also one of the most influential personalities in this field.

It is smart contracts that have made it possible to expand the scope of blockchain use so much that today there are dozens of blockchains, and the capitalization of Ethereum is $340 billion. In addition to Bitcoin and Ethereum, the most famous blockchains include: Solana, Cardano, Polkadot, Terra, Waves, Neo, Stellar .

A smart contract is a program that is designed to perform a specific function and, in its simplest form, is an “IF-THEN” algorithm. If event X occurs, then the smart contract performs operation Y.

The Bitcoin blockchain, in a very simplified form, can be represented as a calculator. It counts how many bitcoins someone has and recalculates their balances after each transaction. Ethereum is a full-fledged virtual machine. This machine allows you to run programs (smart contracts) and entire software systems.

The upward trend in the number of blockchains is likely to continue. And the next stage could be Multichain – a network that will unite different blockchains into a single space. And it will be possible to transfer and process data from different blockchains.

The idea of ​​digital money began to take shape in the 1980s on exchanges and was dictated by the need for faster transactions when dealing with financial instruments.

Cryptocurrency is a type of digital currency (electronic money) that can be used as an alternative or additional one. Satoshi Nakamoto used the term “electronic cash” (electronic cash). The term “cryptocurrency” began to spread after Forbes magazine published an article by Andy Greenberg “Crypto Currency”.

Several commercial projects have been launched based on the development and implementation of a digital version of money.

In 1990, DigiCash was created with its eCash monetary system. The system implemented a function to support the confidentiality of electronic payments and included cryptographic data protection. The eCash system was completely centralized. The company existed for 8 years and successfully went bankrupt in 1998. But, nevertheless, the very idea of ​​​​anonymous payments was noticed by other enthusiasts.

The B-money project is directly listed as No. 1 in the bibliography, as a source in Satoshi Nakamoto’s document “Bitcoin: a peer-to-peer electronic cash system.”

Then, based on Hashcash technology, two independent projects appeared: B-money and Bit-Gold. Both used a decentralized data ledger. And it is these projects that can be considered as cryptocurrency prototypes.

In 1997, British businessman and cryptographer Adam Beck developed the Hashcash system . This system has been used as part of the data analysis algorithm for both Bitcoin and other cryptocurrencies. The improvement of Hashcash was carried out by Harold Finney, the same one who was a participant in the very first transaction with Bitcoin.

Therefore, we can consider that the founder of Bitcoin implemented a very important and conceptually breakthrough project. But this project is the final step in a long chain of research.

DIGICASH

HASHCASH

B-MONEY

With the advent of Bitcoin, anyone could gain access to digital money. The security of the protocols guarantees the safety of money. But transactions on the Bitcoin blockchain are expensive and slow. This is acceptable for money, but unacceptable for finance. Money becomes finance when it begins to move through the system and generate benefits.

Blockchain takes the financial system to a new level of development. The main difference from the traditional financial system is the absence of an intermediary in transactions, a shift towards decentralization.

The next stage was the implementation of such movement. Fast transactions, lower commissions – this has greatly simplified the use of blockchain. But the most important thing is smart contracts. It was they who, figuratively speaking, turned the blockchain from a wallet into a bank with various financial instruments. Now there is an opportunity to make a profit from cryptocurrency.

And the next stage of development is the tokenization of other values ​​that a person wants to transfer to the blockchain. Almost anything can be digitized, such as personal belongings, a credit score, a piece of art, and included in the new global financial system. Such attempts are already being made, NFT technology is proof of this.

Why do altcoins arise? Various blockchains or projects based on them (protocols) are emerging to eliminate the shortcomings inherent in the Bitcoin network or to offer new solutions.

The word “altcoin” consists of two parts. “Alt” is short for “alternative” and “coin” is short for “coin.” These are alternative cryptocurrencies, all the others except Bitcoin. The most famous is ETH, the currency of the Ethereum blockchain.

And they issue their own coins, with the help of which they solve various problems: project management, attracting funding, hiring specialists, providing users with access to their services. Not all altcoins are equally popular. Some were never able to gain their place in the market, and some, like Ethereum, became very valuable.

Although Bitcoin has quite a lot of users, it is used mainly as a means of accumulating and storing value. The altcoin market has increased the number of cryptocurrency users by an order of magnitude. And this happened largely due to the fact that many altcoins have practical applications within the project.

It is worth clarifying several concepts that cryptocurrency includes. Cryptocoins are monetary units issued on their own blockchain. Crypto tokens are digital assets of a project launched on a third-party blockchain.

Learn more about why a project might need its own cryptocurrency.

Fraud among crypto projects is also common. Crypto tokens are also used for deception. Various schemes are used, often the main task of scammers is to advertise a new token, increase its price as quickly as possible and sell it. In the fall of 2021, the Squid Game token, ostensibly based on the TV series “The Squid Game,” rose 2,280%. After which the organizers of the scam left the project, deceiving gullible users of $3 million.

This mechanism is used in DeFi, decentralized finance. There are special platforms, for example, Uniswap, Curve. They create liquidity pools – trading pairs of coins or tokens with funds blocked in smart contracts. When a user contributes his assets to the liquidity pool, he receives in return a liquidity provider token, the so-called LP token. This token represents the user’s stake in the pool and can be used in other DeFi projects as a valuable asset. This, and some other financial mechanisms, have led to significant funds being accumulated in DeFi.

They allow holders to participate in the development of the project by voting. Each token is equal to one vote. Any token owner can make a proposal for any changes. If the required number of votes is received, the change is implemented. Governance based on voting of tokens is inherent in a new form of organization – DAO. This is a decentralized autonomous organization, a kind of analogue of a corporation, but created on the blockchain, decentralized and controlled by governance tokens.

ALL ALTCOINS

BITCOIN

The question may arise: why transfer cryptocurrency between different blockchains at all? Modern DeFi tools can offer various scenarios in which this could be interesting. For example, in a decentralized application (Dapp) running on another blockchain, you can get a favorable interest rate for storing an asset.

Since there are different blockchains with their own technical characteristics, the cryptocurrency of each of them is created according to certain standards. Therefore, it is impossible to directly transfer a coin or token from one blockchain to another; this will lead to the loss of the transferred funds. One solution that allows you to move assets between blockchains is the use of wrapped tokens.

To better understand how such a translation occurs, let’s look at a specific example. You need to transfer 1 BTC from the Bitcoin blockchain to a Dapp located on the Ethereum blockchain. By the way, Ethereum is currently the most developed ecosystem of DeFi applications.

The user needs to send 1 BTC to the Bitcoin address generated by the Dapp. At the same time, you need to indicate your address in the Ethereum blockchain. The sent 1BTC will be blocked at the specified Bitcoin address, and instead the user will receive 1 WBTC token – wrapped in BTC – to the Ethereum address. This is a token of the ERC-20 standard; it is this standard that all cryptocurrencies in the Ethereum blockchain comply with. The exchange rate for the tokens will be the same, 1 BTC = 1WBTC.

The mechanism of wrapped tokens significantly expands the scope of use of cryptocurrencies. Thanks to it, liquidity in various protocols and the speed of transactions increases, and transaction fees decrease. As of 05/03/2022, $10.65 billion worth of WBTC alone was blocked on the Ethereum network in various DeFi applications.