2. Fundamentals and Principles of Blockchains

2.1. Block Structure

Block Header:

• Block Hash: hash of the block

• Previous Block Hash: hash of the previous block

• Version: version of the block

• Merkle Root: hash of the merkle tree/tree of transactions

• Timestamp: time of block creation

• Nonce: random number used in mining

• Difficulty Target: mining difficulty in PoW-based consensus [Zheng et al., 2017]

Block Body:

• Transactions: list of transactions within the block

2.2. Structure of a Blockchain

2.3. Transactions

Basic elements of a transaction:

• Sender’s Address (public key)

• Receiver’s Address (public key)

• Amount

• Signature (transaction is signed by sender’s private key)

Transaction lifecycle: [Crypto.com, n.d.]

1. Transaction is created

2. Transaction is broadcasted to the network

3. Transaction is validated by nodes

4. Transaction is included in a block

5. Block is mined and added to the blockchain

2.4. Example Transaction

{
  "txid": "1eabcde1234567890abcdef1234567890abcdef1234567890abcdef1234567890",
  "version": 1,
  "locktime": 0,
  "vin": [
    {
      "txid": "abcdef1234567890abcdef1234567890abcdef1234567890abcdef1234567890",
      "vout": 0,
      "scriptSig": {
        "asm": "3045022100e3b0c44298fc1c149afbf4c8996fb92427ae41e4649b934ca495991b7852b855022100fb4b0a063b5f7f8a5c47b7e9e527e55e3e55ffb015e9078578b7d7c8f1fa3d4e",
        "hex": "483045022100e3b0c44298fc1c149afbf4c8996fb92427ae41e4649b934ca495991b7852b855022100fb4b0a063b5f7f8a5c47b7e9e527e55e3e55ffb015e9078578b7d7c8f1fa3d4e"
      },
      "sequence": 4294967295
    }
  ],
  "vout": [
    {
      "value": 0.50000000,
      "n": 0,
      "scriptPubKey": {
        "asm": "OP_DUP OP_HASH160 89abcdefabbaabbaabbaabbaabbaabbaabbaabbaabba OP_EQUALVERIFY OP_CHECKSIG",
        "hex": "76a91489abcdefabbaabbaabbaabbaabbaabbaabbaabba88ac",
        "reqSigs": 1,
        "type": "pubkeyhash",
        "addresses": [
          "1Ez69SnzzmePmZX3WpEzMKTrcBF2gpNQ55"
        ]
      }
    },
    {
      "value": 0.49900000,
      "n": 1,
      "scriptPubKey": {
        "asm": "OP_DUP OP_HASH160 89abcdefabbaabbaabbaabbaabbaabbaabbaabbaabba OP_EQUALVERIFY OP_CHECKSIG",
        "hex": "76a91489abcdefabbaabbaabbaabbaabbaabbaabbaabba88ac",
        "reqSigs": 1,
        "type": "pubkeyhash",
        "addresses": [
          "1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa"
        ]
      }
    }
  ]
}

1. Alice wants to send 0.5 BTC to Bob.

   • Inputs: Alice’s address, Bob’s address, amount (0.5 BTC), fee (0.001 BTC).

   • Outputs: Transaction outputs include the amount being sent to Bob and any change back to Alice.

   • Signature: Alice signs the transaction with her private key.

2. Transaction Broadcast:

   • Alice’s transaction is broadcast to the Bitcoin network.

3. Miners Validate:

   • Miners validate the transaction, checking Alice’s balance and the signature.

4. Inclusion in a Block:

   • Once validated, the transaction is included in the next mined block.

5. Confirmation:

   • Bob sees the transaction after it’s included in a block and has been confirmed by the network.

2.5. The role of nodes

Types of nodes:

• Full Nodes: store the entire blockchain, validate and relay transactions and blocks

• Light Nodes: store only block headers, rely on full nodes for transaction validation

• Mining Nodes: specialized full nodes that participate in the consensus mechanism

Node Functions:

• Maintaining Blockchain Copy: Every full node keeps a copy of the entire blockchain

• Validating Transactions: Ensure all transactions comply with network rules before adding them to a block

  • Double-spending: Ensure that the same funds are not spent twice

  • Transaction format: Check that the transaction is properly formatted

  • Transaction signature: Verify that the transaction is signed by the correct private key

  • Transaction validity: Ensure that the sender has enough funds to complete the transaction

  • Transaction history: Check that the transaction does not conflict with previous transactions

• Relaying Information: Propagate transactions and blocks throughout the network to ensure synchronization

2.6. Consensus Mechanisms

• Hard to achieve agreement in a decentralized network

• Ensure that all nodes agree on the state of the blockchain

• Prevent double-spending and other malicious activities

Types of Consensus Mechanisms:

• Proof of Work (PoW): Miners solve complex mathematical puzzles to validate transactions and create new blocks

• Proof of Stake (PoS): Validators are chosen based on the number of coins they hold

• Delegate Proof of Stake (DPoS): Validators are elected by coin holders to create new blocks

• Practical Byzantine Fault Tolerance (PBFT): Nodes reach consensus through a series of voting rounds

2.7. Proof of Work (PoW)

• random selection prone to attacks -> nodes should prove they did work required to propose a new block

• concept adapted from digital tokens by Hal Finney in 2004 through the idea of “reusable proof of work” using SHA-1 [RPOW - Reusable Proofs of Work, n.d.]

  • each node of the network is calculating a hash value of the block header

  • the first node to find a hash value below a certain threshold is allowed to propose a new block

  • when reaching the target value, it broadcasts the block to other nodes

  • all other nodes must mutually confirm the correctness of the hash value

  • if the hash value is correct, the block is added to the blockchain

2.8. Proof of Work (PoW) II

• in decentralized network, multiple blocks might be generated simultaneously -> blockchain branches

• longest chain rule: the chain with the most accumulated proof of work is considered the correct one

• PoW is energy-intensive and slow -> scalability issues

• PoW (or mining) is used in Bitcoin, Ethereum (until 2022), and other cryptocurrencies

• PoW in Bitcoin based on SHA-256 hash function

• Bitcoin adjusts the mining difficulty every 2016 blocks to maintain a 10-minute block time