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Brian Wu and Bridget Wu

Blockchain for Teens

With Case Studies and Examples of Blockchain
Across Various Industries
Brian Wu
Livingston, NJ, USA

Bridget Wu
Livingston, NJ, USA

ISBN 978-1-4842-8807-8 e-ISBN 978-1-4842-8808-5

https://doi.org/10.1007/978-1-4842-8808-5

© Brian Wu and Bridget Wu 2023

This work is subject to copyright. All rights are solely and exclusively
licensed by the Publisher, whether the whole or part of the material is
concerned, specifically the rights of translation, reprinting, reuse of
illustrations, recitation, broadcasting, reproduction on microfilms or in
any other physical way, and transmission or information storage and
retrieval, electronic adaptation, computer software, or by similar or
dissimilar methodology now known or hereafter developed.

The use of general descriptive names, registered names, trademarks,

service marks, etc. in this publication does not imply, even in the
absence of a specific statement, that such names are exempt from the
relevant protective laws and regulations and therefore free for general
use.

The publisher, the authors, and the editors are safe to assume that the
advice and information in this book are believed to be true and accurate
at the date of publication. Neither the publisher nor the authors or the
editors give a warranty, expressed or implied, with respect to the
material contained herein or for any errors or omissions that may have
been made. The publisher remains neutral with regard to jurisdictional
claims in published maps and institutional affiliations.
This Apress imprint is published by the registered company APress
Media, LLC, part of Springer Nature.
The registered company address is: 1 New York Plaza, New York, NY
10004, U.S.A.
Introduction
Blockchain for Teens is a beginner-friendly guide for young people
looking to build a basic foundation in blockchain technologies. Similar
to the Internet in the 1990s, blockchain now promises to revolutionize
the world by reforming current business models. In this new era,
economies will become decentralized—a concept where every
individual contributes to and benefits from the network. Blockchain’s
wide appeal comes from its ability to ensure transparent, secure, and
tamper-proof transactions without the need for a central authority.
With clear explanations covering essential topics, including blockchain,
cryptocurrency, cryptography, Dapps, smart contract, NFTs,
decentralized finance (DeFi), and the Metaverse, Blockchain for Teens
will help the reader develop various skills to get them started on their
Blockchain journey.
Chapter 1, “Blockchain: A Groundbreaking Technology,” will talk
about the basics of blockchain. First, we will discuss how the current
monetary system works and how blockchain technology impacts
money, business, and the modern world. Then we look into how a
blockchain works by going over each step in the transaction process
and the PoW and PoS consensus algorithms that form the backbone of
the blockchain. We continue with the evolution of monetary systems,
from barter to cryptocurrency. At the end of this chapter, we briefly
introduce cryptocurrency and some basic concepts of the crypto
market.
Chapter 2, “Cryptography: The Backbone of Blockchain Security,”
gives a more thorough understanding of cryptography. This chapter will
help enrich your knowledge of symmetric key cryptography and
asymmetric key cryptography. You will also learn how digital signatures
work. The chapter covers the hash algorithm, and we walk through
elliptic curve cryptography to understand how it works. At the end of
this chapter, you will learn how to generate an Ethereum address.
The main purpose of Chapter 3, “Bitcoin: The Future of Money,” is to
present a basic concept of the Bitcoin network. The chapter starts with
a discussion on the history of Bitcoin. Then we learn about the Bitcoin
wallet and Bitcoin network. Next, we also cover Bitcoin transactions to
familiarize you with the key concepts behind the Bitcoin blockchain.
Lastly, we briefly introduce Lighting Network.
Ethereum, the second-largest cryptocurrency after Bitcoin, is
considered a distributed Turing machine machine–you’ll learn more
about what this means in the book. In Chapter 4, “Ethereum: A Gateway
to Cryptocurrency,” you will learn about the history of Ethereum as well
as the key components behind Ethereum. The chapter also goes over
Ethereum nodes and Ethereum clients while providing examples. By
delving into the Ethereum architecture, you will understand how the
Ethereum Virtual Machine (EVM) works, how smart contract Opcode is
executed within the EVM, and the structure of the block, state, and
transactions in EVM.
The best way to understand how the Ethereum smart contract
works is to practice writing a smart contract and Dapps. Chapter 5,
“Smart Contracts and Dapps: From Theory to Practice,” will familiarize
you with smart contracts and Dapps through a hands-on learning
experience. You will write your first smart contract and deploy it to the
public Ethereum network. We also demonstrate the basics of Dapp and
web3.js and how Dapp interacts with smart contracts by connecting
with the Metamask wallet.
NFTs, or nonfungible tokens, represent the future of collectibles and
the expanding digital resource economy. NFTs will change not only art
but also business, finance, and culture as mainstream interest in NFTs
continues to grow. Chapter 6, “NFT: Crypto As Collectibles,” gives you a
general introduction to what NFTs are. Along the way, you will learn the
applications of NFTs, the difference between fungible and nonfungible
items, and the selling points of NFTs. We also provide examples of NFTs
and cover the current NFT marketplace. By the end of this chapter, you
will create your own NFT in the OpenSea market.
Although the Metaverse is still in its early stages, it is rapidly gaining
more attention in recent years. The Metaverse will be a 3D Internet that
is based on new technologies including virtual reality (VR), mixed
reality (MR), augmented reality (AR), blockchain, artificial intelligence
(AI), and the Internet of Things (IoT). Chapter 7, “Metaverse: The World
Reimagined,” will help you understand the basics of the Metaverse. We
will also discuss immersive technology. By exploring the different layers
of the Metaverse, we will learn about different products or services in
the Metaverse landscape, including NFTs and cryptos. By entering a
virtual blockchain world, you will experience the current stage of
virtual real estate in the Metaverse. At the end of this chapter, we
provide an overview of the future of the Metaverse.
Decentralized finance (DeFi) represents an innovative way to
reshape the global financial industry. Chapter 8, “Decentralized Finance
(DeFi): Reinventing Financial Services,” will introduce you to DeFi’s
core concepts and structure, as well as provide an in-depth look at
specific products in DeFi. We will discuss the most popular
decentralized stablecoin and deep dive into the Maker stablecoin to
understand how it works. Later, we also explore the most popular DEX
—Uniswap. Finally, we provide a complete walkthrough on how to
deploy your own ERC-20 token in the public blockchain, create a
liquidity pool, add liquidity, swap your custom token, and get a staking
reward in the Uniswap platform. In the decentralized lending and
borrowing platform, we demonstrate how to lend, withdraw, swap,
borrow, and repay crypto assets in the Aave platform. We also discuss
decentralized insurance.
At the end of the book, Chapter 9, “The Future of Blockchain,” we
will review topics from previous chapters in a discussion on the future
of blockchain. You will learn about the evolution of the Internet and
conclude with an overview of real-life examples of blockchain across
various industries.
It is assumed that you have little to no experience in a professional
blockchain environment. This book provides a general introduction to
critical aspects associated with blockchain. We will not provide too
many technical details, such as writing an advanced smart contract and
setting up a professional development environment. Instead, we will
give you practical information on the most important and latest
concepts within blockchain, which will give you a strong basis for
entering the world of blockchain.
Any source code or other supplementary material referenced by the
author in this book is available to readers on GitHub via the book’s
product page, located at www.apress.com/. For more detailed
information, please visit https://github.com/Apress/Blockchain-for-
Teens.
Acknowledgments
We thank everyone who made this book possible, including family and
friends who supported us, colleagues who encouraged us, and
reviewers and editors who polished our work.
Table of Contents
Chapter 1:​Blockchain:​A Groundbreaking Technology
What Is Blockchain?​
How the Blockchain Works
Block Header
Block Body
Consensus Algorithms
Proof of Work (PoW)
Proof of Stake (PoS)
The Evolution of Monetary System
A Barter System
Commodity Money
Paper Money
Plastic Money
Mobile Payments
Understanding Cryptocurrency
Cryptocurrency Market
What Is Crypto Volatility?​
Difference Between Coin and Token
Summary
Chapter 2:​Cryptography:​The Backbone of Blockchain Security
The Basics of Cryptography
Symmetric Key Cryptography
Asymmetric Key Cryptography
Summary
Chapter 3:​Bitcoin:​The Future of Money
 Bitcoin History
Early Attempts
The Financial Crisis of 2008
Getting to Know Bitcoin
Bitcoin Unit
Bitcoin Halving
Bitcoin Wallet
Bitcoin Network
Transactions
The Transaction Data Structure
Transaction Pool
Transaction Fees
Lighting Network
How Lightning Network Works
Summary
Chapter 4:​Ethereum:​A Gateway to Cryptocurrency
The History of Ethereum
Whitepaper Released (November 2013)
Yellow Paper Released (April 2014)
The Birth of Ethereum (July 2014)
Launching the Ether Sale (July–September 2014)
Ethereum Released (June 2015)
DAO Attack (July 2016)
Ethereum 2.​0 (The Merge)
Getting to Know Ethereum
Ether (Unit)
 Gas, Gas Price, and Gas Limit
Ethereum Account
Smart Contract
Ethereum Virtual Machine (EVM)
Ethereum Nodes
Ethereum Clients
Ethereum Network
How Ethereum Works
The Structure of a Transaction
Transaction Receipt
Block
Summary
Chapter 5:​Smart Contracts and Dapps:​From Theory to Practice
Introducing Remix
File Explorers
Solidity Compiler
Deploy and Run Transactions
Other Modules
Writing Your First Smart Contract
Write a Contract
Compile a Contract
Deploy and Run a Contract
Taking Control of Your First Ethereum Wallet
Decentralized Applications (Dapps)
Getting Started
Connect to Metamask
 Tokens Standard
ERC-20
ERC-721
Summary
Chapter 6:​NFT:​Crypto As Collectibles
What Is an NFT?​
Fungible vs.​Nonfungible
A Brief History of NFTs
Applications of NFTs
Images
Videos
GIFs
Audio
Digital Real Estate
Trading Cards
Video Game Items
Fashion
3D Models
Text
Domain Names
Examples of NFTs
Selling Points of NFTs
Scarcity
Authenticity
Easy to Use with Cryptocurrency
Ownership
 Permanence
Efficiency
Royalties
Cheap to Create
Creating Your Own NFT
NFT Market Place
OpenSea.​io
Rarible
SuperRare
Foundation
Nifty Gateway
Axie Marketplace
NBA Top Shot Marketplace
Mintable
Larva Labs/​CryptoPunks
The Future of NFT
Summary
Chapter 7:​Metaverse:​The World Reimagined
Introduction to Metaverse
What Is the Metaverse?​
The Brief History of Metaverse
Characteristics of the Metaverse
AR, VR, MR, and XR
Augmented Reality (AR)
Virtual Reality (VR)
Mixed Reality (MR)
 Extended Reality (XR)
Understanding Metaverse Layers
Experience
Discovery
Creator Economy
Spatial Computing
Decentralization​
Human Interface
Infrastructure
Crypto NFTs Games in the Metaverse
Business Model in the Game Industry
Example of Play-to-Earn NFT Games
Virtual Real Estate in the Metaverse
What Is Virtual Land?​
Decentraland (A Case Study)
The Future of the Metaverse
Metaverse Stages 1:​Emerging (2021–2030)
Metaverse Stages 2:​Advanced (2030–2050)
Metaverse Stages 3:​Mature (After 2050)
Summary
Chapter 8:​Decentralized Finance (DeFi):​Reinventing Financial
Services
What Is Decentralized Finance (DeFi)?​
The Structure of DeFi
Layer 1:​The Settlement Layer
Layer 2:​The Asset Layer
 Layer 3:​The Protocol Layer
Layer 4:​The Application Layer
Level 5:​The Aggregation Layer
Decentralized Stablecoin
Stablecoin History
Types of Stablecoins
A Deep Dive into Stablecoins—Maker (DAI)
Decentralized Exchanges (DEXs)
Type of Decentralized Exchanges
Automated Market Makers (AMMs)
AMM Basic Concepts
Decentralized Exchange Aggregators
A Deep Dive into the AMM DEXs—Uniswap
Decentralized Lending and Borrowing
An Overview of the DeFi Lending Platform—Aave
Decentralized Insurance
Popular DeFi Insurance Platform
Summary
Chapter 9:​The Future of Blockchain
The Evolution of the Internet
Web 1.​0 (1989–2004)—World Wide Web
Web 2.​0 (2004–Present)—Participative Social Web
Web 3.​0—Decentralization​
Blockchain in Finance
Letters of Credit in Trade Finance
Blockchain in a Supply Chain
 Document Management
Integration of Various Centralized IT Software Systems
Lack of Transparency Regarding Data
Blockchain in the Food Supply Chain Industry
Other Sectors of Supply Chain Industries
Blockchain in Healthcare
Health Data Accuracy
Health Data Interoperability​
Insurance Claims
Health Data Management
Disease Prevention
Summary
Index
About the Authors
Brian Wu
holds a master’s degree in computer
science and is an author and senior
blockchain architect. Brian has over 20
years of hands-on experience across
various technologies, including
blockchain, DeFi, big data, cloud, AI,
system, and infrastructure. He has
worked on more than 50 projects in his
career.
He has written several books,
published by O’Reilly and Packt, on
popular fields within blockchain,
including Learn Ethereum (first edition),
Hands-On Smart Contract Development
with Hyperledger Fabric V2, Hyperledger
Cookbook, Blockchain Quick Start Guide, Security Tokens and Stablecoins
Quick Start Guide, Blockchain By Example, and Seven NoSQL Databases
in a Week.

Bridget Wu
is a blockchain, AI, and Metaverse
enthusiast. She has had a passion to
explore NFTs and the Metaverse
beginning in 2020 and is also a
programmer and artist who enjoys
developing projects in her free time. She
has hands-on experience with HTML,
CSS, JavaScript, Java, Python, and writing
algorithms. Combined with over a
decade of practice in drawing, painting,
and digital art, her unique background in
machine learning and graphic design
makes her eager to pioneer the NFT, Metaverse.
About the Technical Reviewer
Imran Bashir
has an MSc in information security from
Royal Holloway, University of London. He
has a background in software
development, solution architecture,
infrastructure management, information
security, and IT service management. His
current focus is on the latest
technologies, such as blockchain, IoT,
and quantum computing. He is a
member of the Institute of Electrical and
Electronics Engineers (IEEE) and the
British Computer Society (BCS). He loves
to write. His book on blockchain
technology, Mastering Blockchain, is a
widely accepted standard text on the
subject. He is also the author of Blockchain Consensus, the first formal
book on the subject introducing classical, blockchain, and quantum
consensus protocols. He has worked in various senior technical roles
for different organizations around the world. Currently, he is living and
working in London, UK.
© The Author(s), under exclusive license to APress Media, LLC, part of Springer
Nature 2023
B. Wu, B. Wu, Blockchain for Teens
https://doi.org/10.1007/978-1-4842-8808-5_1

1. Blockchain: A Groundbreaking
Technology
Brian Wu1 and Bridget Wu1

(1) Livingston, NJ, USA

In recent years, there has been a rising number of Americans who own
cryptocurrency. Even among those who don’t, most Americans have heard of
cryptocurrencies—does “Bitcoin” sound familiar? If you have heard about
blockchain, but you are unsure of how it works, then do not worry; you are
not alone! Although blockchain may seem like an intimidating topic at first,
we are here to help you become familiar with important concepts of
blockchain.
This chapter will begin with the basics of blockchain. Then, we will
discuss how the blockchain works and gain a solid understanding of
consensus algorithms. Next, we will learn about the evolution of the
monetary system and how blockchain technology impacts money, business,
and the modern world. Finally, at the end of the chapter, we will provide an
overview of cryptocurrency.
In this chapter, we cover the following specific topics on blockchain:
What is blockchain?
How the blockchain works
Consensus algorithms
The evolution of monetary system
Understanding cryptocurrency

What Is Blockchain?
At the heart of all cryptocurrencies, we can find the revolutionary and
decentralized technology known as blockchain. It’s important to be clear
about what we mean by decentralization, as this concept is frequently used
in blockchain. Let’s start by looking at the opposite of decentralization:
centralization is when authority is held by a specific individual,
organization, or location.
Figure 1-1 shows an example of a centralized organization.

Figure 1-1 Centralization example

Think of a typical hierarchy within a company—the executives make all

the critical decisions. Then, executives pass decisions down to managers,
who are in charge of lower levels. They are expected to perform whatever
tasks are assigned to them by the executives. Going one step further, the
employees are expected to listen to their managers and complete assigned
work. While a centralized company can make achieving objectives relatively
quick and easy, employees often do not have visibility and communication
with other departments and higher levels. Lack of such communication can
cause issues and lead to failures, causing all levels to feel the consequences.
Often, a flaw in any part of the company can compromise the goals, which is
known as single point of failure.
Another example of centralization is online service providers, such as
Meta (Facebook), Amazon, Apple, and Google. These Internet services follow
a client-server architecture. The user uses a client machine (known as
remote processors—think web browser or mobile) to send remote requests
to a centralized server machine (known as a host system). The user receives
results for their service request from this single course of complex service
providers. On the bright side, billions of people use these superb digital
services for everyday tasks, such as online shopping, posting photos, and
calling family and friends, all without charge. But there is an overlooked cost
to these “free” services: these companies collect and store large amounts of
valuable data on user behavior in their centralized servers. With big data
analysis and machine learning algorithms, this user data is converted into a
product and sold to a third party. With this data, companies can target the
users in ads and services, increasing opportunities to be exposed to security
risks—this is all out of the user’s control.
Now that we have looked at centralization, we can explore
decentralization, which refers to the distribution of equal power from a top
authority or location to every unit. Unlike the previous examples we looked
at, decision making is not concentrated in a central authority or power in a
decentralized organization. Rather than collectively relying on one
authority, each member is independent and can decide on organizational
activity. With decentralization, all members are involved and working with
each other to reach a goal. Everyone can vote for decisions based on the
organization’s rules.

Figure 1-2 Decentralization example

 In contrast to the centralized online service providers, the decentralized
world offers users total control over their transactions and data. Every
member has equal power when making their decisions. The system will
receive the decisions sent from individual participants and utilizes
cryptographic consensus methods (we will take a look at this later) to make
a decision. There is no single authority to receive and respond to requests;
the system still functions even if some individuals do not participate in
decision making.
Table 1-1 provides a comparison of centralization and decentralization.
Table 1-1 Comparing centralization and decentralization

Centralization Decentralization
The blockchain network is peer-to-peer,
Single and each node possesses a complete
point Yes No copy of the blockchain data. Therefore,
failure when a failure occurs, data will never
be lost.
Who is in Centralized There is no centralized authority to
User
control? authority control the blockchain network.

Now we understand the difference between centralization and

decentralization. Still, what on earth is blockchain?
On an ancient island called Shell Island, people frequently traded with
each other to get the resources they needed or wanted. In the beginning, the
islanders trusted each other and only traded shells and food; this works well
for some time. After a while, the islanders traded more elaborate goods,
such as jewelry, clothes, and tools. As the trades became more frequent and
complex, it became harder to trace them. For example, someone trades with
20 people every day, but trades different items with each person. To address
this, the leaders of the island hired a trusted “middle man” to record all the
transactions to keep things fair and auditable; this also works well for some
time. However, the “middle man” started charging extra fees for his work
and even began to accept bribes. With much unfair trade happening,
corruption spread throughout the island, and no one trusts the “middle
man” anymore. Business slowed down as a result of fewer trades. To help
the people trade fairly again, the leaders of the island dismissed the “middle
man” and agreed to replace him with a more efficient solution. In the center
of the island is a giant rock, which could clearly be seen by everyone on the
island. The leaders propose that the islanders can permanently mark every
trade information sequentially on the rock after the traders complete and
prove the trade, which makes the system verifiable. This rock is accessible
to everyone, so anyone on the island can view and verify these transactions,
which means the system is transparent. If any records are mismatched, the
islanders can vote to verify the record, which gives everyone equal
participating power. The islanders also do not need to trust each other for
this system to work; they only need to visit the rock to look at the records
instead of relying on the “middle man,” which makes the system trustless.
The islanders agree to follow these rules that the leaders proposed, and
from then on, there was a happy ending for everyone, where fair trade was
possible for all.
Similar to the Shell Island trading system, blockchain is a decentralized
peer-to-peer network. In the blockchain network, participants can submit
and confirm transactions without a need for centralized authority. Once the
transaction data is saved in the network, it will be immutable, or unable to
be altered. Members or network nodes can directly interact with one
another on the network without a central authority or middleman to
interfere with the transaction process.
Blockchain is also called distributed ledger technology (DLT). DLT allows
all data to be shared across computer networks distributed across multiple
entities or locations, referred to as nodes. Each node keeps a copy of the
same data of the blockchain ledger.
Blockchain has the following key characteristics:
1. Decentralization
As we learned, blockchain decentralization means distributing the
central power to all participating users in the blockchain network,
which eliminates the single point of failure. It generally exists in a peer-
to-peer network.

2. Consensus protocol
Distributed consensus is a crucial component of any blockchain
network. All network participants must reach a common agreement to
add a transaction record to the blockchain. This will enable a blockchain
to present a single version of the transactions. There are many
consensus protocols, including:
Proof of Work (PoW)
Proof of Stake (PoS)
Practical Byzantine Fault Tolerance (PBFT)
Delegated Proof of Stake (DPoS)
 Proof of Elapsed Time (PoET)
Proof of Authority (PoA)
And more…

We will discuss some of these consensus protocols in a later section.

3. Immutability
Blockchain immutability means that once data has been recorded in
the blockchain, it is impossible to manipulate, alter, or delete data. The
blockchain data will stay there forever.

4. Transparency
All blockchain transactions are publicly viewable by any party or
individual, which creates transparency.

5. Security
Since blockchain’s immutability and decentralization features
eliminate the single point of failure, the records in the blockchain cannot
be tampered with. This makes blockchain data extremely secure. When
users transfer funds from blockchain wallets, they are cryptographically
signed by their wallet’s private key. We will explain this in Chapter 2.

Figure 1-3 shows blockchain key characteristics.

Figure 1-3 Blockchain key characteristics
Now that we have a fair understanding of the concept of blockchain,
we’re going to take a look at how blockchain works.

How the Blockchain Works

A blockchain is made up of an ordered chain of blocks. When a new block is
generated, it connects to the previous block through a hashing mechanism.
This way, the most recent data can be always added at the top of the chain.
Imagine there is a daily wall calendar that covers a full year. The
calendar initially starts on January 1. After the day is over, the owner of the
calendar flips to the next page, which will be January 2. Because the
numbers of the days follow a linear sequence, it is easy to tell if any page is
missing or modified.
Figure 1-4 Block diagram of blockchain
It is also important to know that a bit is a binary digit (either 0 or 1) and
is the smallest unit of data that is stored on a computer. 8 bits make 1 byte.
A hash is a unique identifier that uses a mathematical function to
generate a fixed-length character string from the input text or data records.
(We will explain the hash and encryption functions in more detail in Chapter
2.) The cryptographic hash function is designed to protect data against any
alterations.
The blockchain hashing algorithm SHA-256, or Secure Hashing
Algorithm 256, generates a hash code of size 256 bits or 32 bytes. SHA-256
is a one-way hash function, meaning that it is easy to compute but
impractical to reverse the hash to find what the initial input was. Even the
slightest change to the input message typically makes the output hash
completely different. To crack hash results, the best way is through a brute-
force strategy, which means to test every possible combination one by one.
The approach is to guess what was the original value being hashed by
applying the same hash function to see if the result matches. We need to
process 2256 variants of 256-bit string, which results in a total amount of 3.2
* 1079 possible combinations. The total calculation time would be more than
a billion years.
SHA-256 hash is also deterministic, meaning that given same input (or
file), the output will always deliver the same hash value.
Table 1-2 shows examples of SHA-256 hashing.
Table 1-2 SHA-256 hash examples
SHA-256 Output
(Input)
Hello 185f8db32271fe25f561a6fc938b2e264306ec304eda518007d1764826381969
hello 2cf24dba5fb0a30e26e83b2ac5b9e29e1b161e5c1fa7425e73043362938b9824
blockchain
ae398c6f1d78e76d472c26e091869b9913f7624abea82901c00893a0015ccd50
for teens
Blockchain
f067428fdeb5984a6eeff5dbbe39a60cdb9dbffecdb80f18830eeb1e91d3dde5
hash
You can see that the length of the input data does not affect output
length—the output will always be 64-character text. Because of this, it is
nearly impossible to guess the input from the output. Blockchain uses this
SHA-256 hash function to hash transaction data and ensure transactions
cannot easily be altered. If someone wanted to tamper with a transaction,
they would need to rehash it, which would completely change the output.
So, when we say a hash, we are referring to the 64-character text output of a
hashing algorithm.
The structure of each block is separated into a block header and body, as
shown in Figure 1-5.
Figure 1-5 Blockchain block structure

Block Header
The Block Header is made up of a few components of block version,
previous block hash, timestamp, nBits, nonce, and Merkle root:
Block version – The version number of the blockchain.
Previous block hash – The current block must refer to the previous
block hash, known as the parent block, to ensure the new block is added to
the chain in the correct order. It enables the user to know previous
transactions from the current block. By tracing back hashes that link each
block to its parent, we can traverse back to the first block, the genesis block.
Timestamp – The time and date when the block was added.
 nBits – The difficulty of current consensus algorithm that was used to
create this block. (We will cover this in the next section.)
Nonce – Known as number used once, a random value that a block
creator is allowed to change in order to produce a block hash which is less
than the target hash.
Merkle root – A Merkle tree is a hash-based data structure, also known
as Binary hash tree. A Merkle root is the root node of a Merkle tree.
In computer science, a tree is a data structure with a collection of nodes.
A tree has the following properties:
Each node has only one parent.
Each node can have up to two children.
The tree has one node without a parent called the root node (or root). The
tree starts from the root node.
Nodes are connected via an edge.
Each node has a data element inside.
Figure 1-6 is an example of binary tree. A, B, C, D, E, F, G, and H are all
nodes. A is the root node, and B and C are children of A; they are connected
by edge. E and F are children of B. G and H are children of C.

Figure 1-6 Tree data structure

Since a Merkle tree is classified as a binary hash tree, it will share the
same tree structure. Each leaf node is a hash of a block of data. Each node
contains blockchain transactions data, meaning that the children’s hash is
contained in the parent node.
In our previous tree example, the leaf nodes will be E, F, G, and H since
these nodes don’t have children. B, C, and A are parent nodes, A is the root
node.
If we assume node E has a transaction value, the block data is hashed
using hash function HASH (E), which will be similar for other leaf nodes:
HASH (E), HASH (F), HASH (G), HASH (H). When we reach the parent node,
each pair of child nodes is rehashed recursively (repeatedly, based on a rule)
until we reach the root node.
Parent node B is the hash of their child nodes E, F – HASH (HASH (E) +
HASH (F)).
Parent node C is the hash of their child nodes G, H – HASH (HASH (G) +
HASH (H)).
And root node A is the Merkle root; it contains the hash of the tree nodes
following it: HASH (HASH(B) + HASH (C)).
Figure 1-7 illustrates how to calculate the Merkle root hash value from
the leaf-node hashes up to the root.

Figure 1-7 Merkle tree hash calculation

Why we do need Merkle root hash?

In the earlier example, H (B) = H (E) + H(F).
 Assume E is 1, F is 2. We will use the SHA-256 hash function.
SHA-256(1) =
6b86b273ff34fce19d6b804eff5a3f5747ada4eaa22f1d49c01e52ddb7875b4
b
SHA-256(2) =
d4735e3a265e16eee03f59718b9b5d03019c07d8b6c51f90da3a666eec13a
b35
For simplicity, let’s concatenate(combine) both hash values together into
a long string (H (1) + H(2)), so we get the following value:
33b675636da5dcc86ec847b38c08fa49ff1cace9749931e0a5d4dfdbdedd
808a
But if we modify it by changing the order to concatenating (H(2) + H(1)),
we get
9704a05c9afffc927899ad21907866ec72b166fd58250b57bca6a184e462d5
54
You can see that even the slightest change will lead to completely
different results. Considering that each block data needs to include
transaction data, time stamps, and many other types of data, changing any
of these values will cause the Merkle root hash to be completely different. In
the earlier example, we can calculate the Merkle root hash as follows:
Merkle root hash = H (B) + H(C) = H (E) + H(F) + H (G) + H(H).
Root node hash represents the fingerprint for the entire node data. To
verify the node data’s integrity, you don’t need to download the data of the
entire block and transverse the entire Merkle tree; you just need to check
whether the data is consistent with the Merkle root hash. If a copy of the
block in the blockchain networks has the same hash value of Merkle root to
another, then the transactions in that block are the same. Through this way,
the transaction data can be proved very quickly.
In the blockchain, each block has a Merkle root stored in the block
header. The Merkle tree allows every node on the network to verify
individual transaction without having to download and validate the entire
block. If a copy of the block in the blockchain networks has the same Merkle
root as another, then the transactions in that block are the same. Even a bit
of incorrect data would lead to vastly different Merkle roots because of the
properties of the hash. Therefore, it is not necessary to verify the amount of
required information.
All blocks are connected through their previous block hash as a pointer
in the blockchain and form a block list. Since the block header contains the
Merkle root hash, we can verify whether the block header and transactions
data have been tampered with by executing the Hash operation. Any tiny
modification of transaction data will cause an entire chain change of all the
block hash pointers.
So now the blockchain is linked by a continuous sequence of blocks. It
will look like Figure 1-8.

Figure 1-8 The sequence of blocks with Merkle tree and previous block hash

Block Body
The block body consists of a transaction counter and transactions.

Transaction Counter
A transaction number represents the number of transactions that is stored
in the block. Transaction Counter is 1 to 9 bytes. It is typically used to
measure blockchain daily transaction count or “tps”—transactions per
second. The following diagram (from
https://studio.glassnode.com/) shows daily transaction counts
for Bitcoin:
Transactions
A transaction refers to a single logical group of actions that need to be
treated as a single action. The transaction request can be executed
successfully or fail. The process will ensure data integrity in the system. In a
blockchain, a transaction is a fundamental element to build block.
Transaction data can include the asset, price, timestamp, and user account
address.
Now that we have learned the components in a block structure, let’s take
a look at how blockchain process a transaction request submitted by a user.
Alice wants to send Bob five Bitcoins (BTC) to the blockchain network; in
order to join this network, Alice and Bob both need to have an account
address. When Alice sends five BTC to Bob, the transaction request will be
processed on a blockchain:
1. Alice sends five Bitcoin from her address to Bob’s Bitcoin address. A
transaction request was created and authenticated (signed by Alice
wallet’s private key).

2. A new block is created including this new transaction.

3. The new block is broadcast to every node in the network.

4. Each node verifies and approves new block transaction data. A node
that received the transaction will verify the transaction data using
blockchain consensus.
5. The new block is permanently added to the end of the existing
blockchain.

6. All nodes update and include this new block.

7. The transaction is now complete.

Figure 1-9 depicts each step in the transaction process.

Figure 1-9 Block transaction process

Consensus Algorithms
Consensus algorithms form the backbone of blockchain by helping all the
nodes in the network reach the necessary agreement on the global state in
the chain. The consensus validates transactions or data, then broadcasts it
across the network. All the other nodes will receive a copy of the data and
add it to the new block by verifying using the same rule.
These are some important properties of the distributed consensus
protocol:
Fault tolerance – Consensus protocol will ensure that the network
continues operating smoothly, regardless of any failures.
Unified agreement – Since blockchain is decentralized in nature, every
transaction data in the network needs to be validated and verified by the
consensus rule. Consensus protocol requires reaching a unified
agreement between network participants, ensuring that all processed
data is valid and that the distributed ledger is up-to-date. This way, the
network can be reliable and users can operate in a decentralized manner.
Ensure fairness and equity – The protocol will not perpetuate bias or
discrimination in a decentralized network. Anyone will be able to access
and join the network and attend consensus protocol, and each and every
vote will be equal.
Prevent double spending – Only publicly verified and validated
transactions can be added to the blockchain ledger. All nodes will agree
on a single source of truth. This guarantees the different nodes have the
same final result in the network.
Each consensus algorithm possesses different features and properties to
achieve the desired outcome. With the basics of blockchain consensus
properties we just covered, let’s dive deeper into popular blockchain
consensus algorithms in the current market.

Proof of Work (PoW)

Proof of work, also referred to as PoW, is one of the most common
consensus algorithms used by blockchain and cryptocurrencies such as
Bitcoin, Ethereum, Bitcoin Cash, ZCash, Litecoin, and others.
The concept was first published by Cynthia Dwork and Moni Naor in
1993. The term “Proof of Work” or POW was used by Markus Jakobsson and
Ari Juels in a 1999 paper. The first cryptocurrency, Bitcoin, was created by
Satoshi Nakamoto in 2008. It was the first time that proof of work protocols
were used as consensus in the blockchain.
Proof of work describes a mechanism where computers in the network,
called miners, race each other to be the first to solve complex math puzzles.
When miners solve this “puzzle,” they are allowed to add a new block to the
blockchain and receive rewards.
 In “How the Blockchain Works” section, we discussed that all blocks are
connected through a previous block hash to form a block list. The miner
needs to solve exceptionally difficult math problems to add a new block. To
find a solution, miners have to guess a random number (aka nonce) using
the brute-force approach till they find the solution. The nonce is a 32-bit (4-
byte) field. Each block hash value was generated by SHA-256 (previous
block hash), Merkel root, timestamp, nonce and the predefined value of the
difficulty target. The difficulty target is shown by the leading zeros before
the hash. More leading zeros before the hash value will make the whole
process take more time and resources to compute. With computers’ power
growing, miners can solve these puzzles faster, and so the difficulty target of
the blockchain will increase accordingly. Figure 1-10 describes how to
calculate a block hash in the proof of work.

Figure 1-10 Hash in proof of work

Here is an example of recent Bitcoin difficulty (there are 19 leading 0s):

0000000000000000000469f80aeb7bac1b440652a9ef729658c1010d2
3962a1cdi
It will take a powerful mining machine around ten minutes to mine each
Bitcoin block. A solo miner will be rewarded around 1 BTC after successful
mining.
As we learned before, SHA-256 hash function is a one-way function,
which means there is no way to revert to the original value. The fastest
solution that we know is brute force. Miners need to try different nonce
numbers to calculate hashes as fast as possible until they find a matching
hash.
Here is the process of proof of work:
1. New transactions are broadcasted to all nodes.

2. Each node collects the transactions into a candidate block.

3. Miner verifies the transactions and proposes a new block.

4. Miner competes to solve a difficult puzzle to find a solution of proof of

work for its block.

5. When a miner finds a solution, the PoW is solved and broadcast across
the block to all nodes.

6. Nodes verify that the transactions in the new block are valid and accept
adding the new block.

7. Miner gets the reward.

Figure 1-11 visualizes the process of proof of work:

Figure 1-11 The process of proof of work

Energy Consumption
In 2008, you could easily mine one Bitcoin using your personal machine.
Today, you’d need around 149.2PH/s to mine a Bitcoin. PH is one peta hash:
1 PH/s = 1,000,000,000,000,000 (one quadrillion) hashes per second
The process typically needs a room full of mining machines, which
usually cost thousands of dollars, specially designed to improve hash rate
ratings and optimize power consumption. A large amount of electricity is
required to operate these mining nodes continuously. In 2022, global Bitcoin
mining accounted for 0.12% (188 TW/h, Terawatt/hour) of the world’s
energy production—which exceeds the energy consumption of Norway.

The 51% Problem

To add a block to the network, proof of work requires enough computational
power to solve a puzzle. For a hacker to reverse a transaction’s hash, they
need to control at least 51% of the mining power (hash rate) processing
transactions on the blockchain. This is very costly, so it is impossible that a
network can be hacked by a person.
Table 1-3 shows the cost of PoW 51% attack for Bitcoin and Ethereum:
Table 1-3 Cost of PoW 51% attack

Name Hash rate 1 hour attack cost

Bitcoin 33,511 PH/s $583K
Ethereum 216 PH/s $364K

However, if a group of powerful miners collaborate with each other and

control this majority, they then ultimately can control the entire network
and decide which transactions can be added to network. This is known as a
51% attack.
Due to these disadvantages, many other new consensus mechanisms
have been proposed and implemented over these years. The most popular
one of these is proof of stake (PoS).

Proof of Stake (PoS)

Proof of work is a validation competition approach where miners verify
transactions and get rewards by solving cryptographic puzzles. The process
consumes lots of energy on proof-of-work computations. Miners exchange
energy for profit. Think of it like “one cpu, one vote.”
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