Distributed Ledger Technology (DLT) : Blockchain
The story of blockchain is just beginning.
The word blockchain has become synonymous to the word bitcoin, both words are used interchangeably. There is a stark difference between the two. Blockchain is a distributed ledger made up of blocks. While bitcoin is a peer-to-peer network that runs on blockchain. In simple terms blockchain is a group of connected blocks, were a block is just a diary.
To fully understand what blockchain is, a deeper understanding of ledgers is required. A traditional ledger store transaction that are posted on it. Blockchain works in a similar manner but unlike conventional ledgers it is decentralised. There is no governing authority that owns or controls the ledger. All participants on the platform have equal power and can view everything. A third party is not required to verify the transactions.
Compared to conventional ledgers the difference between credit and debit is not zero. That amount is called the transaction fee. Usually, the fee is paid to crypto miners for their efforts. The longest chain is used as a proof of work by hashing. Hashing is the process of verifying a transaction using an algorithm and mathematical interventions. The longest block is broadcasted across all the nodes. To avoid double spend, all participants need to agree on the chain they received first.
Blockchain uses cryptography and the proof of work concept to avoid hacking. An asymmetric function is used for the encryption. The mathematical function has a special feature. The value it produces is in one direction and practically infeasible to invert. The cryptographic proof is used rather than trust, which involves competing to find solutions to a mathematical problem. It is this property that make blockchain immutable, sequential chain of records.
In this article blockchain is explored from two angles, the first point of view is that of a developer and followed by the that of an investor.
Understanding blockchain
In this section, an in-depth understanding of blockchain is explored. Blockchain is a technology to get a holistic view, interaction with it from a technical point of view is required.
Every block within the blockchain network has attributes that make it unique from the rest. A block is just an entry of transactions, a group of blocks can be connected to form a chain. The longest chain has the valid transactions. But for the chain to be valid and trusted a consensus needs to be reached among nodes. All the nodes or users need to agree on the validity of chain this is done by proof of work algorithm.
To demonstrate how blockchain works the Pybitcointools a python library is used. The library is used for bitcoin signatures and transactions.
The bitcoin library is import as shown below,
The encryption function SHA256 is used to generate a private key associated to a block,
The password to the private is in hexadecimal,
Hexadecimal is used frequently for blockchain. It is useful for encryption purposes.
The private has an associate address on the network, we can view by using the following function as shown in the screen print below,
The address has a different format to the private key but still uses hexadecimal.
The private key can be converted into a public one using the function displayed on the screen print,
The python library mimics how a blockchain network operates. There is addresses and keys associated to a block. The above screen prints show exactly that, a lot more can be done but for the purposes of this article only the keys are explored.
Application of Blockchain: Bitcoin & Ethereum
Cryptocurrencies are by far the most popular application of blockchain. In this section, the performance of cryptocurrencies is investigated. Bitcoin and Ethereum are studied, the two cryptocurrencies are popular among traders.
Bitcoin is a distributed, peer-to-peer system. There is no central server or point of control. Bitcoin are created through a process called mining. Bitcoin consists of a decentralized peer-to-peer network (the bitcoin protocol, a public transaction ledger (the blockchain), a set of rules for independent transaction validation and currency issuance (consensus rules) and a mechanism for reaching global decentralized consensus on the valid blockchain (Proof of Work algorithm).
Ethereum on the other hand it has many uses from being a coin to being used as a digital asset. Just like Bitcoin, Ethereum is a peer-to-peer system. Ethereum it is perhaps the most exciting cryptocurrency after Bitcoin. Other cryptocurrencies that are worth mention are Coinbase, Ripple and Dogecoin.
Market Performance.
Bitcoin was the best performing asset in 2020. Performed better than gold and other major commodities.
The market performance of Bitcoin, Ethereum and Gold are studied below. The graph below shows the stock price of Bitcoin for the year 2020. The cryptocurrency grew exponential in the latter part of the year.
For Ethereum there also an exponential growth in the latter part of the year 2020.
Things start to get interesting when we observe the gold price, gold had a troubling year in 2020 compared to the cryptocurrencies.
If we compare gold to Bitcoin in the same chart we see that Bitcoin out performed gold in every aspect from growth, to return on investment and market capitalisation.
Closing Thoughts
Cryptocurrencies are without a doubt revolutionary and disruptive in nature. A number of companies are investing in the blockchain technology. Every industry is looking into integrating blockchain into their business. They are using it to track inventory to reward programmes. The World Economic Forum estimates that blockchain will contribute more 10% to the world’s GDP in the next decade. Adoption across many industry is increasing rapidly.
The notebook I used to model the problem can be found on the following link,
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