Cryptocurrencies – The least you need to know

Blockchain technology can be used in a variety of fields, including logistics, supply chain, IoT, and many others. However, no other industry, such as the financial sector, has gained more recognition and has a bigger number of uses than cryptocurrencies.

Bitcoin is a cryptocurrency and the first blockchain application. Blockchain was only employed in various applications following the broad adoption of cryptocurrencies. 

What is a cryptocurrency?

A cryptocurrency is a decentralized digital asset that uses hash encryption, asymmetric keys, and consensus processes to assure the security of financial transactions, information validity, and asset transfer verification. 

Transactions on the blockchain – cryptos

Each transaction is sent over the network and put into a block for validation.

To ensure legitimacy and accuracy, a transaction must be digitally signed using the original user’s private key. If there is a failure, the network discards the transaction.

In addition, if the double spend situation arises, only one of the network transactions is maintained. After a transaction is validated, it is incorporated into blocks that must be validated as well, eventually adding to the blockchain’s main chain, or the blockchain. 

Consensus Mechanism

The PoW consensus process determines a block’s identification (through hash) via computing work. In the case of Bitcoin’s PoW, a hash with a particular number of leading zeros must be found.

Ethereum employs the PoW process, however it does not require the sequence of leading zeros to be determined. In reality, Ethereum has been exploring ways to obtain agreement more quickly, which is why it has made a tweak to its validation system. 

For example, Buterin presents the Casper algorithm based on Proof-of-Stake (PoS), with implementation scheduled to occur between 2022/23 called Ethereum Serenity. This algorithm is actually a hybrid of PoS and PoW.

PoS consists of validating blocks, agreements and insertions, where any user with credit within the system can participate as a validator. The choice is made by lottery, and in this process the values that a user has influence their choice of block validator.

Block validation

The blocks are propagated over the user network and added to the blockchain when they have been validated, allowing it to grow in a consistent and decentralized manner. The information and valuables in the block can be redeemed by the person who receives the transaction once it is inserted into the blockchain.

This transaction creation procedure is depicted in the diagram until it is inserted onto the blockchain. Let’s say John, an Ethereum network user, produces a transaction, signs it, and sends it out to the network. This transaction will be added to a block that will need to be mined. 

Blockchain transaction life cycle

The network propagates this block, which is then added into the blockchain. The money will be deposited to the target user Maria’s account after confirmation of the block’s entry into the main chain. 

Block content

The transaction fields differ depending on the platform implementation project.

However, because the great majority of apps are based on the same technology, blockchain, there are some fundamental fields that are similar to all of them.

These are the following:

  • block id,
  • block hash,
  • transaction hash,
  • timestamp,
  • source address,
  • destination address,
  • miner’s value, and reward.

These domains enable the development of a more complete analytical model, which is applicable to blockchain-based financial systems. 

Juliana Mascarenhas
Juliana Mascarenhas

Cientista de dados e mestre em modelagem computacional pelo LNCC.