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Key Components of the Blockchain

State Management

Blockchains start off with a Genesis State when they launch. Bitcoin's genesis state happened in 2009 when the public network launched. Binance's Genesis State happened in 2017, when it launched.

Every transaction on a blockchain modifies the global state that is replicated across all nodes, the transactions are grouped together in blocks. These blocks are chained together in a cryptographically verifiable way so they are historically traceable

The current state of a network can be recalculated at any time by starting from the genesis block and transitioning the state according to each block's information up until now.

Nodes

A node is a computer that runs the blockchain software to validate and store the complete history of transactions on the network.

A blockchain network is managed autonomously through a peer-to-peer distributed network of computer nodes, you can simply think of each node in the network as keeping a copy of the global transaction ledger. The blockchain is a complex technological economic and social phenomenon it calls into question what might have seemed to be established parameters of the modern world like currency, economics, trust value and exchange.

Blockchain nodes are responsible for acting as a communication point that may perform different functions. Any computer or device that connects to the Bitcoin interface may be considered as a node in the sense that they communicate somehow with each other.

These nodes are also able to transmit information about transactions and blocks within the distributed network of computers by using the Bitcoin peer-to-peer protocol.

However, each computer node is defined according to its particular functions, so there are different types of Bitcoin nodes.

Full nodes are nodes that really support and provide security to Bitcoin, and they are indispensable to the network. These nodes may also be referred to as fully validating nodes as they engage in the process of verifying transactions and blocks against the system's consensus rules. Anyone is able to run a fully validating node.

Listening nodes (supernodes) communicates and provides information to any other node that decides to establish a connection with it. It's basically a redistribution point that may act both as a data source and as a communication bridge.

Miners' nodes mine Bitcoins. To become a mining node one has to invest in specialized mining hardware and programs.

A miner may choose to work alone (solo miner) or in groups (pool miner). Solo miners make use of their own copy of the blockchain, pool miners work together, each one contributing to his own computational resources (hash power).

Lightweight or Simplified Payment Verification (SPV) make use of the Bitcoin network but do not really act as a full node. SPV is the method through which a user can check whether some transactions were included or not in a block, without having to download the entire block data. Rely on the information provided by other full nodes (super nodes).

They do not contribute to the network's security because they do not keep a copy of the blockchain and do not participate in the process of verifying and validating transactions.

peer-to-peer (P2P)

In financial technology, the term peer-to-peer usually refers to the exchange of cryptocurrencies or digital assets via a distributed network.

A P2P platform allows buyers and sellers to execute trades without the need for intermediaries. In some cases, websites may also provide a P2P environment that connects lenders and borrowers.

P2P networks are at the core of most cryptocurrencies, making up a great portion of the blockchain industry. They are also leveraged in other distributed computing applications, including web search engines, streaming platforms, online marketplaces, and the Interplanetary File System (IPFS) web protocol.

Although the P2P architecture is inherently distributed, it's important to note that there are varying degrees of decentralization. So, not all P2P networks are decentralized.

Mining

Mining is the process in which cryptocurrency transactions between users are verified and added to the blockchain public ledger. The mining operations are also responsible for introducing new coins into the existing circulating supply.

All transactions are recorded in a peer-to-peer network without the need for a central authority. Any new transactions made are sent to a pool called a memory pool. The job of a miner is to verify the validity of these pending transactions and organize them into blocks.

A mining node is responsible for collecting unconfirmed transactions from the memory pool and assembling them into block. To do so, they need to find a solution for a complex mathematical problem. This requires a lot of computational resources, but every successfully mined block will give the miner a block reward, consisting of newly created cryptocurrencies plus transaction fees.

Blocks

The term block refers to computer files that store transaction data. These blocks are arranged in a linear sequence that forms an endless chain of blocks - hence, the term blockchain.

Blocks are made up of multiple elements. Bitcoin blocks contain (among other things) a list of recent transactions, a timestamp, and a reference to the block that came right before it.

All information about blockchain transactions is gathered and recorded inside these blocks, and every newly generated block is connected to the previous one through the use of cryptographic techniques.

Generation of a new block always includes the hash of the previous one, and this is what makes the blocks cryptographically linked. The block hash acts like an identifier. It is unique to each block and is produced through a process called mining.

Hash function

Hashing is the glue that holds blocks together. It consists of taking data of any size and passing it through a mathematical function to produce an output (a hash) that's always the same length.

The odds of you finding two pieces of data that give the exact same output are astronomically low. Any slight modification of our input data will give a totally different output.

Public/Private key

Public key which is a long random looking string of numbers is an address on the blockchain, value token sent across the network is recorded belonging to that address. The private key is like a password that gives its owner access to their digital asset or the means to otherwise interact with the corresponding data.

A public key is associated with the private key. So that anyone can make an encrypted transaction to the public address. The encrypted message can only be deciphered with the private key that correspond to that public key

Effective security only requires keeping the private key private and the public key can be openly distributed without compromising security.

Public, private & hybrid Blockchain

It isn't new that bitcoin laid the foundation for the blockchain industry to grow into what it is today. Ever since Bitcoin has started proving itself as a legitimate financial asset, innovators have been thinking about the potential of the underlying technology for other fields.

This has resulted in an exploration of blockchain for countless use cases outside of finance.

Bitcoin is what we call a public blockchain. This means that anyone can view the transactions on it, and all it takes to join is an Internet connection and the necessary software. Since there aren't any other requirements for participation, we may refer to this as a permissionless environment.

We often also use the term permissionless alongside public. No gatekeeper can stand in the way of participation, and anybody can engage with the consensus mechanism. As anybody is free to join and to be rewarded for their role in achieving consensus, we would expect to see a highly decentralized topology on a network established around a public chain.

As anyone can join the network, the protocol must incorporate certain mechanisms to prevent malicious actors from anonymously gaining an advantage.

Public blockchains tend to excel when it comes to censorship-resistance, at the cost of speed and throughput. These are best for greater security assurances on transaction settlements (or smart contracts).

The private blockchain establish rules regarding who can see and interact with the blockchain (they're permissioned environments)

These are not decentralized systems, as there is a clear hierarchy with regards to control. They are distributed, in that many nodes still maintain a copy of the chain on their machines.

Private chains are better suited to enterprise settings, where an organization wants to enjoy blockchain properties without making their network externally accessible.

Private blockchain prioritize the system's speed as it doesn't need to worry about central points of failure to the extent that public blockchains do. These are ideally deployed in situations where an individual or organization must remain in control, and information kept private.

The hybrid blockchain sits on the fence between public and private chains, combining elements from both. The most notable difference from either system can be observed at the consensus level.

Instead of an open system where anyone can validate blocks or a closed one where only a single entity appoints block producers, a private blockchain sees a handful of equally-powerful parties function as validators.

The rules of the system are flexible, the visibility of the chain can be limited to validators, viewable to authorized individuals, or by all. Provided the validators can reach consensus, changes can be easily rolled out. As to the functioning of the blockchain.

Hybrid blockchains are likely to appeal to organizations that want to streamline communication amongst one another.

hybrid blockchains mitigate some of the counterparty risks of a private chain (by removing centralized control), and a smaller node count generally allows them to perform much more effectively that a public chain.

Blockchain fork

As with any software, blockchains requires upgrades to fix issues, add new rules, or imporove on existing ones. Since most blockchain software is open-source, in theory, anyone can propose new updates to be added to the software that governs the network.

The blockchains are distributed networks. Once the software is upgraded, thousands of nodes scattered around the world need to be able to communicate and implement the new version. What happens if participants can't agree on what upgrade to implement? Typically, there isn't an organization with an established decision flow to decide. This leads us to soft and hard forks.

To understand how forks work, it's important to first understand the participants involved in the decision-making process (or governance) of the network. The developers, miners, and full node users are the parties that actually contribute to the network.

Soft forks

When there's a general agreement on how an upgrade should look like, the software is updated with a backward-compatible change, meaning that nodes that are updated can still interact with nodes that aren't. It's expected that nearly all nodes will upgrade over time. This is called a soft fork.

An example of a soft fork was the Segregated Witness (SegWit) fork, which occurred shortly after the Bitcoin/Bitcoin Cash split. SegWit was an update that changed the format of blocks and transactions, it was cleverly crafted. Old nodes could still validate blocks and transactions (the formatting didn't break the rules), but they just wouldn't understand them.

Hard forks

A hard fork is more complicated. Once implemented, the new rules will be incompatible with the old rules. So, if a node that's running the new rules tries to interact with a node that's running the old rules, they won't be able to communicate.

This results in the blockchain splitting into two - in one, the old software is running, in the other, the new rules are implemented. It's worth noting that at the time of the fork, the balances of the blockchain's native unit are cloned from the old network. So, if you had a balance on the old chain at the time of the fork, you'll also have a balance on the new one.

An example of a hard fork was the 2017 fork that saw Bitcoin fragmented into two separate chains – the original one, Bitcoin (BTC), and a new one, Bitcoin Cash (BCH). The fork occurred after a lot of arguing over the best approach to scaling. Bitcoin Cash proponents wanted to increase the block size, while Bitcoin proponents opposed the change.