01 - Intro to Blockchain & Smart Contracts

What is “blockchain”?

“Blockchain technology” is the buzzword in the business. You probably have heard about everything but the kitchen sink being put “on the blockchain.” Let’s review what a blockchain actually is.

A good starting point for understanding the structure of a blockchain is comparing it to a linked list, specifically a singly-linked list, which is probably the type of linked list with which you are most familiar.

Linked lists are composed of nodes that contain pointers to the next node in the list. In the context of cryptocurrency, a blockchain structure contains blocks which contain references to the previous block in the chain. It’s like a linked list, except instead of adding new nodes onto the end (furthest node) of the list, you add new blocks to the beginning (closest node).

A block on a blockchain represents a certain span of time, making a cryptocurrency’s blockchain a living structure of sorts, in that it is always being updated with the next timespan’s block. Bitcoin’s blocks represent a timespan of about 10 minutes, and Ethereum’s about 14 seconds. This timespan is called block time, and the data included in each block represents the activity that occurred during that time. This activity takes the form of a list of transactions, like:

From To Amount
Alice Bob $10
Charlie Dana $15
… … …

Everyone1 connected to a cryptocurrency’s network maintains a complete copy of that cryptocurrency’s blockchain. However, this means that whenever a change to the blockchain occurs (e.g. someone makes a transaction and wants to add it to a block), everyone needs to agree on whether that change is allowed, and once agreement has been reached, that change can be distributed to everyone.

Mining

The idea of “mining” cryptocurrency lends itself to some imaginative mental imagery of steampunk hackers delving into the depths of cyberspace to extract mysterious cryptographic treasures. While it’s a fun thought, the reality of mining is a lot more like balancing hundreds of millions of checkbooks at once than it is like chopping rocks with a digital pickaxe.

Cryptocurrency miners help secure the blockchain. They establish trust with the network, and then the network accepts blocks that the miners say are legitimate.

The problem of consensus

Since anyone is allowed to connect and propose new blocks to a cryptocurrency network, there has to be some way to ensure that only legitimate blocks (i.e. those containing legitimate transactions) are added to the chain and that illegitimate blocks are rejected from the chain. However, the network is made up of a whole bunch of strangers whose only common link is that they want to use the same cryptocurrency, and thus, they have little to no reason to trust each other to make the correct decision (as opposed to the decision that most benefits themselves).

One way to create a trust bond between strangers is for them to offer some sort of collateral to each other. For example, Alice could offer $100 collateral to the network as proof that she will be honest, and if she isn’t honest, the network has permission to appropriate that money.

This simple example is roughly similar to the category of consensus algorithms known as Proof-of-Stake (PoS). Nodes connected to the network will offer some of their crypto as stake, which will be forfeited if the node acts incorrectly.

Ethereum is switching to proof-of-stake as part of the Eth2 series of upgrades.2 Until that happens, Ethereum (and Bitcoin) both operate using a type of consensus called proof-of-work.

Proof-of-Work (PoW) is similar to PoS in that they both have the end goal of helping the network agree (reach consensus). However, in PoW, the “collateral” offered by a miner is not in terms of crypto, but in terms of computing power. A miner races against other miners to be the first to find the solution to a mathematical riddle. If they find the solution, they get to add a block to the chain. However, if they’re dishonest, they waste all of the computing power they invested into mining, which can be quite a lot.3 However, in exchange for their honesty, miners are rewarded with new coins generated every block.

Regardless of the consensus algorithm used, nodes are incentivized to participate because:

  • They get to help decide which transactions make it into the next block
  • They receive transaction fees
  • They receive a block reward

The block reward is a sum of cryptocurrency awarded to whoever successfully mines the next block on the blockchain. (This is where new coins come from.) The block reward comes from the block’s coinbase transaction, which is a transaction with a fixed value that a miner is allowed to generate in a mined block.

Smart Contracts

A regular Ethereum account simply consists of a keypair that can be identified with an address as the recipient of a transaction and thus has some balance of ETH associated with it. Normally these accounts are controlled by humans. However, Ethereum addresses can also point to smart contracts: little programs whose behavior is defined by on-chain logic. These little programs have the ability to send, store, and receive ETH tokens, perform computations, interact with other smart contracts, store data on the blockchain, etc.

Smart contract logic can be activated by sending them special transactions called message calls. These message calls are effectively like calling a function that operates on the saved state associated with the smart contract, and can include additional data for the contract (like parameters to a function call).

Ethereum’s smart contracts are quasi-Turing-complete.4 Their many use-cases include:

  • Decentralized finance (DeFi)
  • Non-fungible tokens (NFTs)
  • Auctions
  • Elections
  • Trading
  • Resource sharing
  • Donations
  • Multiparty decision making
  • etc.

These smart contracts have a couple of interesting properties that make them different from regular programs:

  • Smart contracts are stored on the blockchain. This means…
    • A contract’s instructions are public on the blockchain
    • A contract’s stored state is public on the blockchain
    • Even small amounts of storage can be very expensive
    • A contract cannot be changed once it is deployed (its state can be changed as the contract allows)
  • Smart contracts are executed in the context of the blockchain, and the results are stored on chain. This means…
    • The result of a computation must be deterministic (every node executing a contract must come up with the same answer). This means…
      • No network requests
      • No randomness
      • No asynchronicity
      • No node-specific logic (e.g. “What’s your timezone?”, “What’s your IP address?”, etc.)
    • A contract is executed by every node attempting to mine a block containing transactions to that contract
  • Message calls to a smart contract are transactions like account-to-account ETH transfers are transactions. This means…
    • The execution and state of a smart contract are secured the same as the transfer and balance of regular ETH accounts
    • The state of a smart contract deployed to Ethereum can update at most once every 14 seconds (on average)

This course primarily focuses on exploring, understanding, and building smart contracts in Ethereum’s smart contract language Solidity.

Notes

  • Blockchain as a “pimped-out” linked list structure
  • Blocks contain data representing activity that occurred during the block time
  • Hash functions are one-way and generate a unique fingerprint for data
  • Hash functions useful for crypto are also “avalanching” (a tiny change in the input completely changes the output)
  • Bitcoin uses Hashcash for mining, which uses $sha256 \circ sha256$ as its hash function5
  • Ethereum uses hashimoto for mining, which uses modified versions of $sha3\_256$ and $sha3\_512$6

  1. Well, not exactly everyone, but close enough for now ↩︎

  2. https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/ ↩︎

  3. https://www.independent.co.uk/climate-change/news/bitcoin-bad-environment-mining-cryptocurrency-b1846773.html ↩︎

  4. https://ethereum.github.io/yellowpaper/paper.pdf#section.9 ↩︎

  5. https://en.bitcoin.it/wiki/Proof_of_work ↩︎

  6. https://eth.wiki/concepts/ethash/ethash#mining ↩︎