Unit 4

Cryptocurrency
Cryptocurrency is a form of digital or virtual currency that relies
on cryptography to secure transactions, regulate the creation of
new units, and verify the transfer of assets. It operates
independently of a central bank or government authority, utilizing
decentralized networks based on blockchain technology.

History of Cryptocurrency
Pre-Bitcoin Era: Before Bitcoin, there were multiple attempts to
create a form of digital currency, such as David Chaum's eCash in
the 1980s and Bit Gold, developed by Nick Szabo in the 1990s.
However, these early projects did not achieve widespread use due
to technical limitations and regulatory issues.
Bitcoin Creation (2008): In 2008, an anonymous person or
group under the pseudonym "Satoshi Nakamoto" published
the Bitcoin whitepaper, which introduced the concept of a
decentralized digital currency. Bitcoin's network launched
in 2009, marking the beginning of the modern
cryptocurrency era. This was the first practical
implementation of a blockchain as a public, distributed
ledger.

Altcoins and Ethereum (2011-2015): Following Bitcoin's

success, other cryptocurrencies emerged, known as altcoins,
with Litecoin being one of the earliest. In 2015, Ethereum
introduced a programmable blockchain, expanding
cryptocurrency’s use beyond simple transactions to enable
smart contracts and decentralized applications (DApps).
Distributed Ledger Technology (DLT)

A Distributed Ledger is a digital record of transactions that is

shared and replicated across multiple locations, often in a peer-to-
peer network. Unlike traditional databases managed by a central
authority, DLTs have no central point of control.
Features:

Blockchain: A blockchain is a type of DLT where transactions are

recorded in blocks and linked together in a chronological chain.
This structure makes it highly secure against tampering since
altering a single transaction would require altering all subsequent
blocks on the network.
Decentralization: Because a distributed ledger is
maintained across multiple nodes, there is no need for a
central authority, making it highly resilient and secure.

Immutability: Once recorded, transactions on the

blockchain are almost impossible to alter without majority
control of the network, a feat known as a 51% attack, which
is rare and costly in large networks.
 Bitcoin
Bitcoin operates on a Proof-of-Work (PoW) consensus mechanism, where
miners validate transactions and secure the network by solving complex
cryptographic puzzles.

Advantages:
Block Reward: Miners receive a fixed number of bitcoins as a reward for
mining a new block.
Transaction Fees: In addition to the block reward, miners collect
transaction fees from the transactions included in the block, which will
become more significant as the block reward continues to decrease.
Security and Hashing Power: As more miners join, the Bitcoin network
adjusts the mining difficulty to maintain a steady rate of block creation
(approximately one block every ten minutes). This increases the network's
security, making it resistant to attacks.
Mining Strategy:

Miners compete to solve mathematical puzzles, and the first

to solve it gets to add a new block to the blockchain. This
process requires substantial computational power, which
increases as the network grows.
Ethereum and Smart Contracts
Ethereum is a decentralized platform, launched in 2015,
that goes beyond simple digital currency transactions by
enabling the execution of smart contracts and decentralized
applications (DApps).

Smart Contracts: Smart contracts are self-executing

contracts with terms directly written into code. When
conditions are met, the contract executes automatically,
without the need for intermediaries.
Ethereum Virtual Machine (EVM): Ethereum operates on its
unique blockchain with an Ethereum Virtual Machine
(EVM), allowing developers to deploy and execute smart
contracts. This makes Ethereum programmable and highly
flexible for various applications, from finance to supply
chain management.

Proof-of-Stake Transition (Ethereum 2.0): Initially, Ethereum

also relied on Proof-of-Work, but as of 2022, it has begun
transitioning to Proof-of-Stake (PoS), where validators are
chosen based on the number of coins they hold and are
willing to “stake” as collateral. PoS is more energy-efficient
and scalable compared to PoW.
NFTs (Non-Fungible Tokens) and DeFi (Decentralized
Finance) are two innovative concepts in the blockchain
space. NFTs represent unique digital assets like art and
collectibles, focusing on ownership and provenance.
In contrast, DeFi aims to recreate traditional financial
services such as lending, borrowing, and trading using
decentralized technologies without intermediaries.
While both utilize blockchain, they serve different purposes
and cater to distinct markets, highlighting the versatility
and potential of this technology.
Cryptocurrencies represent a significant shift in finance and
technology, leveraging blockchain for secure, decentralized
transactions.
Bitcoin’s introduction of blockchain technology laid the
groundwork, and Ethereum expanded possibilities with
programmable smart contracts.
The ecosystem continues to evolve, with advancements in
scalability and efficiency aimed at mainstream adoption.
What is Blockchain Protocol?
Blockchain protocols are a set of protocols used to govern
the blockchain network.
The rules define the interface of the network, the
interaction between the computers, incentives, kind of data,
etc.
The principles are,
Security: Protocols maintain the security of the whole
crypto network. Since the network involves the transfer of
money so protocols define the structure of data and also
secure data from malicious users.
Decentralization: Blockchain is a decentralized network.
There is no involvement of any central authority. So the
protocols authorize the whole network.
Consistency: Whenever a transaction occurs, protocols
update the whole database at each step so that each user is
well-versed with the whole crypto network.
Scalability: Scalability means an increase in the number of
transactions. Earlier scalability was an issue in the
blockchain. But nowadays most protocols handle the issue
of an increasing number of transactions in the network and
the addition of nodes to the network.
Every transaction is verified by the developers and is stored
so that each individual can have access to the transaction
and protocols help to maintain this transparency.
Key Components of Blockchain
Protocols
Nodes: Individual computers or devices that participate in
the blockchain network.
Transactions: The basic units of data that represent the
transfer of assets or information on the blockchain.
Blocks: Blocks are containers that hold a set of transactions.
Consensus Mechanism: The protocol used to achieve
agreement among nodes on the validity of transactions.
Common mechanisms - Proof of Work (PoW) and Proof of
Stake (PoS).
Cryptography: Techniques used to secure data and
transactions on the blockchain. It provides data integrity,
confidentiality, and authentication.
Smart Contracts: Self-executing contracts with the terms of
the agreement directly written into code.
Protocols: A set of rules and standards that define how data
is transmitted and validated across the network. Govern
communication between nodes, transaction processing, and
consensus.
Ledger: A distributed database that records all transactions.
It ensures transparency and immutability, allowing anyone
to verify the history of transactions.
Network: The infrastructure that connects all nodes and
facilitates communication. It enables the transfer of data
and coordination among nodes, ensuring the blockchain
operates effectively.
 GHOST
"Greedy Heaviest-Observed Sub-Tree," is a protocol
designed to improve the performance of blockchain
networks by optimizing how new blocks are selected and
added.
It was introduced by Aviv Zohar and Yonatan Sompolinsky
as a way to address specific limitations within the Bitcoin
protocol, particularly around mining efficiency, block
propagation times, and the associated risk of centralization.
 Key Concepts of GHOST
• Block Orphans and Blockchain Efficiency
• Propagation Time and Block Size
• Centralization Risks
 By incorporating GHOST, Ethereum achieves several goals:
• Reduced Incentive for Mining Centralization
• Improved Block Time
• Enhanced Security