Blockchain: Blueprint for a New Economy

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Acknowledgments

I would like to acknowledge Andreas M.

Antonopoulos, Trent McConaghy, Steve

Omohundro, Piotr Piasecki, Justin Sher,

Chris Tse, and Stephan Tual.

Chapter 1. Blockchain 1.0:

Currency

Technology Stack: Blockchain,

Protocol, Currency

Bitcoin terminology can be confusing

because the word Bitcoin is used to

simultaneously denote three different

things. First, Bitcoin refers to the

underlying blockchain technology

platform. Second, Bitcoin is used to

mean the protocol that runs over the

underlying blockchain technology to

describe how assets are transferred on

the blockchain. Third, Bitcoin denotes a

digital currency, Bitcoin, the first and

largest of the cryptocurrencies.

Table 1-1 demonstrates a helpful way to

distinguish the different uses. The first

layer is the underlying technology, the

blockchain. The blockchain is the

decentralized transparent ledger with the

transaction records—the database that is

shared by all network nodes, updated by

miners, monitored by everyone, and

owned and controlled by no one. It is

like a giant interactive spreadsheet that

everyone has access to and updates and

confirms that the digital transactions

transferring funds are unique.

The middle tier of the stack is the

protocol—the software system that

transfers the money over the blockchain

ledger. Then, the top layer is the

currency itself, Bitcoin, which is

denoted as BTC or Btc when traded in

transactions or exchanges. There are

hundreds of cryptocurrencies, of which

Bitcoin is the first and largest. Others

include Litecoin, Dogecoin, Ripple,

NXT, and Peercoin; the major alt-

currencies can be tracked at

http://coinmarketcap.com/.

Table 1-1. Layers in the technology

stack of the Bitcoin blockchain

Cryptocurrency: Bitcoin (BTC), Litecoin,

Dogecoin

Bitcoin protocol and client: Software

programs that conduct transactions

Bitcoin blockchain: Underlying

decentralized ledger

The key point is that these three layers

are the general structure of any modern

cryptocurrency: blockchain, protocol,

and currency. Each coin is typically both

a currency and a protocol, and it may

have its own blockchain or may run on

the Bitcoin blockchain. For example, the

Litecoin currency runs on the Litecoin

protocol, which runs on the Litecoin

blockchain. (Litecoin is very slightly

adapted from Bitcoin to improve on a

few features.) A separate blockchain

means that the coin has its own

decentralized ledger (in the same

structure and format as the Bitcoin

blockchain ledger). Other protocols,

such as Counterparty, have their own

currency (XCP) and run on the Bitcoin

blockchain (i.e., their transactions are

registered in the Bitcoin blockchain

ledger). A spreadsheet delineating some

of the kinds of differences between

Crypto 2.0 projects is maintained here:

http://bit.ly/crypto_2_0_comp.

The Double-Spend and

Byzantine Generals’

Computing Problems

Even without considering the many

possible uses of Bitcoin and blockchain

technology, Bitcoin, at its most

fundamental level, is a core

breakthrough in computer science, one

that builds on 20 years of research into

cryptographic currency, and 40 years of

research in cryptography, by thousands

of researchers around the world. 13

Bitcoin is a solution to a long-standing

issue with digital cash: the double-

spend problem. Until blockchain

cryptography, digital cash was, like any

other digital asset, infinitely copiable

(like our ability to save an email

attachment any number of times), and

there was no way to confirm that a

certain batch of digital cash had not

already been spent without a central

intermediary. There had to be a trusted

third party (whether a bank or a

quasibank like PayPal) in transactions,

which kept a ledger confirming that each

portion of digital cash was spent only

once; this is the double-spend problem.

A related computing challenge is the

Byzantine Generals’ Problem, connoting

the difficulty of multiple parties

(generals) on the battlefield not trusting

each other but needing to have some sort

of coordinated communication

mechanism. 14

The blockchain solves the double-spend

problem by combining BitTorrent peer-

to-peer file-sharing technology with