This book covers blockchain from the underlying principles to how it enables applications to survive and surf on its shoulder. Having covered the fundamentals of blockchain, the book turns to cryptocurrency. It thoroughly examines Bitcoin before presenting six other major currencies in a rounded discussion. The book then bridges between technology and finance, concentrating on how blockchain-based applications, including cryptocurrencies, have pushed hard against mainstream industries in a bid to cement their positions permanent. It discusses blockchain as underlying banking technology, crypto mining and offering, cryptocurrency as investment instruments, crypto regulations, and markets.
Contents
List of Figures...............................................................................................xix
List of Tables................................................................................................xxv
Section I □BLOCKCHAIN AND BIT COIN
1 Introduction to Blockchain.....................................................................3
1.1 The Birth of Bitcoin............................................................................3
1.1.1 A Mysterious Scientist............................................................4
1.1.2 What is Bitcoin?.....................................................................4
1.1.3 Double-Spending Problem.....................................................5
1.1.4 Nakamotos Solution..............................................................6
1.2 Blockchain..........................................................................................7
1.2.1 Motivation.............................................................................7
1.2.2 Definition of Blockchain........................................................8
1.2.3 Distributed Ledger.................................................................8
1.2.4 Key Properties........................................................................9
1.3 Architectural Overview....................................................................10
1.3.1 Centralised vs Decentralised Architecture...........................10
1.3.2 Peer-to-Peer Network...........................................................11
1.3.3 Characteristics.....................................................................13
1.4 Block................................................................................................14
1.4.1 Structure..............................................................................14
1.4.2 Block Identifier and Height..................................................15
1.4.3 Genesis Block.......................................................................16
1.5 Mining.............................................................................................16
1.5.1 What is Mining?..................................................................16
1.5.2 Consensus............................................................................16
1.5.3 Incentivisation.....................................................................17
1.6 Forks................................................................................................17
1.6.1 When Does a Fork Occur?...................................................17
1.6.2 Types of Forks......................................................................18
1.7 Consensus Mechanisms....................................................................18
1.7.1 Proof of Work (PoW)...........................................................18
1.7.2 Alternative Consensus Algorithms.......................................19
1.7.3 Comparison.........................................................................20
1.8 Types of Blockchains........................................................................21
1.8.1 Public and Private Blockchains............................................21
1.8.2 Consortium, Shared Ledger, Sidechain................................21
1.8.3 Hybrid Blockchains.............................................................22
1.8.4 Comparison.........................................................................22
1.9 Applications......................................................................................23
1.10 Revisiting the Double-Spending Problem.........................................26
1.11 Summary..........................................................................................26
2 Immutability of Blockchain..................................................................27
2.1 Cryptography...................................................................................27
2.1.1 What is Cryptography and Cryptanalysis?...........................28
2.1.2 Background.........................................................................28
2.1.3 Basic Concepts.....................................................................29
2.2 Modern Cryptography......................................................................30
2.2.1 Symmetric-Key Cryptography.............................................31
2.2.2 Public-Key Cryptography....................................................33
2.3 Cryptographic Applications..............................................................36
2.3.1 TLS and SSL........................................................................36
2.3.2 Cryptographic Hash Function.............................................37
2.3.3 Digital Signature..................................................................38
2.4 Elliptic Curve Cryptography (ECC).................................................41
2.4.1 Basic Concept......................................................................41
2.4.2 Public and Private Keys....................................................... 42
2.4.3 How Does ECC Compare to RSA?......................................43
2.5 Making Blockchain Immutable....................................................... 44
2.5.1 Block and Block Header..................................................... 44
2.5.2 Timestamp.......................................................................... 44
2.5.3 Merkle Tree.........................................................................45
2.5.4 Building the Chain..............................................................45
2.6 Summary..........................................................................................48
3 Consensus Mechanisms of Blockchain..................................................49
3.1 Distributed Systems and Consensus.................................................49
3.1.1 Distributed Systems.............................................................50
3.1.2 Coordination and Agreement..............................................50
3.1.3 Consensus............................................................................51
3.2 Byzantine Generals Problem.............................................................52
3.2.1 Two Generals Paradox..........................................................52
3.2.2 Byzantine Generals Problem................................................53
3.2.3 Byzantine Fault Tolerance....................................................55
3.3 Blockchain’s Consensus Mechanism.................................................56
3.3.1 Hashcash Proof of Work......................................................56
3.3.2 Proof of Work in Blockchain...............................................57
3.3.3 BFT in Blockchain...............................................................58
3.4 Solving the Double-Spending Problem.............................................59
3.5 Summary..........................................................................................60
4 Bitcoin: World’s First Cryptocurrency..................................................61
4.1 What is Bitcoin?...............................................................................61
4.2 Brief History of Bitcoin....................................................................63
4.2.1 Before Bitcoin......................................................................63
4.2.2 Bitcoin Era.......................................................................... 64
4.3 Token: BTC.................................................................................... 64
4.3.1 Bitcoin Mining and Supply..................................................65
4.3.2 Units of Bitcoin................................................................... 66
4.4 Bitcoin’s Blockchain........................................................................ 66
4.4.1 Block Header.......................................................................67
4.4.2 Timestamp...........................................................................67
4.4.3 Merkle Tree.........................................................................67
4.4.4 Hash Generation..................................................................68
4.4.5 Genesis Block.......................................................................68
4.5 Bitcoin Address.................................................................................69
4.5.1 Formats................................................................................71
4.5.2 Hash Generation..................................................................72
4.5.3 Address Structure.................................................................72
4.6 Transactions.....................................................................................73
4.6.1 Input and Output................................................................74
4.6.2 Redeeming Tokens.............................................................. 77
4.6.3 Multi-Signature...................................................................78
4.6.3.1 Escrow..................................................................78
4.6.3.2 Cold Storage.........................................................78
4.6.4 Generation Transaction.......................................................79
4.6.5 Storing Data........................................................................79
4.6.6 Contracts.............................................................................79
4.7 Mining.............................................................................................80
4.7.1 Method................................................................................80
4.7.2 Proof of Work......................................................................82
4.7.3 Target and Difficulty...........................................................83
4.7.4 Mining Process................................................................... 84
4.8 Split Coins and Altcoins...................................................................85
4.8.1 Split Coins...........................................................................85
4.8.1.1 Bitcoin Cash.........................................................85
4.8.1.2 Bitcoin Gold.........................................................85
4.8.1.3 Bitcoin Private.......................................................86
4.8.2 Altcoins................................................................................86
4.8.2.1 Namecoin.............................................................87
4.8.2.2 Litecoin.................................................................87
4.8.2.3 Peercoin................................................................88
4.8.2.4 Nxt........................................................................88
4.8.2.5 Dash.....................................................................88
4.9 Summary..........................................................................................89
Section II □SMART CONT RACTS
5 Ethereum and Smart Contracts.............................................................93
5.1 Introduction to Smart Contracts......................................................93
5.1.1 Vending Machine Analogy..................................................94
5.1.2 Nick Szabo and Bit Gold.....................................................95
5.1.3 Turing-Completeness...........................................................96
5.2 What is Ethereum?...........................................................................96
5.3 Token: ETH.....................................................................................97
5.3.1 Pre-Mining..........................................................................97
5.3.2 Price.....................................................................................98
5.3.3 Units....................................................................................98
5.4 Architecture......................................................................................99
5.4.1 Ethereum Virtual Machine (EVM).....................................99
5.4.2 Account.............................................................................100
5.4.3 Address..............................................................................101
5.4.4 Mist...................................................................................101
5.5 Mining...........................................................................................102
5.5.1 Mining Process..................................................................102
5.5.2 Block-Generation Rate.......................................................103
5.5.3 Rewards.............................................................................103
5.6 Smart Contracts in Ethereum.........................................................103
5.6.1 Transactions.......................................................................103
5.6.2 Gas....................................................................................104
5.6.3 High-Level Languages.......................................................104
5.7 ERC Standards...............................................................................105
5.7.1 ERC-20..............................................................................105
5.7.2 ERC-223............................................................................106
5.7.3 ERC-721............................................................................106
5.7.4 Other Standards................................................................107
5.8 Comparison to Bitcoin...................................................................107
5.9 Summary........................................................................................107
6 NEO ..................................................................................................109
6.1 What is NEO?................................................................................109
6.2 Token: NEO and GAS................................................................... 110
6.2.1 Token Generation.............................................................. 110
6.2.2 Token Distribution............................................................ 111
6.3 Architecture.................................................................................... 111
6.3.1 Basic Structure................................................................... 111
6.3.2 Advanced Features............................................................. 111
6.4 Consensus Mechanism: dBFT........................................................112
6.4.1 Algorithm..........................................................................112
6.4.2 Procedure...........................................................................113
6.4.3 Transaction Validation.......................................................113
6.4.4 View Change..................................................................... 114
6.4.5 Fault Tolerance and Transaction Time............................... 114
6.5 Smart Contracts............................................................................. 114
6.6 Summary........................................................................................ 116
7 EOS ..................................................................................................117
7.1 What is EOS?................................................................................. 117
7.2 Token: EOS.................................................................................... 118
7.2.1 Initial Coin Offering.......................................................... 118
7.2.2 Transaction Fees................................................................ 119
7.2.3 Inflation............................................................................. 119
7.3 Architecture.................................................................................... 119
7.4 Consensus Mechanism: DPoS........................................................120
7.4.1 Algorithm..........................................................................120
7.4.2 Procedure...........................................................................121
7.4.3 Reward..............................................................................122
7.5 Smart Contracts.............................................................................122
7.6 EOS.IO Operating System.............................................................123
7.6.1 Schema-Defined Actions and Database..............................123
7.6.2 Separation of Authentication from Applications................124
7.6.3 Inter-Blockchain Communication.....................................124
7.7 Summary........................................................................................124
Section III □FINANCIAL NET WORKS
8 Ripple ..................................................................................................127
8.1 What is Ripple?..............................................................................127
8.2 Token: XRP....................................................................................128
8.2.1 Token Generation and Distribution...................................128
8.2.2 Bridge Currency.................................................................129
8.2.3 Market Capitalisation........................................................129
8.3 Architecture....................................................................................129
8.3.1 Hawala...............................................................................130
8.3.2 XRP Ledger.......................................................................131
8.3.3 Transactions.......................................................................132
8.4 Consensus Mechanism: RPCA.......................................................133
8.4.1 Components......................................................................133
8.4.2 Consensus Process.............................................................134
8.4.3 Correctness........................................................................135
8.5 Codius and Interledger...................................................................136
8.6 Real-Time Gross Settlement System...............................................136
8.6.1 RippleNet..........................................................................137
8.6.2 xCurrent............................................................................138
8.6.3 xRapid...............................................................................139
8.6.4 xVia....................................................................................139
8.7 Partners..........................................................................................139
8.8 Summary........................................................................................141
9 Stellar ..................................................................................................143
9.1 What Is Stellar?..............................................................................143
9.2 Token: Lumens (XLM)..................................................................144
9.2.1 Generation and Distribution..............................................144
9.2.2 Price and Market Cap........................................................145
9.2.3 Role of XLM in the Protocol.............................................145
9.3 Architecture....................................................................................146
9.4 Consensus Mechanism...................................................................146
9.4.1 Quorum and Slices............................................................146
9.4.2 Agreement..........................................................................148
9.5 Applications....................................................................................148
9.5.1 Anchors..............................................................................148
9.5.2 Distributed Exchange........................................................149
9.5.3 Multi-Currency Transactions.............................................149
9.6 Partners.......................................................................................... 153
9.7 Summary........................................................................................ 153
Section IV ADVANCED LEDGERS AND APPLICATION S
10 Purpose-Built Distributed Ledgers.....................................................157
10.1 Purpose-Built Ledgers and Blockchains.......................................... 157
10.2 Internet of Things: IOTA............................................................... 159
10.2.1 Overview........................................................................... 159
10.2.2 Technical Details............................................................... 159
10.2.3 Applications....................................................................... 161
10.2.4 Alternatives: IBM Watson and Waltonchain...................... 161
10.3 Supply Chain: OriginTrail..............................................................162
10.3.1 Overview...........................................................................162
10.3.2 Technical Details...............................................................163
10.3.3 Applications.......................................................................163
10.3.4 Alternatives: VeChain and OpenChain..............................163
10.4 Connectivity: Moeco......................................................................164
10.4.1 Overview...........................................................................164
10.4.2 Technical Details...............................................................164
10.4.3 Applications.......................................................................166
10.5 Cybersecurity: Naoris.....................................................................166
10.5.1 Overview...........................................................................166
10.5.2 Technical Details...............................................................167
10.5.3 Applications.......................................................................168
10.6 Private Network: HydraChain........................................................168
10.6.1 Overview...........................................................................168
10.6.2 Technical Details...............................................................168
10.6.3 Applications.......................................................................170
10.7 Framework: Hyperledger................................................................170
10.7.1 Overview...........................................................................170
10.7.2 Technical Details...............................................................171
10.7.3 Application........................................................................173
10.8 Emerging Distributed Ledgers........................................................173
10.8.1 Medical Services: MediChain and MediLedger.................173
10.8.2 Drug Development: BlockPhrama..................................... 174
10.8.3 Quality Assurance: Ambrosus............................................ 174
10.8.4 Sharing Economy: Slock.it................................................. 174
10.8.5 Genomic Data Collection: Nebula Genomics.................... 174
10.9 Summary........................................................................................175
11 Applications of Blockchain.................................................................177
11.1 Hype or Hope?...............................................................................177
11.2 Classification..................................................................................180
11.2.1 Classifying the Domains....................................................181
11.2.2 Classifying the Categories..................................................181
11.3 Citizen Services..............................................................................182
11.3.1 e-Governance.....................................................................182
11.3.2 Healthcare.........................................................................183
11.3.3 Education..........................................................................185
11.4 Business and Financial Services......................................................186
11.4.1 Financial Services...............................................................186
11.4.2 Smart Property..................................................................187
11.4.3 Exchange and Trading.......................................................187
11.5 Online Marketplace........................................................................187
11.5.1 e-Commerce......................................................................188
11.5.2 Online Betting, Gambling and Gaming............................189
11.5.3 e-Auctions and Online Bidding.........................................189
11.6 Supply Chain, Production and Provenance..................................... 191
11.6.1 Commercial Supply Chain................................................. 191
11.6.2 Food Production................................................................ 191
11.6.3 Drug Manufacturing.........................................................192
11.7 Safety and Security.........................................................................193
11.7.1 Cybersecurity.....................................................................193
11.7.2 Physical Safety, Security and Tracking...............................194
11.8 Smart City......................................................................................195
11.8.1 Smart Home......................................................................195
11.8.2 Smart Transportation.........................................................196
11.8.3 Smart Grid.........................................................................196
11.8.4 Citizen Engagement...........................................................197
11.8.5 Quality Control.................................................................197
11.9 Summary........................................................................................198
Section V CRYPTO CURREN CY
12 Evolution of Money: From Barter to Bitcoin.......................................201
12.1 Money............................................................................................201
12.1.1 Functions of Money...........................................................202
12.1.2 Properties...........................................................................202
12.1.3 Money Supply....................................................................203
12.1.4 Central Bank.................................................................... 204
12.2 Origin and Early Forms................................................................. 204
12.2.1 Barter: The Origin of Money?........................................... 204
12.2.2 Commodity and Representative Money............................ 206
12.2.3 Coinage.............................................................................207
12.2.4 Banknotes..........................................................................209
12.3 Fiat Money.....................................................................................212
12.3.1 Gold Standard...................................................................212
12.3.2 US Dollar Standard...........................................................212
12.3.3 Nixon Shock and Creation of Fiat Money..........................213
12.4 Digital Money................................................................................213
12.4.1 Centralised Digital Money.................................................213
12.4.2 Decentralised Digital Money.............................................214
12.5 Cryptocurrency.............................................................................. 215
12.6 Summary........................................................................................217
13 Cryptocurrency Mining......................................................................219
13.1 Mining........................................................................................... 219
13.1.1 Evolution of Mining......................................................... 220
13.1.2 Mining Process................................................................. 220
13.1.3 Difficulty...........................................................................221
13.1.4 Rewards.............................................................................221
13.2 Hash Rate.......................................................................................221
13.2.1 Understanding Hash Rate..................................................221
13.2.2 Calculating Hash Rate...................................................... 222
13.2.3 Hash Rate and Profits....................................................... 222
13.3 Mining Hardware.......................................................................... 222
13.3.1 Non-Specialised Hardware............................................... 222
13.3.2 Specialised Hardware (ASICs)...........................................224
13.3.3 Profitability Factors............................................................225
13.4 Pooled Mining................................................................................225
13.4.1 Pooled Mining Basics.........................................................225
13.4.2 Mining Pools.................................................................... 226
13.4.3 Reward Sharing................................................................ 228
13.5 Mining Nations............................................................................. 228
13.6 Criticism of PoW Mining...............................................................229
13.7 Summary........................................................................................231
14 Cryptocurrency Wallet........................................................................233
14.1 Wallet.............................................................................................233
14.1.1 Private Key and Address.................................................... 234
14.1.2 Transferring Funds........................................................... 234
14.2 Types of Wallets.............................................................................235
14.2.1 Web Wallet........................................................................236
14.2.2 Software Wallet.................................................................236
14.2.3 External Storage Media......................................................238
14.2.4 Paper Wallet.......................................................................238
14.2.5 Hardware Wallet................................................................239
14.2.6 Brain Wallet.......................................................................240
14.3 Special Wallets...............................................................................241
14.3.1 Multi-Signature Wallet......................................................241
14.3.2 Cold-Storage Wallet...........................................................241
14.3.3 Receive-Only Wallet..........................................................242
14.4 Deterministic Wallet......................................................................242
14.4.1 Type-1 Wallet....................................................................242
14.4.2 Type-2 Wallet....................................................................243
14.4.3 HD Wallet........................................................................ 244
14.5 Wallet Providers............................................................................ 246
14.6 Summary........................................................................................247
15 Cryptocurrency Trading and Investment............................................249
15.1 Investment......................................................................................249
15.1.1 Financial Instruments........................................................250
15.1.2 Commodities.....................................................................251
15.1.3 Currencies..........................................................................251
15.1.4 Derivatives.........................................................................252
15.1.5 Status of Cryptocurrency...................................................253
15.2 Portfolio.........................................................................................253
15.2.1 Funds.................................................................................253
15.2.2 Indices...............................................................................254
15.2.3 ETFs..................................................................................256
15.3 Exchanges and Platforms................................................................257
15.3.1 Cryptocurrency Trading Exchange....................................258
15.3.2 Derivative Trading Exchanges...........................................259
15.3.3 Investment Platforms........................................................ 260
15.4 Investment Strategy........................................................................261
15.4.1 Day Trading.......................................................................261
15.4.2 Buy and Hold....................................................................262
15.4.3 Value Investment...............................................................262
15.5 Investing in Cryptocurrencies.........................................................262
15.5.1 Self-Investment..................................................................263
15.5.2 Guided Investment........................................................... 264
15.6 Regulation and Tax Affairs.............................................................265
15.7 Summary....................................................................................... 266
16 Initial Coin Offerings (ICOs)..............................................................267
16.1 Overview........................................................................................267
16.1.1 The Creation of ICOs....................................................... 268
16.1.2 How Do ICOs Work?........................................................269
16.2 Token Creation...............................................................................269
16.2.1 Token.................................................................................269
16.2.2 Platforms............................................................................270
16.3 Understanding ICOs......................................................................271
16.3.1 ICOs vs IPOs.....................................................................271
16.3.2 Signs of Good and Bad ICOs.............................................272
16.3.3 Advantages and Disadvantages..........................................273
16.4 ICOs in Number............................................................................274
16.4.1 Amount Raised..................................................................274
16.4.2 Breakdown by Industry......................................................274
16.4.3 Biggest Winners and Losers...............................................275
16.5 Scams and Criticisms.....................................................................275
16.6 Summary........................................................................................277
Section VI □SOCIO -ECONO MIC LANDSCAPE
17 Economic Outlook of Cryptocurrency................................................281
17.1 Classification..................................................................................281
17.1.1 Currency............................................................................282
17.1.2 Commodity.......................................................................283
17.1.3 Stock................................................................................. 284
17.2 Price of Bitcoin.............................................................................. 284
17.3 Volatility of Bitcoin........................................................................285
17.4 Historic Price Predictions...............................................................287
17.5 Price Movement of Major Cryptocurrencies...................................287
17.5.1 ETH..................................................................................288
17.5.2 XRP...................................................................................288
17.5.3 XLM..................................................................................289
17.5.4 NEO..................................................................................289
17.5.5 EOS...................................................................................289
17.6 Reception.......................................................................................290
17.6.1 Acceptance by Merchants..................................................290
17.6.2 Acceptance by Investors.....................................................291
17.6.3 Acceptance by Governments..............................................292
17.7 Summary........................................................................................293
18 Crime, Criminals and Cryptocurrencies.............................................295
18.1 Criminal Activities.........................................................................295
18.2 Deep Web.......................................................................................296
18.2.1 Darknet and Dark Web.....................................................297
18.2.2 Onion Routing and Tor.....................................................297
18.2.3 Bitcoin: The Missing Piece.................................................298
18.3 Darknet-Based Crimes...................................................................299
18.3.1 Silk Road...........................................................................299
18.3.2 Post-Silk Road Markets......................................................301
18.3.3 Assassination Markets....................................................... 304
18.3.4 Cybercrimes...................................................................... 306
18.4 Financial Crimes........................................................................... 308
18.4.1 Money Laundering........................................................... 308
18.4.2 Market Manipulation........................................................310
18.5 Fraudulent Activities.......................................................................310
18.5.1 False Claims....................................................................... 311
18.5.2 Scams.................................................................................312
18.6 Prevention......................................................................................312
18.6.1 Regulation.........................................................................313
18.6.2 Cooperation....................................................................... 314
18.6.3 Participation...................................................................... 315
18.7 Summary........................................................................................316
19 Regulations, Laws and Practices.........................................................317
19.1 Legality of Blockchain and Cryptocurrency................................... 317
19.2 Regulatory Issues............................................................................ 318
19.2.1 Misuse of Pre-Mining and ICOs........................................ 319
19.2.2 Crackdowns on Mining and Trading................................. 319
19.3 Current Landscape.........................................................................320
19.3.1 Challenges.........................................................................320
19.3.2 Areas..................................................................................321
19.3.3 Blockchain-Friendly Nations.............................................322
19.4 Regulations for Blockchain Technology and Cryptocurrency.........323
19.4.1 The Americas.....................................................................323
19.4.2 Europe...............................................................................324
19.4.3 Asia....................................................................................326
19.4.4 Australia and Africa...........................................................327
19.5 Summary........................................................................................328
20 Criticism, Scepticism and Support......................................................329
20.1 Before It All Started........................................................................329
20.2 Early Days of Bitcoin......................................................................330
20.3 Bitcoin Grabs Attention..................................................................331
20.4 Beginning of the Bull Run.............................................................332
20.5 Crazy Price Hike............................................................................334
20.6 To Invest or Not to Invest?.............................................................335
20.7 $10K and Counting........................................................................337
20.8 Nosedive.........................................................................................338
20.9 Summary....................................................................................... 344
Bibliography.................................................................................................345
Index............................................................................................................355
Biography
Dr. Niaz Chowdhury is a postdoctoral researcher working with blockchain technology in the European Union funded project QualiChain. His research experience spans over a decade across three British and Irish nations in England, Scotland and Ireland. He presently holds a Research Associate position in the Open Blockchain group of Knowledge Media Institute, a small but renowned and well-regarded research lab within the Open University in England. He also completed two more postdocs before joining this position, one in the Department of Computing and Communication in the same university working for the Big Data and Smart City project MK:Smart while another at his current lab in the Data Science group. Dr. Chowdhury obtained his PhD from the School of Computing Science of the University of Glasgow in Scotland, as a recipient of the prestigious Scottish ORS Scholarship. He was also a research scholar at the School of Computer Science in Trinity College Dublin where he received Government of Ireland IRCSET Embark Initiative Scholarship. His earlier academic achievements include a bachelor and a master degree with gold medal distinction in Computer Science and Engineering from East West University, Bangladesh. Dr. Chowdhury published numerous journal articles, conference papers and book chapters on the blockchain technology, the Internet of Things, wireless networks and data science.
