With all the hype about blockchains and cryptocurrencies, I decided to learn a bit more about it. And what better way to learn than to try to build it yourself? Below you will find a step-to-step explanation of how a blockchain works and how to build one from their basic principles. At every step below, you can check out the equivalent version of the demo at blockchain-step${N}.nambrot.com with the final version being available at blockchain.nambrot.com Disclaimer: I took some liberties in some aspects where this blockchain will diverge from reality for pedagogical purposes.
To understand how blockchains work, let's start with the name. Blockchain? A chain of blocks?
A common misconception is that a blockchain is a single chain of blocks, when in reality, it's more like a tree of blocks. So at any given time, there are multiple chains for blocks by pointing to their respective parent. The pointing happens via hashes which are calculated based upon the data inside the block (i.e. hash of the parent, transaction data and other important stuff)
By pointing via hashes of blocks, we can enforce a specific order of blocks. I.e given a chain of blocks, you can't just take a block in the middle of the chain and change its data, since that would change its hash and subsequently also all blocks that are descendents of the block in question.
class Block {
constructor(blockchain, parentHash, nonce = sha256(new Date().getTime().toString()).toString()) {
this.blockchain = blockchain;
this.nonce = nonce;
this.parentHash = parentHash;
this.hash = sha256(this.nonce + this.parentHash).toString()
}If you look at the code, you can see how the P2P aspect of blockchains comes into play. Once a node decided it "mined" a block, it can broadcast that block to all other nodes, you can verify it and then add it to their tree, as well.
In step 1, we saw that in a chain of blocks, the last block basically validates all data in the chain of its ascendents, as any change in the data up the chain would inevitably change the hash of the last block. That is all great, but what do people mean by THE blockchain?
By definition, THE blockchain is just the longest chain available in the tree. So at one point, a chain can be the longest one, but then get superseeded by another. Let's visualize the longest chain in the tree.
class Blockchain {
longestChain() {
const blocks = values(this.blocks)
const maxByHeight = maxBy(prop('height'))
const maxHeightBlock = reduce(maxByHeight, blocks[0], blocks)
const getParent = (x) => {
if (x === undefined) {
return false
}
return [x, this.blocks[x.parentHash]]
}
return reverse(unfold(getParent, maxHeightBlock))
}
}
So given a tree, the longest chain represents our current view of which history of blocks, and thus which representation of data is the one we deem valid.
If real blockchains worked like Step 2, then it would be a chaotic free-for-all where nodes just can abitrarily fork a chain of blocks and add basically infinitely many blocks to it, to make it the longest chain and thus THE blockchain (as you have seen in the above GIF). That would mean that anyone could just change history and effectively mutate past data. How do we avoid that situation?
By making it difficult to add a block with a computational puzzle. Instead of accepting any arbitrary block, part of the concensus rules of a blockchain mandate what blocks are valid and which ones aren't. In this case, we want to make adding blocks resource-intensive. The most common way of doing so, and probably the most admirable piece of the original Bitcoin whitepaper), is to pair this with proof-of-work (POW). POW allows us to ensure that nodes who want to add blocks to the tree to proof that they had to expend considerable effort. Since the SHA256 hash of a block is (hopefully) truly random, we can mandate that the hash ends in a certain number of '0's (in Bitcoin the requirement is for it to start with a certain number of '0's).
class Block {
isValid() {
return this.parentHash === 'root' ||
(this.hash.substr(-DIFFICULTY) === "0".repeat(DIFFICULTY) &&
this.hash === sha256(this.nonce + this.parentHash).toString())
}
setNonce(nonce) {
this.nonce = nonce
this._setHash()
}
_setHash() {
this.hash = sha256(this.nonce + this.parentHash).toString()
}
}The actual number of '0's in real world blockchains is calculated dynamically based upon the speed at which recent blocks have been added. A miner would then have to try many different nonces to hope that evetually it yields in a hash that ends with {DIFFICULTY} '0's.
Proof-of-work is what "secures" the blockchain, makes it decentralized and the reason where the infamous 51% double-spend attack comes from. Once a block makes it onto the blockchain (the longest chain of blocks), an attacker would have to redo the proof-of-work for that block and all blocks following it. The example would be a double-spend: Add a transaction to a block, but then make it "invalid" by mining an alternate chain from the parent. However, without having 51% of the computation power of the network, it would be always lagging behind all the other nodes in the network trying to add blocks from the currently legitimate blockchain. Thus the security of the blockchain relies on computational power to not be centralized within single parties.
So the question is why miners would expend all this effort to add a block? Unless it is a fun game for them, usually we are talking about economic incentives now. In order for the blockchain to be secured by miners, the protocol gives miners a mining reward, currently amounting to 12.5 Bitcoin. Other nodes will accept the miners block with the reward to itself as long as it passes the other rules of the protocol we discussed above. Let's talk about the specific mechanic of how a miner gives itself the reward, which requires a concept of ownership and a way to include such ownership in a block.
To understand ownership, you'll need a high-level understanding of public-key encryption which is beyond the scope of this tutorial. (https://www.youtube.com/watch?v=3QnD2c4Xovk looks like a good non-technical explanation). All you need to know for this is that the following possible:
- There is a way to generate two things, a public key and a private key. Keep the private key secret.
- Per the name, the public key is something that you can publish publically to other parties.
- In order to proof that you were the one that generated the public key, you can sign a specific message (or arbitrary data) with your private key. Others can take your signature (that is specific to the message), the message as well as your public key and verify that the signature must have indeed come from someone who has control of the private key (as there is no way to satisfactorally sign the message without the private key).
- (With a public key, you can encrypt a message (data) so that only the owner of the private key can decrypt it)
In short, ownership is the concept of being in control of something, in this case, you "own" the public key, and you can prove such ownership by signing data with your private key. Thus, in order to receive the mining reward, i.e. claim ownership over it, all the miner has to do is to include their public key in the block. That public key is also known as the wallet address in Bitcoin (oversimplication).
So let's just simply add a field in the block called coinbaseBeneficiary that contains the public key of the miner and add it to the payload for the hash calculation:
class Block {
isValid() {
return this.parentHash === 'root' ||
(this.hash.substr(-DIFFICULTY) === "0".repeat(DIFFICULTY) &&
this.hash === this._calculateHash())
}
createChild(coinbaseBeneficiary) {
return new Block({
blockchain: this.blockchain,
parentHash: this.hash,
height: this.height + 1,
coinbaseBeneficiary
})
}
_calculateHash() {
return sha256(this.nonce + this.parentHash + this.coinbaseBeneficiary).toString()
}
}Thus, a coin is just ownership over a public key with a private key. By walking down a chain of blocks, you can add up which public keys own how many coins. In reality, these are called Unspent Transaction Outputs (UTXOs), the transaction part will come shortly). To avoid having to traverse chains of blocks everytime we want to find out how many coins an address controls, we "cache" that knowledge with each block into a UTXO pool. Whenever we add a block to a parent, we just take the parents UTXO pool and add the coins of the coinbase beneficiary.
class UTXOPool {
constructor(utxos = {}) {
this.utxos = utxos
}
addUTXO(publicKey, amount) {
if (this.utxos[publicKey]) {
this.utxos[publicKey].amount += amount
} else {
const utxo = new UTXO(publicKey, amount)
this.utxos[publicKey] = utxo
}
}
clone() {
return new UTXOPool(clone(this.utxos))
}
}
class Blockchain {
_addBlock(block) {
if (!block.isValid())
return
if (this.containsBlock(block))
return
// check that the parent is actually existent and the advertised height is correct
const parent = this.blocks[block.parentHash];
if (parent === undefined && parent.height + 1 !== block.height )
return
// Add coinbase coin to the pool of the parent
const newUtxoPool = parent.utxoPool.clone();
newUtxoPool.addUTXO(block.coinbaseBeneficiary, 12.5)
block.utxoPool = newUtxoPool;
this.blocks[block.hash] = block;
rerender()
}
}As you can see, if we keep mining more blocks, we keep accumulating coins.
This way, you should also start the see of how the blockchain acts as a ledger, but also how it is inherently volatile. A fork in the blockchain will yield different UTXOPools and thus different assertions over coins (which is why securing consensus is so important) as you can see in the GIF below. That's why it is generally recommended to wait a certain number of blocks until you can consider a transaction to be settled, otherwise a fork can invalidate what you assumed to be the state of the ledger.
We are getting very close to have this be a usable blockchain. The only thing we are really lacking is the ability to send someone a coin. We are finally getting to transactions. And it's actually pretty simple:
class Transaction {
constructor(inputPublicKey, outputPublicKey, amount) {
this.inputPublicKey = inputPublicKey
this.outputPublicKey = outputPublicKey
this.amount = amount
this._setHash()
}
_setHash() {
this.hash = this._calculateHash()
}
_calculateHash() {
return sha256(this.inputPublicKey + this.outputPublicKey + this.amount).toString()
}
}A transaction is simply a declaration to move ownership from one public key to the other, thus all we have to record in a transaction is the public key that has any coins, the target public key and the amount of coins we want to transfer. (In real Bitcoin, UTXOs have to be fully consumed and can have multiple inputs and outputs.) We obviously need to make sure that people only spend coins that exist. We do that with the UTXOPool which keeps track of "balances".
class UTXOPool {
handleTransaction(transaction) {
if (!this.isValidTransaction(transaction.inputPublicKey, transaction.amount))
return
const inputUTXO = this.utxos[transaction.inputPublicKey];
inputUTXO.amount -= transaction.amount
if (inputUTXO.amount === 0)
delete this.utxos[transaction.inputPublicKey]
this.addUTXO(transaction.outputPublicKey, transaction.amount)
}
isValidTransaction(inputPublicKey, amount) {
const utxo = this.utxos[inputPublicKey]
return utxo !== undefined && utxo.amount >= amount && amount > 0
}
}Since we add the hashes of the transactions to the computation of the block hash, other nodes in the network can easily verify that the transactions are 1. valid given a block's ascendants and 2. came from a node that had to do the "proof-of-work".
class Blockchain {
_addBlock(block) {
// ...
const newUtxoPool = parent.utxoPool.clone();
block.utxoPool = newUtxoPool;
// Add coinbase coin to the pool
block.utxoPool.addUTXO(block.coinbaseBeneficiary, 12.5)
// Reapply transactions to validate them
const transactions = block.transactions
block.transactions = {}
let containsInvalidTransactions = false;
Object.values(transactions).forEach(transaction => {
if (block.isValidTransaction(transaction.inputPublicKey, transaction.amount)) {
block.addTransaction(transaction.inputPublicKey, transaction.outputPublicKey, transaction.amount)
} else {
containsInvalidTransactions = true
}
})
// If we found any invalid transactions, dont add the block
if (containsInvalidTransactions)
return
// ...
}
}You should recognize an additional method of keeping miners "honest". If miners include transactions that are invalid, peer nodes will reject the block and thus not consider it to be part of the longest chain. Thus we maintain concensus over valid transactions. Here is everything in GIF-form:
What if you (or more specifically your computers) are bad at math, does that mean you don't get to have your transactions added to the blockchain? That would be terrible! Instead, as a non-mining node, let's add the ability to broadcast a transaction, that a different mining node can then add to their block:
class Blockchain {
constructor() {
// ...
subscribeTo("TRANSACTION_BROADCAST", ({ transaction, blockchainName }) => {
if (blockchainName === this.name) {
this.pendingTransactions[transaction.hash] = new Transaction(
transaction.inputPublicKey,
transaction.outputPublicKey,
transaction.amount
);
}
});
}
}
Unless you subscribe to the charitable interpretations of "love thy neighbor", people generally don't like to do things free for others. So why would a mining node add a transaction for a non-mining node? You are right, they wouldn't. So let's add some incentives for them with a transaction fee that we can specify as a transaction author to increase the chances of some mining node adding our transaction to their block.
class Block {
addTransaction(inputPublicKey, outputPublicKey, amount, fee) {
if (!this.isValidTransaction(inputPublicKey, amount, fee))
return
const transaction = new Transaction(inputPublicKey, outputPublicKey, amount, fee)
this.transactions[transaction.hash] = transaction
this.utxoPool.handleTransaction(transaction, this.coinbaseBeneficiary)
this._setHash();
}
}
class UTXOPool {
handleTransaction(transaction, feeReceiver) {
if (!this.isValidTransaction(transaction.inputPublicKey, transaction.amount, transaction.fee))
return
const inputUTXO = this.utxos[transaction.inputPublicKey];
inputUTXO.amount -= transaction.amount
inputUTXO.amount -= transaction.fee
if (inputUTXO.amount === 0)
delete this.utxos[transaction.inputPublicKey]
this.addUTXO(transaction.outputPublicKey, transaction.amount)
this.addUTXO(feeReceiver, transaction.fee)
}
}If you paid attention, you have noticed that it was possible for any node to spend any UTXO available. If that were the case in reality, it would be madness! Let's fix this by completing the ownership story. As we said above, ownership is really just the ability to prove that you have generated the private key. So to know if a transaction was truly the intention of the owner, all we have to do is request a signature of the transaction hash with the private key. Nodes can then verify that the signature is indeed valid for the transaction when they validate transaction of blocks they are receiving.
class Transaction {
constructor(inputPublicKey, outputPublicKey, amount, fee, signature) {
this.inputPublicKey = inputPublicKey;
this.outputPublicKey = outputPublicKey;
this.amount = amount;
this.fee = fee;
this.signature = signature;
this._setHash();
}
hasValidSignature() {
return (
this.signature !== undefined &&
verifySignature(this.hash, this.signature, this.inputPublicKey)
);
}
}
class Block {
isValidTransaction(transaction) {
return (
this.utxoPool.isValidTransaction(transaction) &&
transaction.hasValidSignature()
);
}
}As seen in the GIF below, this will complete our blockchain by tieing control of UTXOs to the corresponding owner of the public key via signatures from their private key.
AND THATS IT!!! As you'll hopefully agree with me, blockchains are actually quite simple. So simple that Bitcoin's original whitepaper is only 8 pages. As we learned in this walkthrough, all you really need to know is some public key encryption knowledge and the fact that some hash functions are very hard to reverse.
JK, there isn't as of yet. I might add merkle trees and segwit in the future, but for now, I hope this gives you a good overview of how blockchains such as Bitcoin work.
This project is based upon create-react-app so a simple yarn start will pretty much start everything. You'll only need to start a simple socket.io server with node src/server.js. You can also run it with docker-compose if you prefer. Or find the most recent version running on blockchain.nambrot.com