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SFM Labs - Blockchains: Technology and Layers (PART II)

Updated: Apr 9, 2022

04/04/22 - 2PM EST/7PM GMT/8PM CEST

Disclaimer: All information given in this presentation is researched and intended to be educational and illustrative to the specific topic as always. Any companies, products, people, or other items mentioned do not constitute an endorsement, recommendation, or relationship. Every owner has to do their due diligence, as the decisions and responsibility about any investment lies with the owner. This is not financial advice.

What is a consensus method? What different methods can be used with a blockchain?

A consensus mechanism, in interaction with the blockchain and the transactions, helps to confirm the validation and verification of those and to confirm the process of the blockchain in its use with the desired transactions.

Each blockchain must choose a consensus mechanism that fits the said system for the desired outcome of the performance that they want for themselves. There are many different consensus mechanisms that can validate different criteria with respect to a transaction or verification thereof.

The following 8 consensus mechanisms are among the best known at present:

1. Proof of Work Proof of Work (POW) is the mechanism where the miner or mining are known as nodes. Mathematical puzzles are calculated and solved using computational power, which are then rewarded with a block if they are the first to solve the algorithm of the equation presented. Various hardware components can be used to achieve this, ranging from CPU and GPU mining, to mining pools, FPGA mining (the so-called Field-Programmable Gate Array), ASCI mining (also called Antminers), and more.

With the running time and scarcity of available blocks, the difficulty of solving the puzzles and reaching a solution to find the block first also grows. The energy consumption and the hardware required for this are of course immense depending on the desired performance and scale on the possibility that one sets oneself to achieve certain results.

2. Proof of Stake

Proof of Stake (POS) uses a randomly chosen process to determine who gets to produce the next block. Blockchain users can - if they want to participate in the process - include tokens, which makes them validators. The amount of tokens is determined by the respective blockchain, after which the users are given the opportunity to produce blocks in the first place. The principle of distribution is random, but the person with the most coins and the most time in the network also has the greatest chance of generating the next block.

As a reward, the validator then receives the transaction fees for the block that he has produced and from which transactions originate. This gives the validators the incentive to stay on the blockchain as long as possible, as the profits can be generated over time and have higher chances with longer duration.

This consensus method is significantly more energy efficient, as most proof of stake providers only store the tokens, i.e. they do not generate the tokens themselves, which eliminates the mining process and the provision of their own hardware.

3. Delegated Proof of Stake Delegated Proof of Stake provides users with the ability to stake their tokens to obtain the rights to vote for various delegates. The more tokens that are staked to a particular delegate, the more voting rights one has compared to others in the network, and the greater the weight of the decision. By participating in the system and having the power to decide, users have the chance to be included in the distribution of the selected delegate, for which they have used their tokens, in order to be able to win the production of a block. The return is the same as with the previously mentioned consensus method Proof of Stake, because here one results from the transaction fees that emanate from the block and receives these as a reward.

4. Proof of Capacity Proof of Capacity refers to the storage of results from mathematically difficult equations. The user collects the complex systems on the hard disk and solves them from there. After solving those, the one who has found the solution within the shortest time will get the most chance to produce a block. Since the mathematical formulas are constantly renewed due to the updating of the puzzle and the current difficulty related to the amount circulating, updates and extensions for the current puzzle are constantly reloaded. The one with the largest capacity and the fastest possible performance has the best chance of producing the block.

5. Proof of Elapsed Time Proof of Elapsed Time refers to the method of determining the winner of a block based on time. Someone is randomly and fairly selected to be the new producer of the block. So whoever joins this blockchain the earliest and spends the most time in this system has the greatest chance to win. In this consensus mechanism, only one node can be assigned to each user.

6. Proof of Identity Proof of Identity compares the private key with the authorized key. This is not directly about generating a block in terms of reward, but about matching information and confirming authenticity. Each private key can be compared with the information stored on the blockchain and thus verify the truth. This principle is used, for example, in smart cities to confirm citizens with their identity based on unique information.

7. Proof of Authority Proof of Authority is a modified version of Proof of Stake and is used in a network with staking, but for a different purpose. Here, the nodes that become validators will be the only ones allowed to create new blocks, since private information and authentication verify the person in the network. This is for security, to determine unique participants of the network, to stop or pre-filter false nodes or obstructive processes that could slow down or even endanger the blockchain. As a rule, there are very few validators (usually less than 30) in this blockchain, as the general participation is lower here.

8. Proof of Activity Proof of Activity is the consensus mechanism that combines Proof of Work and Proof of Stake. Miners solve complicated equations and are then entered as creators with information in the created blocks if they are the first. This created block is then distributed to a randomly selected group of validators, whose staking refers to a specific area. The validators with the largest stake have the highest chance of being awarded the block. After the block is awarded, it becomes part of the network. If the block is not distributed or confirmed by the validators beforehand, the block expires and does not become part of the blockchain network.

In addition to these mechanisms, new consensus mechanisms are applied or tried out almost every month. Both combinations of old mechanisms and newly created mechanisms with new criteria are gaining popularity, so the chance of generating something groundbreaking is definitely there.

What is a smart contract?

Smart contracts are contracts with two participants on the blockchain. The mostly self-executing protocol takes on special tasks through integration in the blockchain, for example the exchange of money, shares or similar. The two parties are always the one who interacts with it and the blockchain itself. Of course, there are also smart contracts that only interact in the blockchain and regulate actions internally, which then react to interactions between certain triggers, such as SafeMoon's buyback and burn protocol, which uses a portion of the fee to buy SafeMoon directly and strengthen the ecosystem.

Smart contracts have no interruption, run with high security and fast processing, as they mostly take care of only one process. The chaining of several smart contracts then forms the possibility in the overall system to form a stable structure of the interactions internally or to ensure simple and fast trading from people to the blockchain.

Development of the technologies of blockchain

The blockchain has expanded greatly after years of basic development. Starting with the first blockchain for Bitcoin in 2009 up to the present time, there have been different approaches that have shaped the respective time. Thereby, we speak of different versions of a blockchain, which has renewed itself over time. The following three ways of using a blockchain are currently in use:

1. Cryptocurrency Apps - Blockchain In this version, the blockchain is used to act and handle all cryptocurrencies that it hosts. As a decentralized ledger, cryptocurrency transactions are secured and reconciled among the participants. Various consensus mechanisms take effect here for the respective actions.

2. Decentralized Apps (dApps) - Blockchain Here, the blockchain is used as a decentralized ledger to support smart contracts. dApps can then access the system and use the stored information to confirm transactions and add them to the system, such as buying lottery tickets or tickets to a concert.

3. Widespread Apps - Blockchain In widespread apps, the blockchain is created and used for a specific purpose or task, such as using it to secure and process information for local governments, international trading partners, or specific industries such as food, healthcare, or insurance.

Each use case of blockchain in the context of technology is based on the time that has gone along. The simple application of a blockchain with cryptocurrencies is the oldest, the application of special industries for the use of separate methods and algorithms the most recent. In the coming years, more versions of the blockchain will certainly be added, in this case for new technologies or technologies to be updated/replaced.

Layers of blockchain architecture

A blockchain is not free with the consensus mechanisms, methods for validating the nodes and processing the information. There are layers and forks that clearly define where information is held and stored, whether in simple information documents like .doc and .txt or as a highly encrypted document behind multiple encryption processes.

The following structure explains the division of a layer in the blockchain:

1. Application/Presentation layer

The application layer (also sometimes called the presentation layer) includes smart contracts, chaincode, and decentralized apps (DApps). Below this, there is a division into the pure application and the executing layers. The applications are associated with the user of the DApps, which represents the communication. Commands, executions and scripts are used to ensure communication and to create the connection using APIs (application programming interfaces). The rules for the APIs are defined and determined by the respective smart contract.

2. Consensus layer

The consensus layer is essential to the blockchain and has a handle on all the critical operations involved in maintaining the validation process. The blocks can only be validated by this layer and released upon agreement.

The rules of the peer-to-peer network, the handling of decentralized elements and rules, truth processes and reliability are part of the task of this layer. The important aspect is that only one blockchain can be assigned to this layer process and therefore only one validation can take place for one blockchain in the overall process of all transactions (i.e. no validation of individual blocks for different blockchains).

3. Network layer

The network layer (also called the peer-to-peer layer) deals with the communication and handling of all transactions, desired connections and legitimations. It routes and directs the desired requests in the network to the appropriate places and serves to ensure that all nodes can read and process all necessary requests and information or connections.

4. Data layer

The data layer consists of two main elements: pointers and a linked list. Pointers show the connection of certain variables to other variables, the linked list represents the connection of the chained blocks to each other. Pointers help to combine the connection of the blocks by showing the variables of the respective different blocks, which refer to each other and mark the end point of one block and the beginning of the other block. The hashes of the respective blocks are represented in a table, the so-called "Merkle tree." This shows the binary values of the blocks' hashes, timestamps, nonce, block number and more in a list, thus ensuring security, integrity and truthfulness, as the information of each block in the Merkle tree is fixed and unrepeatable.

The first block of a blockchain is called a genesis block and does not contain a pointer, as it has no directional information and is therefore the first to start the blockchain. All transactions are digitally signed to confirm authenticity. The data in this layer is encrypted so that it is not freely readable and can be extracted from the outside.

5. Hardware/Infrastructure layer

The hardware layer (also sometimes called the infrastructure layer) is the basic structure for storing the blockchain. Servers, virtual machines and service units are stored here and form the physical connection from machines outside to the blockchain. It contains all databases, data, transactions and critical data.

Different layers of a blockchain explained

While the previously mentioned layers represent the structure of a blockchain, there are four layers in which the blockchain can be placed with the preceding technology. The following four blockchain layers are present:

1. Layer 0 Layer 0 refers to the basic components necessary for a blockchain to exist. These consist of the Internet connection, the hardware and connection options.

2. Layer 1 Layer 1 is also called the foundation layer, because this is the level at which the blockchain is created and maintained. Security is immutable, the basic system is fixed, and the basic action is static. Programming languages, rules, consensus settings and basic functionalities are recorded here. Due to the static deployment, the speed of the blockchain is limited because as technology advances, this blockchain is not adaptable. Scaling problems are not uncommon here. Bitcoin can be taken as an example of a layer 1 blockchain.

3. Layer 2 Layer 2 offers scaling enhancements and expanded usability through smart contracts, which remove some legacy features of the layer one blockchain. Layer 2 focuses on the handling of deposits and withdrawals and pays attention to the authenticity of the transactions.

While layer 1 is a decentralized system, layer 2 is a third-party integration used in conjunction to enhance the number of nodes and possibly upscale the existing blockchain. The problem that can arise here is that layer 2 overlaps layer 1 and can lead to incorrect transactions, problems in handling the rewards or even to scalability problems if the processes are not properly coordinated. The Bitcoin Lightning Network is an example of a layer 2 blockchain.

4. Layer 3 Layer 3 gives blockchains a real-world connection and offers extended application use. In most cases, the application layer is also referred to as layer 3, since the technical aspects are taken as the user interface for direct use, thus hiding the technical parameters behind them.

Why do we want to have a blockchain ? What are the benefits and disadvantages?

Blockchains are independent systems with a decentralized nature. They are open, transparent and show the possibility of free use without the influence of third parties. The blockchain itself is currently used for the standardized use of trading and management of currencies, but as briefly mentioned before, it can be used for authentication, verification, storage of entire databases for knowledge preservation and more. All events can be traced and retraced over and over again as the data is preserved.

The disadvantage is the integration into the world considering infrastructure for storage, IT landscapes of other countries and basic performance equality. The systems should be transparent and open, but no one should be able to manipulate them, nor should anyone be able to design their system differently, for example by providing the basic structure with security for themselves for profit, thus creating a backdoor with which, for example, governments can manipulate and divert money.

The integration of this technology in the world is a progress, but this must happen independently and equally, the process itself can be determined by the operators, the basic way of the blockchain must be fair and formulated according to decentralized, anonymous values.

Future of the blockchain technology

In the future, blockchains can be used everywhere there is data, management and processing. Almost any kind of bureaucracy, payment, control and the like can be handled completely with the technology of a blockchain.

The cost of infrastructure, conversion, trust in the systems, and fair independent maintenance without tampering will be the biggest problem for this branch of the world's technological development.



Gandalf - SafeMoon Educator

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