Blockchain Basics

An introduction to the Ethereum universe

What is a blockchain

A blockchain is a public database that is maintained and shared across many computers on a network. Each computer (known as a node) contains a complete record of all transactions; hence, the system will not collapse if any one node fails.

Blockchain technology utilises cryptographic fundamentals to chain together blocks of digital records maintained across multiple nodes (computers). The use of cryptographic principles means the blockchain design will prevent the records and data from being forged, altered, or hacked.

A blockchain network functions as a decentralized system, in which there is no governing authority controlling the network. Transparent recordkeeping is central in getting users to trust the system, meaning the network’s records are open to the public.

Each new block and the chain must be agreed upon by every node (computer) on the network. This means everyone can see and access the same data. To accomplish this distributed agreement, blockchains need a consensus mechanism.

Ethereum currently utilises a proof-of-work consensus mechanism. This implies that anyone who wants to add blocks to the chain must solve a complex puzzle requiring substantial computing power. Solving the puzzle "proves' the computational resources you have spent. This is known as mining. Mining is typically a brute force trial and error but adding a new block successfully is rewarded in Ether.

A blockchain network can track orders, payments, accounts plus so much more. All members of the blockchain share a single view of the truth, allowing everyone to view the details of a transaction end-to-end. This single view of truth offers greater confidence and enhanced security providing new efficiencies and opportunities.

Ethereum 2.0 is a multi-phase update currently (as of August 2021) scheduled to be released in late 2021. This will shift Ethereum from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism. This will be a driving factor in boosting Ethereum’s transaction throughput.

What is Ethereum

Ethereum is an open-source software platform built on blockchain technology to enable developers to build and deploy decentralized applications (Dapps).

A decentralized network means no one person or entity controls the platform. Ethereum uses the cryptocurrency called Ether to power the applications built on the Blockchain.

How Does Ethereum Work

Ethereum works via a public blockchain network. The actual tokens (used for payment on the network) are called Ether.

In the Ethereum universe, there is a single, canonical computer (called the Ethereum Virtual Machine, or EVM) whose state everyone on the Ethereum network agrees on (consensus). Everyone who participates in the Ethereum network (every node within the network) keeps a copy of the state of this computer.

To perform arbitrary computation any participant can broadcast a request for this computer. Whenever a request is broadcast, other participants on the network verify, validate, and carry out (“execute”) the computation. This causes a state change in the EVM, which is committed and propagated throughout the entire network.

Requests for computation are called transaction requests; the record of all transactions and the EVM’s present state is stored in the blockchain, which in turn is stored and agreed upon by all nodes. Furthermore, cryptographic mechanisms ensure that once transactions are verified as valid and added to the blockchain, they can’t be tampered with later. This means that transactions are immutable (unable to be changed) - the inspiration for our company name!

Ethereum blockchain focuses on running the programming code of any dapp. These applications can include, for example; security programs, voting systems and methods of payment, to name a few. Like Bitcoin, Ethereum operates outside the mandate of central authorities such as banks and governments.

Ethereum Wallets

An Ethereum ‘wallet’ (where Ether is stored) is an entity with an Ether (ETH) balance that can perform transactions on Ethereum. Wallets can be user-controlled or deployed as smart contracts.
Users deposit Ether into the wallet/s, and transfer Ether from their wallet to other users. Wallet balances are stored in a big table in the EVM; they are a part of the overall EVM state.

Smart Contracts

A "smart contract" is simply a program that runs on the Ethereum blockchain. Importantly, they are not controlled by a user, instead they are deployed to the network and run as programmed. This means they can perform and send transactions over the network.

How Smart Contracts Work

Smart contracts are a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain. Smart contracts can define rules, like a regular contract and automatically enforce them via the code (the Ethereum coding language is called Solidity). User accounts interact with a smart contract by submitting transactions that execute a function defined in the smart contract.

In practice, users don’t write new code each time they request a computation on the EVM. Instead, application developers upload reusable snippets of code (programs) into the EVM storage. Users then make requests for the execution of these code snippets. The programs are known as smart contracts. For example, a simple partner smart contract could create and assign ownership of a digital asset if the caller sends Ether to a specific recipient.

What is an NFT

A non-fungible token (NFT) is any digital asset that represents both tangible real-world objects like art, music and videos and intangible objects like virtual avatars and in-game items. NTFs are bought and sold online, frequently with cryptocurrency and they are generally encoded with the same underlying software as many cryptos.

NFTs are generally one of a kind and have unique identifying codes. This stands in stark contrast to most digital creations, which are almost always infinite in supply. Hypothetically, cutting off the supply should raise the value of a given asset, assuming it’s in demand. The true value of an NFT is it allows the buyer to own the original item. Each NFT contains built-in authentication, which serves as validation and proof of ownership.

How NFTs Work

NFTs exist on a blockchain, which is a distributed public ledger that records transactions. Specifically, NFTs are typically held on the Ethereum blockchain, although other blockchains do support them as well.

An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including (but certainly not limited to):

  • Art
  • GIFs
  • Video clips
  • Collectibles
  • Social media moments
  • Virtual avatars
  • Video game items
  • Music

Essentially, NFTs are like physical collector’s items, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead.

NFT’s provide exclusive ownership rights. NFTs can have only one owner at a time. NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NTfs metadata.

What is Gas

Gas in cryptography refers to the computational effort required to execute operations on the blockchain. A gas fee is required to successfully conduct a transaction or execute a smart contract on a blockchain platform.

Priced in small fractions of Ether (ETH), commonly referred to as gwei and sometimes also called nanoeth, gas is used to allocate resources of the EVM so that smart contracts can self-execute in a secure but decentralized fashion.

The exact price of the gas is determined by supply and demand and through the network's miners, who can process or decline a transaction should the gas price not meet their threshold. A key value proposition of Immutable X’s solution is it is completely free of gas fees.

What is ERC721

ERC721 tokens, more commonly referred to as non-fungible tokens (NFTs), allow developers to tokenize ownership of any arbitrary data, drastically increasing the design space of what can be represented as a token on the Ethereum blockchain.

The biggest differentiator of NFTs is that each one is tied to a different identifier, making each token unique to its owner. ERC721 is a standard interface for non-fungible tokens, meaning ERC721 tokens are simply a subset of Ethereum tokens.

Understanding the standards of ERC721

The ERC721 standard outlines a set of common rules that all tokens can follow on the Ethereum network to produce expected results. Token standards primarily stipulate the following characteristics about a token:

  • How is ownership decided?
  • How are tokens created?
  • How are tokens transferred?
  • How are tokens burned?

The ERC721 standard is important, particularly in its ability to be easily integrated into ecosystem infrastructure. Having a common interface for exchange and wallet operators makes NFTs that much more valuable.

ERC721 versus ERC20

The ERC20 token standard is a token standard for fungible tokens, meaning each token is interchangeable whereas ERC721 tokens are not (hence why they're called NFTs).
In the ERC20 token standard, developers can create any number of tokens within one contract, however in the ERC721 token standard, each token within the contract holds a different value.
ERC20 tokens are also interchangeable and represent a single asset, whereas ERC721 represents a class of assets.
The standards of an ERC20 token include:

  • Token name
  • Symbol
  • Decimal (up to 18)
  • TotalSupply
  • balanceOf
  • Transfer
  • transferFrom
  • Approve
  • Allowance

The first three of these standards are optional, but the rest are mandatory. For example, an ERC20 token must contain a transfer function, which is where transfer and transferFrom come in. The transfer function allows the token owner to transfer the token/s to any Ethereum address. The transferFrom function is used for a third-party Ethereum address to transfer tokens on behalf of the owner. Furthermore, an ERC20 standard only defines the API of a smart contract, not its implementation.

Why Immutable Chose to Build on Ethereum

Immutable chose to build on Ethereum because it is the largest and most secure blockchain, with the greatest network effects.

Furthermore, choosing Ethereum enables the deployment of smart contracts and decentralized applications (dApps) to be built and run without any downtime, fraud, control or interference from a third party.


References
What is a Blockchain, & What is Ethereum - https://ethereum.org/en/developers/docs/intro-to-ethereum/
What is an NFT & How does an NFT work? n/ https://www.forbes.com/advisor/investing/nft-non-fungible-token/
What is an ERC721 & Understanding the standards of ERC721 https://education.district0x.io/general-topics/understanding-ethereum/erc-721-tokens/
Smart Contracts - https://ethereum.org/en/developers/docs/smart-contracts/
ERC721 verses ECR20 - https://wirexapp.com/blog/post/erc20-vs-erc721-whats-the-difference-0341
What is gas? - https://www.investopedia.com/terms/g/gas-ethereum.asp


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