Blockchain Technology Fundamentals: Bitcoin, Ethereum, and Consensus

Posted on Jan 2, 2026 in Physical Activity and Sports Sciences

Blockchain Technology Fundamentals

What is Bitcoin?

Bitcoin is the foundational concept that introduced the world to blockchain technology. It is fundamentally a decentralized, peer-to-peer electronic cash system designed to solve the Double-Spending Problem without relying on a trusted third party like a bank. The Bitcoin network operates on a public, immutable ledger (the Bitcoin Blockchain) which chronologically records every transaction. This ledger is secured by the Proof-of-Work (PoW) consensus mechanism, where a global network of miners compete using computational power to validate transactions and add new blocks. The resulting system is trustless, meaning users do not need to trust any central authority, and transparent, as all transactions are publicly visible, though associated with pseudonymous addresses. The native cryptocurrency, BTC, is limited to a fixed supply of 21 million coins, establishing its role as a digital store of value.

Bitcoin Key Features

• Purpose: To be a cryptocurrency and a Store of Value (often called “Digital Gold”). It is fundamentally a payment network.
• Type of Network: Public and Permissionless. Anyone can participate, view the entire transaction history (the public ledger), and become a miner/node.
• Native Cryptocurrency: BTC (Bitcoin).
• Supply: It has a fixed maximum supply of 21 million coins, ensuring scarcity.
• Consensus Mechanism: Originally and currently uses Proof-of-Work (PoW).
• Functionality: Its scripting language is limited and primarily focused on simple transactions (sending and receiving currency). It is not designed to run complex decentralized applications (DApps).

The Double-Spending Problem was solved for digital currency without a central authority using the PoW mechanism and the decentralized ledger. The average Block Time is approximately 10 minutes.

What is Ethereum?

Ethereum is a programmable blockchain, extending the capabilities of the technology beyond simple currency to create a decentralized, global computing platform. The Ethereum cryptocurrency, known as Ether (ETH), is the native token of the Ethereum public blockchain. While Bitcoin focuses primarily on being a digital currency and a store of value, Ether’s main function is to serve as “gas”—the fuel that powers the entire decentralized computing platform. Any operation performed on the Ethereum blockchain, from simple token transfers to executing complex self-enforcing agreements known as Smart Contracts, requires users to pay a fee in ETH. Since Ethereum transitioned to the Proof-of-Stake (PoS) consensus mechanism (“The Merge”), ETH is also used as staked collateral by network validators.

Ethereum Key Features

• Purpose: To be a platform for building Decentralized Applications (DApps) and executing Smart Contracts. It is often referred to as a “World Computer.”
• Type of Network: Public and Permissionless.
• Native Cryptocurrency: ETH (Ether). Used as “gas” and staked collateral. Its supply is not fixed.
• Consensus Mechanism: Proof-of-Stake (PoS) following “The Merge.”
• Functionality: Implements the Ethereum Virtual Machine (EVM), enabling complex Smart Contracts written in languages like Solidity.

Consensus Mechanisms Explained

In blockchain technology, consensus is the process by which a distributed network of computers (nodes) agrees on the current state of the ledger. Because there is no central authority, the network needs a mathematical “rulebook” to ensure everyone stays in sync, prevents fraud (like double-spending), and maintains security.

i) Proof of Work (PoW)

Proof of Work is the original consensus mechanism, first implemented by Bitcoin. It relies on computational competition to secure the network.

• Mining Competition: Participants (Miners) compete to solve a computationally intensive mathematical puzzle.
• Resource Expenditure (The “Work”): The solution requires significant computational power and electricity consumption.
• Validation and Reward: The first miner to find the correct solution broadcasts the validated block and is rewarded with newly minted cryptocurrency and transaction fees.
• Security: Maintained because a malicious actor would need to control over 50% of the network’s total computational power (51% Attack).

ii) Proof of Stake (PoS)

Proof of Stake is an alternative mechanism that replaces computational competition with economic stake.

• Staking: Participants (Validators) lock up (stake) a certain amount of the network’s native cryptocurrency as collateral.
• Validator Selection: A deterministic algorithm pseudo-randomly selects a validator based on stake size to create the next block.
• Security (The “Stick”): Security is maintained through financial punishment (Slashing); dishonest validators have their staked coins confiscated.

iii) Proof of Activity (PoA)

Proof of Activity is a hybrid consensus mechanism that attempts to combine the security of PoW with the resource efficiency of PoS.

• PoW Phase (Block Creation): Miners compete to find a cryptographic hash, creating an “Empty Block” header.
• PoS Phase (Block Finalization): Selected Validators (stakers) sign the block template to fill it with transactions and finalize it.
• Goal: To mitigate the high energy cost of pure PoW while retaining strong security guarantees.

Proof of Burn (PoB)

Proof of Burn is a mechanism where participants demonstrate economic sacrifice by permanently destroying cryptocurrency (burning coins) in exchange for the right to validate transactions. The amount burned is proportional to the “virtual mining power” received.

The Byzantine Generals Problem

This classic thought experiment illustrates the challenge of reaching a consensus in a decentralized network where participants cannot fully trust one another.

• The Scenario: Generals must agree on an attack or retreat plan, but some generals may be traitors sending conflicting messages.
• The Problem: How can loyal generals reach a guaranteed agreement despite deception? In blockchain, this means nodes must agree on the ledger state despite malicious actors.
• Consequences: Split Decisions (Network Partition), Double-Spending, and System Failure.
• Solutions: Modern blockchains solve this through Byzantine Fault Tolerance (BFT), such as Bitcoin’s Proof-of-Work.

Cryptocurrency Classification: Coins vs. Tokens

1. Coins (Cryptocurrency Coins)

Coins are cryptocurrencies that operate on their own independent, native blockchain. They are primarily designed to function as a medium of exchange or a store of value.

• Key Characteristics: Native asset of their blockchain; necessary to pay transaction fees (gas); generally fungible.
• Examples: Bitcoin (BTC), Ether (ETH), Litecoin (LTC).

2. Altcoins (Alternative Coins)

Altcoin is a broad term referring to any cryptocurrency other than Bitcoin (BTC).

• Key Characteristics: Many are forks of Bitcoin’s code, while others are built from scratch.
• Examples: Ethereum (ETH), Cardano (ADA), Solana (SOL).

3. Tokens (Cryptocurrency Tokens)

Tokens are crypto assets built and operate on top of an existing blockchain infrastructure (most commonly Ethereum, using standards like ERC-20). They are created using smart contracts.

• Key Characteristics: Rely on the underlying network’s native coin (e.g., ETH) to pay transaction fees; highly programmable.
• Subdivisions: Utility Tokens (e.g., BAT), Governance Tokens (e.g., UNI), and Non-Fungible Tokens (NFTs).

4. Stablecoins

Stablecoins are cryptocurrencies designed to minimize price volatility by pegging their value to a stable, external asset, typically the U.S. Dollar.

• Key Characteristics: Aim for a 1:1 value peg; used as a safe haven during volatility.
• Categories: Fiat-Collateralized (USDT, USDC), Crypto-Collateralized (DAI), and Algorithmic (highest risk).

Enterprise and Specialized DLTs

Hyperledger

Hyperledger is an open-source collaborative project hosted by the Linux Foundation to advance cross-industry blockchain technologies for enterprise use. It is an umbrella of frameworks, not a single blockchain.

• Purpose: To provide enterprise-grade, modular, and high-performance Distributed Ledger Technology (DLT) solutions for B2B applications.
• Network Type: Designed to build Private and Permissioned networks.
• Native Cryptocurrency: None required.
• Smart Contracts: Referred to as Chaincode, written in languages like Java or Go.

Hyperledger addresses key business barriers:

• Privacy: Trade secrets remain private, unlike public ledgers.
• Scalability: High transaction throughput without energy-intensive mining.
• Governance: Clear legal and operational framework for rule changes.
• Permissioned Networks: Access is restricted to known, identifiable participants.

R3 and Corda

R3 is an enterprise software firm leading a consortium of financial institutions. Corda is the DLT platform developed by R3, often described as a “Blockchain for Business.” Unlike traditional blockchains, Corda does not have a “chain of blocks” and does not broadcast data to the entire network, prioritizing privacy.

The Ethereum Ecosystem Components

Significance of the Ethereum Virtual Machine (EVM)

The EVM is the core computation engine of Ethereum, acting as a globally distributed, decentralized environment where code is executed consistently.

• Programmable Logic: Enables Smart Contracts, transforming the blockchain into a programmable platform.
• Turing Completeness: Allows for virtually limitless functionality, enabling complex DApps.
• Determinism and Consensus: Ensures every node produces the exact same output for the same input, maintaining network synchronization.
• Security through Isolation: Provides a sandboxed runtime environment, preventing malicious code from damaging the host computer.
• EVM Compatibility: It has become the industry standard; many other blockchains (Polygon, BNB Chain) are compatible, fostering interoperability.

Two Common Types of Smart Contracts

1. Token Contracts (ERC Standards): Define and manage digital assets (tokens). The ERC-20 standard governs Fungible Tokens, and ERC-721 governs Non-Fungible Tokens (NFTs).
2. Decentralized Finance (DeFi) Contracts (Protocols): Automate traditional financial services like lending/borrowing (Aave) or decentralized exchanges (Uniswap) using Automated Market Maker (AMM) contracts.

Swarm: Decentralized Storage

Swarm is the decentralized storage and content distribution layer of the original Ethereum Web3 vision, solving the problem of storing large data on-chain. It distributes data chunks across numerous nodes, ensuring censorship resistance and fault tolerance.

Built-in Economic Incentives (BZZ Token)

Swarm uses the BZZ token to create a self-sustaining economy for storage:

• Postage Stamps: Users buy stamps using BZZ to pay node operators for storage rent over time.
• Node Rewards: Node operators are rewarded with BZZ for providing bandwidth and disk space.

Decentralized Messaging Protocol: Whisper (Shh!)

Whisper is a P2P communication protocol designed to provide secure, private, and plausibly deniable messaging between users and DApps on Ethereum. It achieves “darkness” through:

• Encrypted Broadcast: Messages are encrypted and broadcast to all nodes; only the recipient can decrypt them.
• Metadata Obfuscation: Broadcasting widely makes tracing the sender/recipient difficult.
• Spam Prevention: Requires a small amount of Proof-of-Work to send messages.

Crypto Wallets

A Crypto Wallet is the essential tool for interacting with a blockchain network. It does not physically store any coins; the cryptocurrency remains on the ledger. Instead, the wallet securely stores the Private Keys needed to access and authorize transactions associated with the Public Key (wallet address).

• Private Key: The secret string used to cryptographically sign and authorize transactions. Loss means permanent loss of funds.
• Seed Phrase: A 12 to 24-word sequence serving as the master key to restore all associated private keys.

Wallet Classification

• Hot Wallets (Online): Software-based (mobile/desktop). Convenient for frequent use but vulnerable to online threats.
• Cold Wallets (Offline): Physical devices (Hardware Wallets). Safest for long-term storage due to air-gapped security.
• Custody: Non-Custodial wallets give users full control over private keys; Custodial wallets hold keys on behalf of the user (e.g., exchanges).

MetaMask

MetaMask is a popular non-custodial software (hot) wallet, primarily serving as a gateway to Ethereum and EVM-compatible networks. It acts as a secure bridge, allowing a user’s browser to interact directly with DApps by using the private key to cryptographically sign transactions.

Types of Blockchain Networks

1. Public Blockchain (Permissionless): Open to anyone. Fully decentralized, highly secure, and transparent. (Examples: Bitcoin, Ethereum).
2. Private Blockchain (Permissioned): Closed network controlled by a single organization. Extremely fast but centralized.
3. Consortium Blockchain (Federated): Managed by a pre-selected group of organizations. Semi-decentralized, requiring coordination among members. (Example: R3 Corda).
4. Hybrid Blockchain: Combines public and private elements, allowing selective transparency.

Blockchain Applications Across Industries

Blockchain in Financial Services

Blockchain addresses high costs, slow processing times, and reliance on intermediaries, often using Permissioned Networks.

• Cross-Border Payments: Enables direct P2P value transfer, settling in minutes instead of days (e.g., SWIFT replacement).
• Clearing and Settlement: Reduces settlement time from T+2 to near-instantaneous, lowering counterparty risk.
• Trade Finance: Digitizes paper-based documentation (Bills of Lading) to reduce fraud and delays.
• Digital Identity and KYC/AML: Reduces redundant verification efforts across institutions.
• Asset Tokenization: Converts illiquid assets (real estate, private equity) into fractional, liquid digital tokens.

Blockchain in Government Operations

Blockchain enhances data security, accountability, and efficiency in public sector functions.

• Enhanced Data Security and Integrity: Decentralization removes single points of failure, protecting sensitive citizen data via cryptographic encryption.
• Increased Transparency and Accountability: Creates a permanent, auditable trail for expenditures and policy implementation, combating corruption.
• Improved Operational Efficiency: Smart Contracts automate processes like welfare payments or title updates, reducing administrative costs.
• Secure Democratic Processes: eVoting systems ensure votes are immutable and verifiable, though endpoint security remains a challenge.

Blockchain Applications in Retail

Retail benefits from enhanced supply chain transparency, anti-counterfeiting measures, and new customer engagement models.

• Enhanced Supply Chain Transparency: Provides end-to-end visibility from raw material sourcing to the shelf, verifiable via IoT sensors and QR codes. Critical for food safety and ethical sourcing verification.
• Counterfeiting and Product Authentication: Assigns a unique digital identity to genuine products, allowing customers to instantly verify provenance via scanning.
• Reinventing Customer Loyalty Programs: Loyalty points are tokenized, giving customers full control, liquidity, and the ability to trade rewards across partner retailers.

Blockchain in Healthcare

Blockchain addresses security, interoperability, and supply chain integrity in healthcare.

• Enhanced Security and Patient Data Ownership: Cryptographic encryption secures Electronic Health Records (EHRs). Patients control access via private keys, ensuring HIPAA compliance.
• Interoperability and Single Patient Records: Creates a single, verifiable index of all medical events across fragmented systems, allowing authorized providers instant access to complete histories.
• Pharmaceutical Supply Chain Management: Tracks drugs from manufacturer to pharmacy immutably, instantly verifying provenance to combat counterfeit drugs.
• Clinical Trials and Research Integrity: Time-stamping trial data on the ledger prevents manipulation and automates consent management via Smart Contracts.

Blockchain and IoT Integration

Combining IoT (data gathering) with blockchain (data securing) creates tamper-proof, autonomous device networks.

• Trust in Machine Data: Ensures data recorded by sensors (e.g., temperature) is immutable.
• Machine-to-Machine (M2M) Economy: Devices can autonomously use microtransactions (via wallets) to pay for services like charging or tolls.
• Security at the Edge: Decentralization removes single points of failure common in centralized IoT setups.

Implementation Challenges

Integrating these technologies is difficult due to conflicting resource needs:

• Resource Constraints: IoT devices lack power for heavy protocols like Bitcoin’s PoW. Solution: Use Edge Computing or Lightweight Consensus (e.g., Hyperledger).
• Scalability & Latency: Blockchains can clog if millions of devices send data every second. Solution: Store only data”hashe” on-chain, keeping raw data in decentralized storage like Swarm.

Blockchain Voting Systems

The goal is to enforce election rules via code, ensuring immutability and transparency.

• Benefits: Immutability (tamper-proof tallies), End-to-End Verifiability (voters can track their count), Accessibility (mobile voting), and Cost Efficiency.
• Potential Challenges & Risks:
  • Endpoint Vulnerability: Malware on a voter’s device can change the vote before it reaches the secure blockchain.
  • Anonymity vs. Accountability: Mathematically complex to guarantee secrecy while verifying eligibility.
  • Coercion Problem: Digital voting removes the privacy of the physical booth, allowing external pressure.
  • Scalability: Public chains may be too slow for national election volume within narrow timeframes.
  • No Physical Trail: Lack of physical ballots for recounts in disputed elections.

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