Blockchain Explained : Definitive guide to blockchain technology

The Beginning

On Oct. 31, 2008, Bitcoin creator and still-mysterious Satoshi Nakamoto (a pseudonym) released his famous white newspaper introducing the idea of a peer-to-peer (P2P) electric cash system he called Bitcoin. The Bitcoin blockchain premiered a couple of months down the road Jan. 3, 2009.

Blockchain is a open public ledger technology that uses digital signatures and cryptographic hashing to give a record of secure trades that can’t be altered. Think of blockchain as a distributed database that maintains a shared list of records. These records are called blocks, and each encrypted block of code contains the history of every block that came before it with timestamped transaction data down to the second.

People often get confused with technological complexity when trying to understand blockchain, but the basic concept is a simple and universal one. We have facts and information we don’t want accessed, copied, or tampered with, but on the Internet, there’s always a chance it could be hacked or modified. Blockchain gives us the trust and security to protect our assets and informations.

In the 2016 book Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World, authors Don and Alex Tapscott explain Nakamoto’s Bitcoin model about as succinctly as one can:

“Bitcoin or other digital currency isn’t saved in a file somewhere; it’s represented by transactions recorded in a blockchain—kind of like a global spreadsheet or ledger, which leverages the resources of a large P2P network to verify and approve each Bitcoin transaction. Each blockchain, like the [Bitcoin blockchain] is distributed: it runs on computers provided by volunteers around the world. There is no central database to hack. The blockchain is public: anyone can view it at any time because it resides on the network… and the blockchain is encrypted… it uses public and private keys (rather like a two-key system to access a safety deposit box) to maintain virtual security.”

Don’t confuse blockchain with bitcoin

Bitcoin may come to be the essential thing that pops into your mind when you hear and imagine about blockchain, nonetheless they aren’t a similar thing. The cryptocurrency bitcoin is merely one of blockchain technology use case, and maybe the most used mainstream example. Even so, bitcoin works on blockchain technology; it isn’t associated with blockchain itself. A simple distinction is to comprehend that blockchain is the underlying technology that bitcoin uses. Bitcoin is the first-and most successful-commercial execution of blockchain technology, though there are about 3,000 other cryptocurrencies on the marketplace. A similar analogy is like Internet and Email. Email is one of the many use of Internet technology.

According to Chris Burniske in his book Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond: The Innovative Investor’s Guide to Bitcoin and Beyond .

“Blockchain technology came from Bitcoin. In other words, Bitcoin is the mother of blockchain technology.The technological foundation to this platform is a distributed and digital ledger referred to as a blockchain. In January 2009, when Bitcoin was first released, it embodied the first working implementation of a blockchain the world had seen. Since then, people have downloaded the open-source software that is Bitcoin, studied its blockchain, and released different blockchains that go far beyond Bitcoin. Blockchain technology can now be thought of as a general purpose technology, on par with that of the steam engine, electricity, and machine learning.”

How Blockchain works?

The blockchain is an Internet-based, distributed, public database where transactions can only be added once they are validated through complex mathematics that prove authenticity of the data.

Five basics underlying the blockchain technology.

  1. Distributed Database
    Each party over a blockchain has usage of the complete database and its own complete history. No party controls the info or the info. Every get together can validate the documents of its transfer partners directly, lacking any intermediary.
  2. Peer-to-Peer Transmission
    Communication occurs directly between peers rather than by way of a central node. Each node stores and forwards information to all or any other nodes.
  3. Transparency with Pseudonymity
    Every transaction and its own associated value are obvious to a person with access to the machine. Each node, or consumer, over a blockchain has a distinctive 30-plus-character alphanumeric address that recognizes it. Users can make to remain private or provide proof their individuality to others. Orders arise between blockchain addresses.
  4. Irreversibility of Records
    Once a exchange is entered in the repository and the accounts are updated, the details can’t be altered, because they’re associated with every business deal record that came before them (hence the word “string”). Various computational algorithms and solutions are deployed to ensure that the saving on the repository is everlasting, chronologically bought, and open to others on the network.
  5. Computational Logic
    The digital nature of the ledger means that blockchain transactions can be linked with computational logic and essentially programmed. So users can setup algorithms and guidelines that automatically lead to ventures between nodes.

The blockchain network

Blockchain can only be updated by consensus between participants in the system, and when new data is entered, it can never be erased. The blockchain contains a true and verifiable record of each and every transaction ever made in the system.

While no system is “unhackable,” blockchain’s simple topology is the most secure today.

According to Alex Tapscott, the CEO and founder of Northwest Passage Ventures, a venture capital firm that invests in blockchain technology companies.

“In order to move anything of value over any kind of blockchain, the network [of nodes] must first agree that that transaction is valid, which means no single entity can go in and say one way or the other whether or not a transaction happened,” Tapscott said. “To hack it, you wouldn’t just have to hack one system like in a bank…, you’d have to hack every single computer on that network, which is fighting against you doing that.”

The computing resources of most blockchains are tremendous, Tapscott said, because it’s not just one computer but many. For example, the Bitcoin blockchain harnesses anywhere between 10 and 100 times as much computing power compared to all of Google’s serving farms put together.

Let see this example to understand more how a blockchain transaction works :

Source : www.accountexnetwork.com

The bitcoin “network” consists of a large network of computers, owned by disinterested parties (called miners) all over the world. Each of these computers (called nodes) contains a dedicated hardware and software environment that runs open source software to operate copies of the blockchain database. This blockchain database is maintained by each miner, and all of the nodes are responsible for safeguarding the security and validity of every record in the database.

Transactions are added to the blockchain database only after mathematical proof confirms that the transaction is valid. Consider this example, which describes what happens when Alice wants to pay Bob some bitcoin.

When Alice initiates the transaction, an encrypted “proposed” transaction is simultaneously broadcast to all of the miners on the blockchain. This proposed transaction contains Alice’s unique ID that proves she is who she says she is and that she owns the digital currency she intends to transmit. It also contains Bob’s public ID.

Immediately and simultaneously, all of the mining nodes in the network go to work on solving a complex mathematical algorithm to decrypt and validate that Alice actually has the authority to transmit this currency to Bob. These computers actually run a “race” to be the first one to solve the mathematical equations, and on average it takes about 10 minutes. These transactions are grouped into “blocks” and added to the database as they are validated by a consensus of the nodes in the blockchain.

You might wonder why people would allow their computers to be used as mining machines and how we can know that someone won’t hack into the whole thing and control everything.

The answer is miner incentives that are built into the system to compensate miners when they are first to verify transactions. The diagram below shows what happens when Alice wants to send 2 bitcoins to Bob. She initially has 10 bitcoins, but after the transaction completes, she will have just 7.999 bitcoins remaining. Bob receives the full 2 bitcoins, but the miner who “wins the race” is rewarded with .001 bitcoins as payment for their validation services.

These incentives are one of the most important concepts in blockchain technology. Essentially it gamifies the whole system by rewarding the fastest miner. The revenue stream from validating transactions funds the miners’ operations for maintaining and securing their copy of the blockchain database. The distribution of revenue across all the mining nodes enhances the security of the entire blockchain because each node participates as an equal partner in the system.

Summary:  Key features of blockchain technology:

The Nakamoto white paper explains the basics of “mining” data into a block, then using a hash (a time-stamped link) to chain those blocks together across a decentralized network of “nodes” that verify each and every transaction. The other key innovation in the white paper is using what is known as the proof-of-work (PoW) model to create distributed “trustless” consensus and solve the double-spend problem (ensuring cryptocurrency isn’t spent more than once).

Centralized vs Decentralised vs DistributedDatabase

A “trustless system” doesn’t mean it’s a system you can’t trust. Quite the opposite. Because the blockchain verifies each transaction through PoW, this means no trust is required between participants in a transaction.

Where does the proof-of-work come from? The miners. A P2P network of Bitcoin “miners” generates PoW as they hash blocks together, verifying transactions that then go into the ledger.

 

 

 

Takeaways:

  • The blockchain is a public ledger of all transactions that have ever been executed.
  • It is constantly growing as blocks are added. The blocks are added to the blockchain in a linear, chronological order. Each node maintains an exact copy of the blockchain. The blockchain has a complete ledger containing all transactions ever generated.
  • The new block can only be added after multiple miners solve the same math problem and after they confirm the answer given by the first miner to solve the problem.
  • New blocks can only be added in the precise order in which they were proposed to the network. Timestamps on all proposals are used to ensure the order of transactions in the chain. Furthermore, every new block contains a “pointer” to the block that immediately precedes it in the chain. This pointer essentially describes the fingerprint of the preceding node.

 

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