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“The blockchain cannot be described just as a revolution. It is a tsunami-like phenomenon, slowly advancing and gradually enveloping everything along its way by the force of its progression.”
Blockchain Explained: The Evolution of Blockchain Technology
Now, let’s take these primitives and look at how they can be use to build a simple blockchain.
These types of blockchains are the basis for cryptocurrencies like Bitcoin and Ethereum. By understanding how they work, you’ll have a foundation for understanding all the different blockchain and cryptocurrency projects.
You’ve probably encountered a definition like this: “blockchain is a distributed, decentralized, public ledger.” It’s easier to understand than it sounds!
Why Blockchains Matter
“It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking [about] what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them.” – Alfred North Whitehead
In a blockchain, each time a transaction takes place, such as one party sending bitcoin directly to another, the details of that deal – including its source, destination, and date/timestamp – are added to what is referred to as a block.
Using cryptography, blockchains dramatically increases social scalability, the ability for humans to collaborate with increasingly large numbers of other humans, a necessary feature of civilization.
Historically, humans only transacted with members of a small tribe, often based on kinship alone, because there was no way for them to trust individuals outside that group.A wide variety of innovations over the last few millennia have increased social scalability by allowing humans to cooperate in larger groups.
The modern legal system which lowers vulnerability to violence, theft and fraud allowing parties or individuals that have no pre-existing relationships to interact.
The internet, particularly through rating systems, facilitated transactions between individuals with little or no social relationship.
Blockchains have the potential to increase social scalability to a level that no previous technology has. For the first time, we have a way for one Internet user to transfer a unique piece of digital property to another internet user safely and securely without relying on a trusted third party. It’s hard to overstate how big of a deal this is.
Think about digital contracts, digital keys (to physical locks or online locks), and digital ownership of physical assets including cars, houses, stocks, bonds and, of course, digital money.
What is blockchain, really?
If this technology is so complex, why call it “blockchain?”
Blockchain is literally just a chain of blocks. When we say the words “block” and “chain” in this context, we are actually talking about digital information (the “block”) stored in a public database (the “chain”).
“Blocks” on the blockchain are made up of digital pieces of information. Specifically, they have three parts:
Blocks store information about transactions, say the date, time, and dollar amount of your most recent purchase from Amazon. (NOTE: This Amazon example is for illustrative purchases; Amazon retail does not work on a blockchain principle)
Blocks store information about who is participating in transactions. A block for your splurge purchase from Amazon would record your name along with Amazon.com, Inc. Instead of using your actual name, your purchase is recorded without any identifying information using a unique “digital signature,” sort of like a username.
Blocks store information that distinguishes them from other blocks. Much like you and I have names to distinguish us from one another, each block stores a unique code called a “hash” that allows us to tell it apart from every other block. Let’s say you made your splurge purchase on Amazon, but while it’s in transit, you decide you just can’t resist and need a second one. Even though the details of your new transaction would look nearly identical to your earlier purchase, we can still tell the blocks apart because of their unique codes.
While the block in the example above is being used to store a single purchase from Amazon, the reality is a little different. A single block on the blockchain can actually store up to 1 MB of data. Depending on the size of the transactions, that means a single block can house a few thousand transactions under one roof.
How does it work?
When a block stores new data it is added to the blockchain. Blockchain, as its name suggests, consists of multiple blocks strung together. In order for a block to be added to the blockchain, however, four things must happen:
A transaction must occur. Let’s continue with the example of your impulsive Amazon purchase. After hastily clicking through multiple checkout prompts, you go against your better judgment and make a purchase.
That transaction must be verified. After making that purchase, your transaction must be verified. With other public records of information, like the Securities Exchange Commission, Wikipedia, or your local library, there’s someone in charge of vetting new data entries. With blockchain, however, that job is left up to a network of computers. These networks often consist of thousands (or in the case of Bitcoin, about 5 million) computers spread across the globe. When you make your purchase from Amazon, that network of computers rushes to check that your transaction happened in the way you said it did. That is, they confirm the details of the purchase, including the transaction’s time, dollar amount, and participants. (More on how this happens in a second.)
That transaction must be stored in a block. After your transaction has been verified as accurate, it gets the green light. The transaction’s dollar amount, your digital signature, and Amazon’s digital signature are all stored in a block. There, the transaction will likely join hundreds, or thousands, of others like it.
That block must be given a hash. Not unlike an angel earning its wings, once all of a block’s transactions have been verified, it must be given a unique, identifying code called a hash. The block is also given the hash of the most recent block added to the blockchain. Once hashed, the block can be added to the blockchain.
When that new block is added to the blockchain, it becomes publicly available for anyone to view — even you. If you take a look at Bitcoin’s blockchain, you will see that you have access to transaction data, along with information about when (“Time”), where (“Height”), and by who (“Relayed By”) the block was added to the blockchain.
Where Is the Blockchain Stored?
Anyone can view the contents of the blockchain, but users can also opt to connect their computers to the blockchain network. In doing so, their computer receives a copy of the blockchain that is updated automatically whenever a new block is added, sort of like a Facebook News Feed that live updates whenever a new status is posted.
Each computer in the blockchain network has its own copy of the blockchain, which means that there are thousands, or in the case of Bitcoin, millions of copies of the same blockchain. Although each copy of the blockchain is identical, spreading that information across a network of computers makes the information more difficult to manipulate. With blockchain, there isn’t a single, definitive account of events that can be manipulated. Instead, a hacker would need to manipulate every copy of the blockchain on the network.
Looking over the Bitcoin blockchain, however, you will notice that you do not have access to identifying information about the users making transactions. Although transactions on blockchain are not completely anonymous, personal information about users is limited to their digital signature, or username.
This raises an important question: if you cannot know who is adding blocks to the blockchain, how can you trust blockchain or the network of computers upholding it?
Trust and Security on the Blockchain
Blockchain technology accounts for the issues of security and trust in several ways. First, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you take a look at Bitcoin’s blockchain, you’ll see that each block has a position on the chain, called a “height.” At the time of writing, the most recent block’s height is 548,015, meaning it is the 548,015th block to be added to the blockchain.
After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash, along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.
Here’s why that’s important to security. Let’s say a hacker attempts to edit your transaction from Amazon so that you actually have to pay for your purchase twice. As soon as they edit the dollar amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash. And the next, and so on.
In order to change a single block, then, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block is added to the blockchain it becomes very difficult to edit and impossible to delete.
To address the issue of trust, blockchain networks have implemented tests for computers that want to join and add blocks to the chain. The tests, called “consensus models,” require users to “prove” themselves before they can participate in a blockchain network. One of the most common examples employed by Bitcoin is called “proof of work.”
In the proof of work system, computers must “prove” that they have done “work” by solving a complex computational math problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain. But the process of adding blocks to the blockchain, what the cryptocurrency world calls “mining,” is not easy. In fact, according to the blockchain news site BlockExplorer, the odds of solving one of these problems on the Bitcoin network are about 1 in 7 trillion at the time of writing. To solve complex math problems at those odds, computers must run programs that cost them significant amounts of power and energy (read: money).
Proof of work does not make attacks by hackers impossible, but it does make them somewhat useless. If a hacker wanted to coordinate an attack on the blockchain, they would need to solve complex computational math problems at 1 in 7 trillion odds just like everyone else. The cost of organizing such an attack would almost certainly outweigh the benefits.
Blockchain and Bitcoin
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. That concept can be difficult to wrap our heads around without seeing the technology in action, so let’s take a look how the earliest application of blockchain technology actually works.
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with. But it wasn’t until almost two decades later, with the launch of Bitcoin in January 2009, that blockchain had its first real-world application.
The Bitcoin protocol is built on blockchain. In a research paper introducing the digital currency, Bitcoin’s pseudonymous creator Satoshi Nakamoto referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
Here’s how it works.
You have all these people, all over the world, who have Bitcoin. According to a 2017 study by the Cambridge Centre for Alternative Finance, the number may be as many as 5.9 million. Let’s say one of those 5.9 million people wants to spend their Bitcoin on groceries. This is where the blockchain comes in.
When it comes to printed money, the use of printed currency is regulated and verified by a central authority, usually a bank or government — but Bitcoin is not controlled by anyone. Instead, transactions made in Bitcoin are verified by a network of computers.
When one person pays another for goods using Bitcoin, computers on the Bitcoin network race to verify the transaction. In order to do so, users run a program on their computers and try to solve a complex mathematical problem, called a “hash.” When a computer solves the problem by “hashing” a block, its algorithmic work will have also verified the block’s transactions. The completed transaction is publicly recorded and stored as a block on the blockchain, at which point it becomes unalterable. In the case of Bitcoin, and most other blockchains, computers that successfully verify blocks are rewarded for their labor with cryptocurrency. (For a more detailed explanation of verification, see: What is Bitcoin Mining?)
Although transactions are publicly recorded on the blockchain, user data is not — or, at least not in full. In order to conduct transactions on the Bitcoin network, participants must run a program called a “wallet.” Each wallet consists of two unique and distinct cryptographic keys: a public key and a private key. The public key is the location where transactions are deposited to and withdrawn from. This is also the key that appears on the blockchain ledger as the user’s digital signature.
Even if a user receives a payment in Bitcoins to their public key, they will not be able to withdraw them with the private counterpart. A user’s public key is a shortened version of their private key, created through a complicated mathematical algorithm. However, due to the complexity of this equation, it is almost impossible to reverse the process and generate a private key from a public key. For this reason, blockchain technology is considered confidential.
Challenges to Adopting Blockchain
While there are significant upsides to the blockchain, there are also significant challenges to its adoption. The roadblocks to the application of blockchain technology today are not just technical. The real challenges are political and regulatory, for the most part, to say nothing of the thousands of hours (read: money) of custom software design and back-end programming required to integrate blockchain to current business networks.
Here are some of the challenges standing in the way of widespread blockchain adoption.
We started with why blockchains matters in the first place: their ability to allow large groups of individuals to coordinate with each other.
Then we explored blockchain primitives, or cryptographic hash functions, which have three important properties:
- Collision Resistance – Two similar strings of text produce very different outputs. If you change just a single character in the manuscript of War and Peace, you get dramatically different results
- Deterministic Hiding – There is no way for a third party observer to know that 138F4504A873C01D0864343FAD3027F03CA9BEA2F0109005FA4FC8C7DCC12634 means “I like ice cream.”
- Puzzle Friendliness – If someone wanted to generate a hash that came up with the same output as “I like ice cream,” it’s extremely difficult to find another value that exactly hits this target.
We then examined how hash functions can be strung together into a transitive hash function. When we add a Merkle tree to a transitive cryptographic hash function, we get a blockchain. Each block contains a set of “merkleized” transactions and the blocks are chained together.
We then saw how bitcoin uses a technology called proof of work to secure the blockchain in a way that is impossible to fake.
Next, we investigated Goofycoin and Scroogecoin to see how blockchain technology had evolved over time to solve the double spending problem.
Finally we looked at how public and private blockchains try to achieve decentralization.
Blockchains are still a very young technology. They’ve only been around since 2009 and we should expect that over the coming decades, we will see an explosion of different blockchain applications and networks.
Already, there are thousands of different projects working on modifying the technology to see if and how it can be improved or adjusted for specific use cases. You now have an understanding of the fundamentals behind blockchain technology and how blockchains work.
Most, if not all, of the biggest innovations in the next generation of blockchain technology haven’t yet happened. There will never be a better time in history to start learning and get involved.
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