Understanding the Basics of Blockchain Systems

shutterstock_722242618Before delving into Bitcoin and cryptocurrency, it’s important to have an underlying foundation of knowledge of blockchain systems. Below is a comprehensive post which underlies the basics of blockchain systems and the varying technologies that can power them.

Blockchain systems are a coalescence of three main principles: private key cryptography, a distributed network with a shared ledger, and an anchoring reason or goal to support secure and recorded network transactions. These three form the basis of blockchain technology, generally defining it as a secure and decentralized ledger that cannot be tampered or altered. Most importantly, a blockchain network eliminates the need for a trusted third-party, as it is able to create a trustless system.

A Trustless System?

A trustless system doesn’t define a system that is untrustworthy but rather is used to connotate a system that isn’t reliant and overtrusting of any single party or distributor of information. This is because blockchain systems distribute trust rather than collectively dumping it upon a trusted third-party, like many centralized services work today. In blockchain technology, trust is placed on the governing protocol of the blockchain, whether it be proof-of-work, proof-of-stake, or another kind of consensus mechanism which approves transactions and additions to the blockchain.

This being said, there is no exact definition of what a blockchain is. While many choose to define blockchain a “decentralized ledger of transactions”, there are many blockchains which are not associated to a cryptocurrency (like Walmart’s supply chain database and recent patent for a blockchain-based health care records system), others which are not recorded publicly (like MasterCard’s blockchain APIs) and are not decentralised.

Defining Blockchain Systems

The Verge has an in-depth article which explores the history and definition of blockchain technology, wherein University of British Columbia associate professor of archival science Victoria Lemiuex states:

“In general, if the transactions are gathered together in blocks, and it is blocks that are secured on the chain using cryptography, and it is designed to be tamper-resistant and produce immutable records, the system qualifies as a blockchain,”

Associate professor Lemieux further explains that even if the above can be seen as a definition for blockchain systems, there are many distributed ledgers that denote themselves as blockchains even when their transactions aren’t organized in blocks. This is why it’s best to think about blockchain in terms of the technology being used, rather than absolute adjectives like trustless or immutable, which might not be applicable in all cases.

How Does Blockchain Technology Work?

A Blockchain system is a cryptographically secured chain of blocks, each block containing a set of data. This dataset can be anything, from a history of transactions to any other kind of record keeping. Let’s break everything down briefly to make blockchain’s innate security easier to understand:

  • A block is a collection of data.
  • Each block‘s information is cryptographically encoded using a mathematical equation into a 64-character string called a hash.
  • If anything is changed in a block‘s data or contents, even just one letter or number, the resulting hash is also completely changed into an entirely different hash.
  • This means every block‘s hash is always unique.
  • Every block includes the previous block‘s hash as part of its data. Let’s call this a memory hash just to make the next section easier to understand.

The mathematical work required to create these cryptographically encoded hashes is called proof of work, as it validates the set of data. In the case of Bitcoin, the proof of work algorithm ensures a block of transactions are valid and legitimate before they are verified and stored on the public blockchain. Proof of work algorithms necessitate a lot of computational power, which is why blockchain systems like Bitcoin function by allowing users around the world to contribute their computational power and act as “miners”. In compensation, a reward is given to the first successful miners who have verified transactions on a completed block using the proof of work algorithm.

There’s also a different kind of blockchain protocol system called proof of stake, but we’ll be going over proof of stake and how it differs from proof of work in a future post.

Why Blockchain Systems are Difficult to Tamper

Because of the If a block’s data is changed or missing, the block’s hash will be different to the memory hash present on the next block. Because a block’s data contents also include the memory hash, and is a factor in that block’s hash, if one tried to cover up their data tampering by changing the memory hash on the next block to match the altered block’s hash, then they would have to continue the process, effectively changing every single block in the blockchain.

It is this structure, using cryptographically obtained hashes to define and secure each block, which makes blockchain difficult to tamper with. However, the decentralised nature of many blockchains also plays a large part in making these chains of information secure and unchangeable.

The Security of Blockchain Systems

In the case of a decentralized blockchain system, data is processed through the proof of work or proof of stake protocol by a network of users acting as a consensus mechanism before all updating the blockchain at the same time. Every participant in the blockchain is continuously contributing some of their computing power into maintaining and updating new data entered into the blockchain.

All nodes (contributing computers or servers) are connected and communicating about the validity of each transaction or information being added into the blockchain. Once all the nodes come to the same conclusion about the data contents within a block, they all approve and add it to the blockchain at the same time. This results in a shared and distributed ledger of transactions (in the case of a cryptocurrency blockchain like Bitcoin) that cannot be altered or tampered.

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