Today, we are jumping into the topic of blockchain technology. It is a doozy, but it's crucial to understand as it lays the foundation for cryptocurrencies and Web 3.0. This article will provide a basic overview of blockchain technology. Be on the lookout for future posts where we will dive deeper into different aspects of the technology.
History of blockchain technology
The idea of distributed ledger technology (DLT) has been around since the late 1980s/early 1990s. Blockchain is a type of DLT that was put into practice with the creation of Bitcoin in late 2009 by Satoshi Nakamoto (a pseudonym used to disguise the author’s true identity). Satoshi thought the banks and centralized institutions had too much power, and the trust-based system had too many faults (i.e., double-spending and privacy). Satoshi envisioned a new form of currency that could be sent and received directly, without the need for 3rd parties financial institutions. What a wild idea, right? Luckily, it’s becoming more mainstream. Since its initial launch, Bitcoin has gained a large user base; its success inspired additional cryptocurrencies to be developed, many of which have their own blockchain. There are use cases outside of the crypto world as well, such as medical records and tracking supply chains. Blockchain technology has even been adopted by major companies such as IBM, Microsoft, Oracle, Anheuser-Busch InBev, and Walmart, amongst many others.
A blockchain is an unchangeable digital ledger that tracks transactions and assets in a business network. Blockchains are trustless systems, removing the secrecy around who can access the ledger and changing how information gets handled as they are transparent and, oftentimes, fully public. The assets tracked can be anything of value, whether they are tangible (i.e., products) or intangible (i.e., cryptocurrencies). The ledger is duplicated and distributed amongst an extensive peer-to-peer network of computers (aka nodes) all over the world that track, record, and verify transactions across the network. The ledger being duplicated and spread across many sources is key to preventing any foul play, such as attempts at changing the record or cheating the system. If someone attempted to hack the ledger, the other nodes in the system would identify the issue since they are verifying all transactions and constantly cross-checking with each other to ensure accuracy. Ultimately, could the system be hacked? Well, the short answer is “yes,” but to do so, the hacker would need to take control of more than half of the nodes (thousands!) and change the blockchains on all the systems so that more than half of the network would verify the change(s) they made. The difficulty of doing that makes blockchains very secure.
Blockchain content and growth
Now that we have a bird’s eye view of a blockchain let’s zoom in a bit to see what information is on a blockchain and how it grows. Here is the general process described as simply as possible:
- A transaction is authorized by the owner's digital signature, thereby authenticating it. This isn’t your actual digital signature, such as one provided via programs like DocuSign. Cryptographic keys are used which maintain a person’s privacy. (See our future post on Cryptographic keys to learn more.)
- Each transaction is time stamped and added to a new block by the nodes, who validate the transactions within the block.
- The new block is validated by a node using complicated computer algorithms (usually via Proof of Work or Proof of Stake- more on these in a future post). Basically, the node checks to ensure the buyer has the funds and verifies the asset gets sent to the recipient for each transaction.
- The validated block is broadcast to the other nodes in the peer-to-peer network. Nodes accept the block only if all transactions in it are valid and not already spent.
- Upon validation, the new block is assigned a hash which is a unique identifier like a fingerprint where no two are the same. The hash of the previous block in the chain is also added to the new block, and finally, the new block is added to the chain.
- The update is distributed across the network, completing the transaction.
Here is a visual representation of a blockchain and the information that each block carries:
The hash is the key to the security of the system. If any changes are made to the data in the block, the hash changes, and it’s no longer considered the same block. Since each block is linked to the prior and future blocks, it makes it easy to notice if something has been tampered with since the tampered block will fail to have the hash noted on the next block:
As the blockchain grows, so does its security. Satoshi Nakamoto said it best,
“The network is robust in its unstructured simplicity. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.… As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers.”
So what do you think? Does blockchain technology seem like a viable option to update how transactions are handled? Over 10,000 cryptocurrencies are operating on blockchains. Not all have their own blockchain, but that is still an impressive number! It’s expected that this number will continue to grow as cryptocurrency adoption increases.
Be on the lookout for additional Decentralized Diary articles that examine blockchain technology and its features in more detail, such as types of blockchains currently in use, Proof of Work and Proof of Stake, and cryptogenic keys.
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Want to read Satoshi Nakamoto's Bitcoin white paper? View it here: https://bitcoin.org/bitcoin.pdf
The content is for informational purposes only. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer of a security, token, or application. This is not investment or legal advice. Please do your own research.