It’s evident to me when discussing topics related to cryptocurrency on the FLAN blog, that it’s important to introduce the topic of blockchain and allow you, dear reader, a chance to fully grasp this new technology that is taking the world by storm.
While the topic is huge, let’s attempt to cover our bases in this blog with the following:
1- What is blockchain?
2- Who Created Blockchain?
3- How does blockchain work?
What is Blockchain Technology?
The simplest way to describe blockchain would be to say that at its most basic form, it is a record of information or digital ledger. This information can be anything, from a list of groceries to an insurance policy, to a documentation of ownership, but it is information that is written down and encrypted with a unique 64-character ‘hash’, this hash was never and will never be used ever again for any other set of information because it also includes a timestamp. Once the hash is created, a ‘block’ of data is created.
If you want to alter this block, by either adding to it or changing something on, then another block of this data is issued with its own hash. This new block is then ‘chained’ to the previous block via the hash code which will now contain a unique reference to the previous block. Since the second block is issued, should you want to alter the data again the same will take place: you won’t be able to change the original block, instead you will have to issue a new block chained to the previous blocks with a new hash encryption. We can deduce from above that blockchain is a technology that intrinsically documents original data and is immutable, making forgery and tampering with data almost impossible.
Since its beginning, blockchain technology has gone through major changes as more people become involved in its evolution and applicability. But to better understand what is currently happening, I will need to start at the very beginning.
Who Created Bitcoin?
Although it is commonly known that Satoshi Nakamoto is the person behind blockchain, his whitepaper references thrice papers written by two scientists whose work facilitated the creation of bitcoin and later on the evolution of blockchain as it is today: Stuart Haber and Scott Stornetta. Haber describes how he became fixated on “how to create immutable records, create digital records that in and of themselves intrinsically, [you] can know that they haven’t been altered, that they are the original”. His reasoning was that cryptology has the answer to this problem, which is where Scott Stornetta comes in. Their partnership resulted in a paper presented in the summer of 1990 at ‘Crypto’ conference and later published in 1991 titled “How to Time-stamp a digital document”.
According to them, in order to verify that a digital document is original three parties will have to be involved: a sender, receiver, and verifier. The issue here is that there can be no way to ensure that the verifier’s credibility is solid, so the answer came in the question form of: how to remove the third party from this interaction? Another rising issue is how to know which document was the original in reference to a later edited version, which brings to mind the issue of chronology.
The paper contributes the following:
1- A hash system that timestamps a digital record thus establishing a chronological fingerprint for the record.
2- A peer-to-peer network of nodes that can verify the hash sequence and therefore achieving credibility based on unanimous consensus. Funny enough, the scientists tested out their solution with a weekly published classified ad on the Sunday edition of the New York Times (image below). The ad is still published on a weekly-basis to this day!
Publishing on the newspaper was the most practical means of ensuring that information at the time was available to most individuals since internet usage was not as widespread in the early 90s.
From 1991, fast forward to 2008 when Satoshi published his/their whitepaper that represents the first widespread application of blockchain technology titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. Satoshi introduced blockchain as a payment system in the form of Bitcoin, his additions to Habert and Stornetta’s paper involves:
1- focusing on the transfer of money from one address (wallet) to another.
2- creating an economic incentive scheme to encourage individuals to keep on validating the bitcoin transactions within the network and produce more bitcoins by getting a percentage of the bitcoins produced which results in the crypto mining process
3- upgrading the hash system so that a block connects with previous blocks via the hash to form a chain.
Following the release of the cryptocurrency, Bitcoin, people were slow to realize the machine that operated the Bitcoin. Other successful cryptocurrencies were launched such as Ethereum in 2015, while some such as bitgold, ecash, and hashcash weren’t as successful. Later on, with the introduction of smart contracts and DeApps the capabilities of blockchain became clearer even though there is still much to discover. Today major industries are adopting blockchain including banking, insurance, and supply chain, thus showcasing the versatility of this technology.
How Does Blockchain Work?
Today, blockchain operates on three main principles: distributed ledger technology, smart contracts, and security.
Generally speaking, a peer-to-peer network is of the essence for blockchain (naturally there are variations to this importance based on the application and type of blockchain). It is therefore imperative that all peers or administrators across a network are notified of changes taking place on the blockchain simultaneously. DLT takes care of that, it is responsible for documenting and sharing information across multiple data stores or ledgers in a network so that they are simultaneously updated with modifications in the ledger displayed as new chains to the block.
Smart contracts are part of the second wave of innovation on blockchain following the introduction of cryptocurrencies. They are best described as an automated execution contract that satisfies a ‘if.. then’ reasoning coded onto a blockchain. It is an agreement between a number of parties who agree beforehand on a set plan of action should a number of conditions apply, this could be an automatic transfer of funds, a notification to someone, or any other action deemed suitable between peers on a blockchain.
One case to better imagine how blockchain smart contracts work would be in the case of a direct refund for a service not completed. Say you signed a digital contract with your flight company so that in the case of a canceled flight you are entitled to a refund, in the case that your flight gets canceled the flight company will automatically refund your ticket payment without you having to contact customer service. This is a classic example of an ‘if.. Then’ situation where an automated execution takes place.
Blockchain is considered to be extremely secure for a number of reasons:
1- transparent transactions within the network where everyone on the network is privy to the on-going of alterations on the blockchain
2- A change has to be unanimously approved by the network in order to be issued on the blockchain, swaying members of the network or carrying out fraudulent transactions becomes increasingly difficult with a growing network where everyone has access to the blockchain.
3- The hash of the blockchain is coded in a way that references the previous block and is timestamped, making the process of fabricating a block extremely difficult. One erroneous block will result in a system error since it references previous blocks and will be used to reference future ones and changing an enough segment of the block is a very expensive and time-consuming process which makes it difficult to carry out.
To be Continued…
Blockchain technology, although becoming more complex with time, is a technology that started with a simple problem at hand: how to create digital records that are immutable and where alterations can be tracked on. This simple solution paved the way for more applications than anyone could have anticipated, but such is the ingenuity of humanity and only time will show us the extent of this technology!
I hope this blog was informative and provided an enjoyable introduction about blockchain technology, you can check out my other blogs for more in depth information about the types of blockchain, its applications, and more here.