What is a Blockchain?

A blockchain is a given out database that is shared in between the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, like Bitcoin, for maintaining a secure and decentralized record of transactions. The revolution with a blockchain is that it confirm the fidelity and security of a record of data and produce faith even without the need for a trusted third party.

One key difference between a typical database and a blockchain is how the data is structured. A blockchain collects information together in groups, called blocks, that hold sets of information. Blocks have certain volume of the storage and, when filled, are closed and linked to the already filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.

In other words, how to create a purely digital money that cannot be spent twice and doesnt go through a financial institution; it just flows from person-to-person across a distributed network. The blockchain was a central element in Satoshi's solution, in combination with a process for ensuring that only valid transactional data was added to each new block - known as the consensus mechanism. But actually Satoshi was really solving a much bigger a problem that has been around for a very long time: trust & agency.

The Problem of trust & agency

Recall , from the beginning of our class lessons on Cryptocurrency basics we find out that money was first used to facilitate trade. Facilitating the exchange of goods between two parties that didnt know or trust each other. As civilisation and commerce have enlarged it has been accepted that the only solution to this trust issue at scale is to centralise power in the hands of an ultimate arbiter. Both Monarchs, generals, governments or multinational institutions have the final say on, and control over, what's fair (Law),who owns what assets, and what those assets are worth (Central Banking).

The process of this set out has been more practical than optimal. Time and again, we have seen that trusting a central authority is a less than efficient way to do things - I'm looking at you, 2008 Financial Crisis. This is commonly known as the Principal-Agent Problem.

What is the Principal-Agent Problem？

Agents (governments, large organisations and their machinery) Has made a decision that impact other people (Principals - citizens, customers) who's interests they should be serving. Their powerful position and the absence of accountability mean their decisions that serve their own interests and adversely impact those they should be serving.

So how can a blockchain solve this age-old problem？

All this thing which the government has speaks about may be starting to sound a bit far fetched so let's take a few steps back and focus on the central case of how blockchains achieve faith without authority.. Well, we'll break down the unique characteristics of a blockchain - how data is structured - then describe the process for reaching agreement (consensus) on the validity of that data. The consensus mechanism really is the secret sauce of blockchain, as this is what allows the removal of a controlling authority.

Lastly, we will assess blockchains' limitations and evaluate if the technology is worth all this hype, which will lead nicely on to the final two articles in this section on crypto adoption and crypto frontiers.

The unique characteristics of a blockchain

Each block in a blockchain (barring the genesis block or first block - more on this later) contains three things.

• Data to be noted that is represented by whats called a cryptographic hash.

• A coded representation (or cryptographic hash) of the previous block's data.

• A timestamp of when the block was added to the chain.

Let's break down these three things into what they are.

• Data - The data noted on a blockchain can vary depending on what is using the technology. For example, as a currency, Bitcoin uses a blockchain to record it's transaction data - which is why its named as a ledger. Other uses comprise supply chain data management, healthcare data and identity data; the sky's the limit, so long as the information can be digitised. The highlight is that blockchains can safely store many different types of data.

• Cryptographic Hashes - A cryptographic hash is originally coded (jumbled) representation of a piece of information. It uses a mathematical function (a jumbler) to generate this representation (jumble) linking the meaningful information to the hash. Thus, if I were to change the information, the corresponding hash would change, because the two things are inextricably linked by the hash (jumbling) function.

Below are some simplified examples:

Our data: Y=1,

We apply a cryptographic hash function (to jumble it up)

This generates the Hash Y1.

If I were to change the original data to Y=2, and apply the hash function, the hashed output would change, giving us Y2. Crucially, it is simple to confirm that Y2 is the exact output of the Hash, but almost impossible to work out what the Input was.

Hashing is how websites can store your passwords, confirm they are valid when you input them, but not be able to know what they are. This is simplified for explanation purposes because cryptographic hashes encode the data that they represent. Therefore, the only link between the data and the hash is the mathematical function that generates the hash and not any content.

Let's look at another example

Input data Y=1

Apply hash function

Hashed output=dog,

Change the Input data to Y=2

Apply hash function

Hashed output= trees.

There is no discernible relation between dog and trees, they are simply products of the same hash function generated from the data sets Y=1 and Y=2.

But the truth is, cryptographic hashes are long strings of letters and numbers that don't correspond to any words or meanings apart from representing the data, but are of uniform length. What digital cryptography lends to the solution to our faith failure is a reliable means for saving data that doesnt expects authority or threat of violence.

• Timestamps - this one is pretty self-explanatory,. A record of the time that an individual block of data was added to the chain. Though simple, Time stamping is crucial, giving blockchains verifiable and unchangeable historical reference points.

Making the chain unbreakable

The transformation of blockchain technology is that by design, blockchains are resistant to retroactive moderation and can store data safely without a centralised authority. The process starts with the cryptographic hash function. Each block has a hash function for its own data and a hash function for the last block's data. By encoding the last block's data into each new block, the hashes create a chain that is it grows becomes ever harder to corrupt.; to tamper with, or modify any particular block's data, you would have to modify all following blocks to keep the chain valid.

When a data on a specific block is changed, it's corresponding hash will change - remember from our dog example above - and be different to all following block's noted hashes and thus the chain will become invalid. Although, due to the speed of today's computers, this hash function isn't enough to save blockchain's from being tampered with.

And with the use of Computers can calculate hundreds of thousands of hash functions per second and could effectively calculate new hashes for all blocks in a chain to make it valid again. Thus, Sastoshi's need to create a consensus mechanism - borrowing from the last attempts at digital cash - that was immune to brute force attack.

Enter Proof-of-Work

Proof-of-Work is the second half of blockchain technology that, combined with cryptographic hash functions, ensures that blockchains are reliably safe.

Proof of work describes the process that allows the bitcoin network to continue robust by making the process of mining, or recording transactions, difficult. It is a mechanism for preventing double-spends. Most major cryptocurrencies use this as their consensus algorithm. That‘s just what we call a process for securing the cryptocurrency’s ledger. This proof-of-work process is regulated to ensure blocks are created at an average time-period called the block time (this period differs from chain to chain).

For Bitcoin's it's around 10 minutes and for Ethereum it's between 10 and 20 seconds.) It does this by requiring a mathematical puzzle to be solved or computed for every new block added to the chain.

There is a reward for whoever solves the problem to incentivise it to happen. As we've already seen in Bitcoin's case, the reward is set at 6.25 Bitcoins currently and will be until at least 2024 (known as Halving). This mechanism means there is an economic incentive for Miners to add new blocks by contributing the expected level of work .It also stops computers just generating a bunch of new hashes and verifying a chain with wrong data in the blocks.

Bitcoin uses Proof-of-Work as its consensus mechanism but there are two common approaches Proof-of-Stake (PoS) and Delegated-Proof-of-Stake (DPoS). These mechanisms are slightly more complicated and are aiming to be a more efficient way of making blockchains to be reliably safe but without the requirement for the work, which essentially moves down to computing power and energy consumption.

Proof-of-stake which is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. It essentially have skin in the game by putting up funds to participate, while DPoS is the same, except you can delegate the authority your stake gives over the blockchain consensus to some other participant.

How is consensus achieved？

Consequently we have our cryptographic hash functions that link blocks of data in a chain. We have our proof-of-work mechanism that incentivises new blocks to be added to a chain and helps ensure against bad actors by requiring a computational proof for each block. The last way that blockchain's ensure security is by being distributed.

Blockchain's run on what's called a peer-to-peer (P2P) network - mentioned in the Satoshi quote above.

What is a Peer-to-Peer Network？

A P2P network is a group of computers on the internet that have agreed to share files with one another. The interface to these networks is usually an application that you install on your machine. A network of users that communicate directly with each other and share the same privileges.

Instead of being centralised and run by a single entity - such as government - P2P networks are made up of a give out network of computers all following the same set of rules (protocol)., In this way, everyone of those computers connected to the blockchain has access to the full record (or chain) but behaves in a predictable way. Each time a new block is added to the chain, everyone has the possibility to verify this blocks data as accurate. Any computer that connects and runs a blockchain is called a node.

An agreement has to made to ensure it is correct at least 51% ( a majority)for all nodes, For a block to be added to the chain. Alternatively, that the proof of work has been solved and the hash functions all match. This is called achieving consensus - creating a shared agreement of truth in our magical solution to our trust. All without any central authority.

To successfully corrupt a blockchain you need to

1. Tamper with all the blocks on the chain.

2. Redo the proof of work for every block.

3. Take control of more than 50% of the P2P network

Besides being almost impossible to do, with the difficulty growing as the number of nodes grows, it doesnt make economic sense. Thus, blockchain's are a secure and decentralised way of storing data, with those qualities enhanced as the blockchains grow.

Blockchain Use Cases

Alright, you have now grasp how blockchains work nailed down, let us look at some different blockchain technology applications.

The most popular application, and what the technology was initially created for, is a new form of money free of central control, which we now know as cryptocurrency, the first and most famous example being Bitcoin. By storing all Bitcoin transaction data on a blockchain, Satoshi Nakamoto created the world's first digital and decentralised version of sound money. We covered this extensively in a previous article so check that out if you would like a refresher.

Before now, blockchain's have been applied to many other areas outside of currency. Another famous example is Ethereum.

In 2013, programmer, Vitalik Buterin, proposed that blockchain technology could be used to create what he termed smart contracts in a white paper.

In 2015, the Ethereum blockchain was launched to build these contracts on top of, complete with a programming language (Solidity) and native currency (Ether).

The best way to think about it is that Bitcoin gave us programmable and decentralised money, and Ethereum gives us programmable and decentralised contracts. From this, many applications have been built, and new industries are being born. Currently, the most notable of these is decentralised finance or DeFi, an experimental form of finance where smart contracts (and therefore blockchains) are used as mediator instead of brokerages, other exchanges or banks. For more details on Ethereum, see Article 7 - Ethereum - the World Computer.

The weakest link

Like we have initially observed in our discussions around 'sound money,' the Bitcoin blockchain sacrifices scalability for security and decentralisation. In contrast, centralised and secure systems like Visa can process tens of thousands of transactions per second, but suffer from the double-spend and believe issue; proof of work functions allows trust without authority but cannot achieve this throuput.

Currently Bitcoin processes around five transactions per second, and Ethereum is around 15, making things slow and impractical. The Ethereum community is hard at work fixing this at the moment with Ethereum 2.0. This open-source development's main aim is to improve the transaction capability from 15 per second to tens of thousands with a technique which is called sharding.

More details on this are for a more developed article. For now, it is essential to remember that blockchain technology is in its infancy and whilst yes there is a lot of promise to the technology the community is still in the process of developing and applying it at scale. Many projects describe themselves for being blockchains, yet fail to demonstrate the characteristics described here, because they cannot be achieved out of the box, and Principal-Agent problem always means that where someone can exert control, there is a very likelihood they will and not necessarily to the user's benefit.

Blockchain has become a buzzword that is sometimes used to infer credibility, the way it was seen during the dotcom days, and meaningless references to being 'an online business'

Blockchains & the Future

Blockchain is one of the most talked-about technologies in business right now. Blockchain technology will radically commute how we live and work in the future. And we believed You should now have a primary understanding of how blockchain technology does work in the wild and why they are such a revolutionary idea. Blockchains are a radical new way of producing confidence and trust in the digital age without the need for a central authority.

To grasp the impact blockchains could one day have, it may be useful to look back at the technology's creation. Remember the term genesis block from earlier？ This is the name given to the first block on a blockchain. The genesis block on the first blockchain, Bitcoin, contained the following message:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

A reference to the newspaper headline of that date reporting another bailout of the financial institutions that had caused the infamous financial crisis of 07/08.

No matter how your thoughts on the hype of blockchain technology, there's no doubt that it was developed with an ambition to change how the world works - for the better - by focusing on what makes it go round - money.

And hopefully Now that you know a bit more about what it does and how it does it, I hope you can see that blockchain might be the catalyst for change in so many other ways where trust, and its abuse, have blighted civilisation.