A “blockchain” is a network-distributed database that stores data in electronic format and disperses it among computer network nodes. The basic difference between a blockchain and a database involves data structuring. A blockchain is a shared, immutable ledger—and like the name suggests—arranges data in chunks or “blocks” whereas a database arranges data in tables.
A blockchain is a “block sequence.” When data fills up a block it becomes associated with the prior blocks created. Different types of data can be stored in the blockchain network but the most important is transaction data, which forms a digital ledger that’s totally transparent.
The Origins of Blockchain Tech—The Pre-Bitcoin Era
Bitcoin is unequivocally the invention of “Satoshi Nakamoto,” but blockchain tech was invented many, many years before the launch of his whitepaper in 2009. David Chaum, a doctoral candidate at the University of California at Berkeley, defined a blockchain database in his dissertation, “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.”
That was in 1982—27 years before Bitcoin was even a thing. Sure, there were decentralized databases before Chaum, but if you’re ever on a game show and the question “Where does blockchain originate from?” comes up—mentioning Chaum will win you the grand prize.
Chaums’ networks weren’t designed originally to support digital currencies, although they did lay the groundwork for Satoshi. Chaum started a venture called “Digicash” back in 1989, and it launched products called “digicash,” “eCash,” and “cyberbucks.”
Clearly, the man was far ahead of his time—but his visionary status didn’t help in business. He failed to secure proper financial backing for his project from investors, and the project died shortly after its inception.
History Nearly Repeats Itself
Nearly two decades later—in 2008—“Satoshi Nakamoto” published his whitepaper on BTC, titled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” No one knows who Satoshi is, but speculation of “his” identity ranges from groups like the CIA to individuals like Adam Back—a well-known name in the development space.
Experts suggest the blockchain protocol in the Nakamoto paper—is in fact—the same as David Chaum’s. The only difference lies in the Bitcoin “proof-of-work” consensus mechanism for validating data blocks and the mining process. However, most people credit Satoshi Nakamoto for the creation of blockchain technology, not Chaum.
How Does a Blockchain Work?
The process of a blockchain transaction can be described in the following steps.
Step #1 – Transaction Facilitation
A new transaction is entered into the blockchain network. All information to be transferred is encrypted with the application of public and private keys.
Step #2 – Transaction Verification
The transaction is subsequently forwarded to the peer-to-peer computer network dispersed throughout the network nodes. All the computers in the network will review the transaction before execution.
Step #3 – New Block Creation
In any general blockchain network, the nodes verify transactions simultaneously. Once the transaction is verified, it will be declared as a confirmed transaction, which will be added to the mempool. All the verified transactions in a node form a mempool and multiple mempools form a block.
Step #4 – Consensus Algorithm
The nodes that create a block will try to add the block to the blockchain network to make it a permanent record in the digital ledger. The nodes use a consensus mechanism so that each new block added to the Blockchain will be the version agreed upon by all the nodes in the Blockchain and only valid blocks are added securely to the blockchain.
The node—aka the “miner”— appointed to add the block to the blockchain will be rewarded with the consensus algorithm creating a hash code for the block that is required to add the block to the blockchain.
Step #5 – Addition of the New Block to the Blockchain
After the newly created block has received its hash value and been verified, it’s added to the blockchain. The hash of the previous block in each block is cryptographically linked to each prior block to produce the “blockchain” and a new block is added to the open end of the blockchain.
Step #6 – Transaction Completion
The transaction becomes complete once the new block is added to the blockchain. The record of the transaction is forever stored in the blockchain ledger and anyone can view the record of the transaction and confirm the transaction.
Understanding Blockchain “Mining”
Blockchain mining is carried out in various stages from transaction to integration on-chain. The transaction is the transfer of data between one party to the other in a blockchain network. A block is created when a transaction is mined.
Miners or a group of miners are required to solve a mathematical problem to get a particular hash by changing various factors and the block is mined by the miner by solving the problem.
Miners confirm the authenticity, and the added block is confirmed by other miners to be non-malicious. In the event it’s compromised, the hackers do not receive the reward. In the case of a normal block, the miner responsible for mining the block—i.e., solving the math problem—receives the reward. Once the steps are successfully processed, the block is added to the blockchain.
Let’s look at a working example of blockchain in action.
For this example, we’ll assume that John and Jill are two nodes in the Bitcoin blockchain network who desire to conduct a transaction between them.
Step #1 – Transaction Facilitation
John will send 20 BTC to Jill using the Blockchain network.
Step #2 – Transaction Verification
The verification message is propagated to all the network nodes. All the nodes check the parameters associated with the transaction; does John have the required balance? i.e. at least 20BTC to carry out the transaction? Is John’s node registered? Is Jill’s node registered? After the parameters are checked the transaction is verified.
Step #3 – New Block Creation
Multiple confirmed transactions are accumulated in mempools and are placed in a block. The confirmed transaction will be placed in a block.
Step #4 – Consensus Algorithm
The BTC Proof-of-Work consensus algorithm is used for verification of the block. In proof-of-work models, the node is provided with the target hash value by the system, and it should produce a hash for the new block in line with it.
The node should calculate the hash value for the new block which should be less than the provided target value. In the case of the same block being mined by two or more miners simultaneously, the higher difficulty block is considered. The others are known as stale blocks. Mining will reward the miners with blockchain currency. In this, the blockchain currency is BTC.
Step #5 – Adding the new block to the blockchain
The newly created block will only be added to the network after it receives the hash value and verification by proof-of-work consensus. Jill will be rewarded with 20 BTC by John. The new block will be linked to the open end of the blockchain.
Step #6 – Confirmation of the transaction:
Once the block is added to the blockchain, the transaction will be confirmed and 20 BTC will be transferred from Johns wallet to Jills wallet. The transaction information is locked in perpetuity in the blockchain ledger and is available for anyone to view.
Any network node can view the ledger and verify the transaction. This guarantees transaction transparency and history, verifying if any user is trying to double-spend. For example, if John tries to make a future transaction, the other nodes can verify the history of past transactions to verify whether there’s a balance to make the current transaction. The transaction will be approved if John’s wallet holds the required balance to process the transaction successfully.
Is the Blockchain Secure? How Is It Safeguarded from Hackers?
In the most basic sense, a blockchain can be visualized as a linked list of transactions. The next block in the list is dependent upon each of the prior blocks, with the only exception being the very first block, the “genesis block,” which is hardcoded in the blockchain.
Each block in the blockchain contains the hash of the last block’s header and a hash of the transactions in the Merkle tree of the current block. This way, each block is cryptographically chained to the previous block up until the last block in the blockchain.
So, what makes it a secure network? Let’s look at an example of when a hacker attempts to modify a transaction or block data. Suppose there’s a chain of 10 blocks, where the 10th block depends on the 9th block, etc. The 10th block relies on each of the blocks before it, including the Genesis block.
If the attacker tries to change data in the second block, they’ll have to change data in the later blocks too, otherwise, the blockchain will be made invalid since the later blocks are derived using the hash value in the second block while the second block itself is changed, though the later blocks are unchanged.
As the blocks progress, immutability is increased as changing the block is an expensive and intensive operation. To alter a block in a blockchain, a consensus algorithm is used by the blockchain network nodes.
To counter the change in a block, the hacker will need to recalculate the hash of each block to modify the hash value of the block header in the next block. This will require a lot of time and computing power.
For such an attack to be effective, the hacker will have to control and modify at least 51% or more copies of the blockchain simultaneously so the new copy becomes the majority copy and thus the agreed-upon chain.
It requires an enormous amount of time, money, and computing power, and hackers don’t have access to these resources—we’re talking about data-centers worth of GPUs required to pull it off.
Advantages of Blockchain Technology and Cryptographic Payment Ledgers
Immutability
Blockchain technology guarantees immutability, which refers to the technology’s capability to ensure no data stored in its network can be deleted or overwritten. This guarantees no data tampering or alteration.
Transparency
Blockchain technology is decentralized such that any user in the network can view the ledger and audit the data stored. This makes the ledger entirely transparent and helps in creating trust between network users.
Security
The blockchain provides added security with transaction verification by network participants required for authenticity and accuracy. This structure provides a secure layer for the network’s transactions and trades. The immutability of the transaction also ensures there’s no risk of the data being exposed to a rouge administrator or a third-party attack.
Disadvantages of Blockchain Tech
High Cost of Implementation
While it saves the users money, it’s very costly for companies to implement, which can be a barrier to mass adoption. Proper planning and execution are required if companies are to adopt the technology in operations.
Performance
Blockchain technology is defined by its process of verification for a single transaction across many users in the network. There are redundancies in the sense of each node in the network having to store each transaction.
Alteration of Data
The immutability of data in the blockchain network can also be a real hindrance when alterations are required. It’s highly time-consuming and expensive to rewrite the code.
What is the Future of Blockchain?
The idea of blockchain technology is in the midst of rapid evolution and still in its infancy. The ways in which this technology will likely transform how we live and work is similar to how the internet disrupted our lives in the late 1990s and early 2000s. There was a time when “experts” stated that the internet was just a fad, and no one would use it—they said the same thing about the personal computer—and now with blockchain tech.
But the reality is that blockchain isn’t just limited to obscure virtual cryptocurrency transactions—it has real-world benefits across every industry. From cold storage logistics to storing medical records, the applications for blockchain tech will continue to disrupt business and commerce for decades to come as the tech rolls out and experiences wider adoption.
