Introduction to Blockchain

Brief history

Bitcoin was introduced in 2009 by someone or a group of people known as Satoshi Nakamoto. It aimed to solve the problem that plagues fiat currencies with the help of blockchain technology. As of 2018, there were more than 1,600 cryptocurrencies that followed the concepts of Bitcoin and Blockchain, including, Ethereum, Litecoin, Dash and Ripple.

Whenever a sender has made a transaction, they send bitcoins to a receiver by submitting the transaction on the public Bitcoin blockchain. Miners around the complete verifications to authenticate users. They also validate whether the sender has enough bitcoins to send to the receiver and ensure that the sanity of the underlying blockchain network is not corrupt.

Once the miner has authenticated the transaction and verified all the parameters, the transaction is added to a block, and then that block is made part of the main blockchain. After that, transactions that were associated with the block are executed. Once the transaction is complete, the block is added and the ledgers across all the nodes are updated, thereby allowing all the participants to have the same copy of the information.

Features of blockchain

Blockchain has many excellent features that further enhance its benefits over a traditional financial institute. These include:

• Publicly distributed ledger: This is available for anyone to use, even if they’ve used the blockchain only once. In other words, they can access all the records from the time the blockchain was created until it’s finished whenever they want.

• Any changes to a block are permanent: The first block is called the Genesis Block. Additional blocks are immutable. Any change, major or minor, is recorded into its block and cannot be altered. This provides total accountability.

• No central authority exists: Because of this and since the ledger is distributed, no one can hack into the ledger and alter it. All changes must be approved by most of the people in the network. Consensus algorithms therefore exist.

• Assets other than money can exist: Vehicles, property, machinery or any other items can be held securely in a block, too.

• High-level encryption: Perhaps the most important feature, this occurs with every transaction recorded in a block entry. Here, SHA-256 level encryption creates a sender’s private key containing the sender’s and receiver’s private information, the transaction information and the SHA-256 encryption algorithm. This private key is turned into an encrypted output that’s transmitted across the world, verified and approved by the miners and added to the block.

• Proof of Work: Each block contains many transactions, while each transaction contains four elements: the previous hash, transaction details, a nonce, and a hash.

  • A nonce is a random value used to variate a hash number. Every time the nonce is changed, it takes huge computational power by the miners to regenerate a new hash, which is why miners must know a lot about generating computations.

  • A hash obtained is a hex value with both numbers and letters. Any change to the nonce, transaction details or previous hash will completely change the new hash. That’s why it’s so difficult for a hacker to hack into a block – if one does, they must change the hashes of all the entries in a block and across the entire blockchain – a virtually impossible task. Just think of all the time and computational power such an endeavor would take!

  • Proof of Work involves several miners around the world using computational algorithms to find the ideal nonce value that satisfies certain predefined conditions for the hash value, which must be less than the target decided by the network to satisfy the block.

• Mining: This is the process whereby a miner is rewarded with cryptocurrency, known as a 'block reward', for finding an appropriate nonce value first. Currently, for Bitcoin, this is 6.25 bitcoins. However, the amount is cut in half every four years. At first, it was 50. In 2024, the block reward will drop to 3.125. It all depends on the number of available cryptocurrencies in the blockchain. As the number gets smaller, the reward does, too. The last transaction recorded in a block also assigns 6.25 bitcoins to a miner as a reward. This is the only way new bitcoins are made. This applies to new forms of other cryptocurrencies, too.

What are the key components of blockchain technology?

Blockchain architecture has the following main components:

A distributed ledger

A distributed ledger is the shared database in the blockchain network that stores the transactions, such as a shared file that everyone in the team can edit. In most shared text editors, anyone with editing rights can delete the entire file. However, distributed ledger technologies have strict rules about who can edit and how to edit. You cannot delete entries once they have been recorded.

Smart contracts

Companies use smart contracts to self-manage business contracts without the need for an assisting third party. They are programs stored on the blockchain system that run automatically when predetermined conditions are met. They run 'if-then' checks so that transactions can be completed confidently. For example, a logistics company can have a smart contract that automatically makes a payment once goods have arrived at the port.

Public key cryptography

Public key cryptography is a security feature to uniquely identify participants in the blockchain network. This mechanism generates two sets of keys for network members. One key is a public key that is common to everyone in the network. The other is a private key that is unique to every member. The private and public keys work together to unlock the data in the ledger.

For example, John and Jill are two members of the network. John records a transaction that is encrypted with his private key. Jill can decrypt it with her public key. This way, Jill is confident that John made the transaction. Jill's public key wouldn't have worked if John's private key had been tampered with.

How does blockchain work?

While underlying blockchain mechanisms are complex, we give a brief overview in the following steps. Blockchain software can automate most of these steps:

Step 1 – Record the transaction

A blockchain transaction shows the movement of physical or digital assets from one party to another in the blockchain network. It is recorded as a data block and can include details such as:

• Who was involved in the transaction?

• What happened during the transaction?

• When did the transaction occur?

• Where did the transaction occur?

• Why did the transaction occur?

• How much of the asset was exchanged?

• How many pre-conditions were met during the transaction?

Step 2 – Gain consensus

Most participants on the distributed blockchain network must agree that the recorded transaction is valid. Depending on the type of network, rules of agreement can vary but are typically established at the start of the network.

Step 3 – Link the blocks

Once the participants have reached a consensus, transactions on the blockchain are written into blocks equivalent to the pages of a ledger book. Along with the transactions, a cryptographic hash is also appended to the new block. The hash acts as a chain that links the blocks together. If the contents of the block are intentionally or unintentionally modified, the hash value changes, providing a way to detect data tampering.

Thus, the blocks and chains link securely, and you cannot edit them. Each additional block strengthens the verification of the previous block and therefore the entire blockchain. This is like stacking wooden blocks to make a tower. You can only stack blocks on top, and if you remove a block from the middle of the tower, the whole tower breaks.

Step 4 – Share the ledger

The system distributes the latest copy of the central ledger to all participants.

How did blockchain technology evolve?

Blockchain technology has its roots in the late 1970s when a computer scientist named Ralph Merkle patented Hash trees or Merkle trees. These trees are a computer science structure for storing data by linking blocks using cryptography. In the late 1990s, Stuart Haber and W. Scott Stornetta used Merkle trees to implement a system in which document timestamps could not be tampered with. This was the first instance in the history of blockchain.

The technology has continued to evolve over these three generations:

First generation – Bitcoin and other virtual currencies

In 2008, an anonymous individual or group of individuals known only by the name Satoshi Nakamoto outlined blockchain technology in its modern form. Satoshi's idea of the Bitcoin blockchain used 1 MB blocks of information for Bitcoin transactions. Many of the features of Bitcoin blockchain systems remain central to blockchain technology even today.

Second generation – smart contracts

A few years after first-generation currencies emerged, developers began to consider blockchain applications beyond cryptocurrency. For instance, the inventors of Ethereum decided to use blockchain technology in asset transfer transactions, introducint the concept of 'smart contracts'.

Third generation – the future

As companies discover and implement new applications, blockchain technology continues to evolve and grow. There is endless potential, and companies are solving scaling and computation limits with each passing year.