Blockchain: Basics and Introduction to Technology

If we look at the description of the Blockchain technology provided by  Coinmarketrate.com then we will see that these are distributed data structures protected from hacking, which, in fact, can be understood as an extension and further development of the idea of the network.

Blockchain is based on distributed ledger technology and is currently the most well-known form of it.

The term “distributed ledger” describes networks in which data is organized in a distributed manner. This data is stored in parallel by all network participants and verified using the consensus procedure.

The use of all network participants ensures the decentralization of the network and, unlike traditional databases, there is no need for centralized data storage. Accordingly, there is no need for a central administrative office. Data maintenance is carried out by all network participants.

The blockchain has a special structure in the form of cryptographic concatenation of data blocks. They are linked to each other in chronological order using certain checksums (hashes). A simplified graphical representation of the blockchain was published by Bitcoin founder Satoshi Nakamoto in the Bitcoin Whitepaper.

Hashes are irreversible encryption functions that can be generated for any data set. After a block of data has been encrypted and stored in the blockchain, it is followed by a new block of data. After saving, the data of the previous block can no longer be changed.

If a change occurs in a data block, the hash value of the entire block changes. However, since the hash value is a prerequisite for the hash value of the subsequent block, any subsequent change of one character leads to the entire blockchain becoming invalid. For this reason, the blockchain is considered especially protected from counterfeiting.

How Blockchain Works: Important Concepts

Technically speaking, blockchain describes a decentralized database structure that is connected between network participants. This ensures that a complete record of all transactions is stored in the history, and that each transaction can be verified by the majority of network participants.

And now we have come to decentralization as a characteristic of the blockchain.

Blockchain is a kind of distributed electronic registry that stores and makes information available constantly and transparently.

Here, the blockchain does not need to rely on a central authority. It is organized in a decentralized manner based on some fundamental concepts of cryptography.

These cryptographic concepts include the following:

• Hash functions
• Cryptographic Puzzles
• Hash trees
• Digital signatures
• Blockchain and Hash functions

1. Hash functions are mathematical functions that are used to match data or information of any size as an input set with a target range. The idea here is that the target range set is much smaller than the potential input data set. The hash function should make maximum use of the target range.

When changing a small part of the input value, the hash function returns a completely different target value. This allows us to conclude about the integrity of the input value by the target value. This is called data integrity.

2. Consensus Mechanisms, Proof of Work, and Cryptographic Puzzles

In addition, there are so-called cryptographic puzzles. This is a kind of puzzle with the following initial condition: using a hash function, you need to reach a certain output value. The solution should be found by varying the set value and calculating the hashes only by trial and error. It is impossible to determine in advance how a certain value of the hash function result can be achieved. Therefore, when using Proof-of-Work, it is necessary to iterate through random values until a solution is found.

With the help of these puzzles, it is possible to make a random choice among many network participants without a central authority making this choice. This corresponds to the main characteristic of blockchain decentralization.

3. Hash trees and digital signatures

In addition to puzzles, hash trees are also used to build certain data structures. They make it possible to effectively check the presence of certain information in the data collection.

4. Digital signatures are another important component of the blockchain. They are a widely used approach to ensure data authenticity. The basic concept is based on two corresponding keys. They are created by the generation function and are available to the user. Each user has a public key that can be distributed at his discretion, and a private key that is available only to him.

In this sense, a signature is an encryption procedure that uses a private key applied to the hash value of a message. Both keys together serve to verify the message (or information, or relevant data).

Transparency: full verifiability of data

Blockchain participants are called nodes, users, and miners. Users use blockchain services by performing certain transactions. Nodes transmit and store information. Miners collect this information in blocks. This is how the system is maintained.

This system ensures that the information that is transmitted, stored and processed in the blockchain is available to all participants. Miners ensure that this information is updated at very regular intervals in accordance with clear rules. The most famous example of this is Bitcoin mining.

It follows from this that the blockchain is always unique and unchangeable.

Blockchain and Censorship Resistance

The information contained in the blockchain cannot be changed. This is only possible if the majority of users agree with the changes. This resistance to censorship is based on precise and unchangeable rules according to which all blocks are connected to each other.

Blockchain nodes verify and store all transactions. Each node has its own local copy of the entire blockchain. This is a list of all transactions ever conducted on the network. If a new transaction is carried out, it is distributed throughout the network, and the result of the transaction is calculated by all checking nodes.

Individual nodes report the results to the network. With the help of the previously mentioned consensus algorithm, it is possible to determine agreement, i.e. general consensus. This system ensures integrity in the general network and guarantees resistance to censorship.

The process of consensus building, creation and distribution of new blocks depends on the consensus mechanism or the specific implementation of the blockchain. For example, Bitcoin and Ethereum use the Proof-of-Work algorithm.

In the Proof-of-Work system, a hash value with a certain number of zeros is calculated from transactions, the hash value of the previous block and a random number to calculate a new block. This calculation process is called mining.

Is the blockchain anonymous?

Another important principle of blockchain is anonymity. Blockchain basically dispenses with authentication, authorization, access control or tracking. Users identify themselves using keys, not identifiers.

Obviously, this does not necessarily go hand in hand with the idea of data protection. For this reason, many regulatory legal acts concerning work with digital identification data are currently being developed. Here we should mention the “white paper” on the development of the blockchain strategy of the German Federal Government, as well as the eIDAS regulation of the European Union.

As for the Bitcoin blockchain, Ben Weiss, the head of the banking BTC provider CoinFlip, claims that it is by no means anonymous, but pseudo-anonymous. It is impossible to buy a large number of Bitcoins without being able to verify your identity.

Blockchain Transaction Costs

Another important aspect of blockchain applicability is the relatively low transaction cost for large transactions. The above-mentioned characteristics of blockchain technology provide automated, efficient, tamper-proof transactions. Theoretically, any form of trading that is currently still carried out manually by intermediaries can be carried out on the blockchain at significantly lower transaction costs.

Famous Blockchains

Probably the most famous blockchain application is Bitcoin (BTC). In 2008, it became the starting point for the further development of various blockchains, which also dominate the market today.

The Bitcoin blockchain is the beginning of innovation.

Bitcoin was developed in 2008 during the financial crisis. The developer or developers are known by the pseudonym Satoshi Nakamoto. The main motivation for the development of the Bitcoin blockchain was the impression of the failure of banks and governments during the financial crisis. Skeptical attitude towards it became the reason for the development of Bitcoin as an open source blockchain that does not require a central authority and is open to all participants.

The Bitcoin digital currency functions in accordance with the basic properties of the blockchain: it is immutable and, therefore, secure. Also, BTC can only be released once at a time. Since the technology is open to everyone, there are many nodes that provide protection against data loss and manipulation.

The Bitcoin blockchain is public. The participants of the transaction identify themselves only by the account number (public key). These keys are stored in a digital wallet. The system does not require a real name. With the help of a private key, users prove that the Bitcoins assigned to the account number belong to them.

After that, the Ethereum blockchain appeared – decentralized applications and smart contracts. Ethereum is a first-level solution, and is also based on blockchain technology. However, unlike BTC, Ethereum is not a pure cryptocurrency, but a platform for smart contracts.

Ethereum is a programmable blockchain. While Bitcoin provides the user with many ready-made functions, Ethereum makes it possible to have any function created by users. Although there are ready-made functions, they can be expanded by users at will.

After that, second-level blockchain solutions appeared, which include such a project as Decimal Chain, with a unique native DEL token.

Based on the Cosmos SDK blockchain project, Decimal Chain is guided by the DPoS consensus. This project allows you to create cryptocurrencies of different categories on a decentralized basis, including NFT and stablecoins, games and applications. And one of its most important features is the use of so-called “bridges”, a cross-chain technology that allows you to make transitions between blockchains.

Advantages and disadvantages of blockchain

Blockchain technology offers many advantages in application, but it is also fraught with risks and dangers.

The Biggest Advantages of blockchain:

• Data protection, security, transparency
• Decentralized structure, so there is no need for intermediaries
• Many possible applications with high efficiency potential
• Better traceability
• Low transaction costs

But, the following disadvantages should be noted:

• There are still too few areas of application
• Comprehensive implementation of new technologies
• Uncertainty about a new, relatively unknown technology
• The growing volume of data leads to storage problems

Blockchain or database – differences

The main difference between a blockchain and a regular database is in the network architecture. Databases use a client-server architecture where the user can request data that is stored on a central server. Management is carried out by the supervisory authority (administrator).

In contrast, the blockchain consists of several decentralized nodes that take over the management.

In this sense, the functionality of the blockchain is mainly focused on the following points:

• Verification of value using cryptographic protection
• Ensuring the possibility of making transactions without an intermediary
• Safe storage of valuables
• Secure lending and exchange of values
• Secure calculations and asset movement assessment

Conclusion

At its core, the basic idea of blockchain can be described by five fundamental properties: immutability, reliability, integrity, transparency and equal rights.

The essence of blockchain is its decentralization. This is also its advantage over conventional database systems. Currently, there are already various blockchain applications that use such basic properties of the blockchain as efficiency, performance and transparency.

However, in many business applications, full transparency is undesirable. Therefore, it remains to be seen how the balance between the necessary transparency and the desired confidentiality will be maintained in the future.