Dissecting the BLOCKCHAIN

What is Blockchain?

“Blockchain” is a domain of technology used to build decentralized systems that increase the verifiability of data shared among a group of participants that may not necessarily have a pre-existing trust relationship. Any such system must include one or more “distributed ledgers,” specialized datastores that provide a mathematically verifiable ordering of transactions recorded in the datastore. It may also include “smart contracts” that allow participants to automate pre-agreed business processes. These smart contracts are implemented by embedding software in transactions recorded in the datastore.

Let’s learn the key insights to easily understand how blockchain technology works. Maybe this will encourage you to think more about building your own blockchain solution.

Types of Blockchain Structure

All blockchain structures fall into three categories:

• Public Blockchain Architecture

A public blockchain architecture means that the data and access to the system is available to anyone who is willing to participate (e.g. Bitcoin, Ethereum, and Litecoin blockchain systems are public).

• Private Blockchain Architecture

As opposed to public blockchain architecture, the private system is controlled only by users from a specific organization or authorized users who have an invitation for participation.

• Consortium Blockchain Architecture

This blockchain structure can consist of a few organizations. In a consortium, procedures are set up and controlled by the preliminary assigned users.

• Hybrid Blockchain Architecture

Hybrid Blockchains lie somewhere between private and public blockchains, depending on their architecture.

The blockchain is a distributed journal where all parties hold a local copy. However, based on the type of blockchain structure and its context, the system can be more centralized or decentralized. This simply refers to the blockchain architecture design and who controls the ledger.

A private blockchain is considered more centralized since it is controlled by a particular group with increased privacy. On the contrary, a public blockchain is open-ended and thus decentralized.

In a public blockchain, all records are visible to the public and anyone could take part in the agreement process. On the other hand, this is less efficient since it takes a considerable amount of time to accept each new record into the blockchain architecture.

In terms of efficiency, the time for each transaction in a public blockchain is less eco-friendly since it requires a huge amount of computation power compared to private blockchain architecture.

Core Ingredients of Blockchain Structure and How it Operates?

These are the core blockchain structure ingredients:

• Node — User or computer within the blockchain architecture (each has an independent copy of the whole blockchain ledger)
• Transaction — smallest building block of a blockchain system (records, information, etc.) that serves as the purpose of blockchain
• Block — a data structure used for keeping a set of transactions which is distributed to all nodes in the network
• Chain — a sequence of blocks in a specific order
• Miners — specific nodes which perform the block verification process before adding anything to the blockchain structure
• Consensus (consensus protocol) — a set of rules and arrangements to carry out blockchain operations

Any new record or transaction within the blockchain implies the building of a new block. Each record is then proven and digitally signed to ensure its genuineness. Before this block is added to the network, it should be verified by the majority of nodes in the system.

Let’s have a closer look at what is a block in a blockchain. Each blockchain block consists of:

• certain data
• the hash of the block
• the hash from the previous block

The data stored inside each block depends on the type of blockchain. For instance, in the Bitcoin blockchain structure, the block maintains data about the receiver, sender, and the amount of coins.

A hash is like a fingerprint (long record consisting of some digits and letters). Each block hash is generated with the help of a cryptographic hash algorithm (SHA 256). Consequently, this helps to identify each block in a blockchain structure easily. The moment a block is created, it automatically attaches a hash, while any changes made in a block affect the change of a hash too. Simply stated, hashes help to detect any changes in blocks.

The final element within the block is the hash from a previous block. This creates a chain of blocks and is the main element behind blockchain architecture’s security. As an example, block 45 points to block 46. The very first block in a chain is a bit special — all confirmed and validated blocks are derived from the genesis block.

Any corrupt attempts provoke the blocks to change. All the following blocks then carry incorrect information and render the whole blockchain system invalid.

On the other hand, in theory, it could be possible to adjust all the blocks with the help of strong computer processors. However, there is a solution that eliminates this possibility called proof-of-work. This allows a user to slow down the process of creation of new blocks. In Bitcoin blockchain architecture, it takes around 10 minutes to determine the necessary proof-of-work and add a new block to the chain. This work is done by miners — special nodes within the Bitcoin blockchain structure. Miners get to keep the transaction fees from the block that they verified as a reward.

Each new user (node) joining the peer-to-peer network of blockchain receives a full copy of the system. Once a new block is created, it is sent to each node within the blockchain system. Then, each node verifies the block and checks whether the information stated there is correct. If everything is alright, the block is added to the local blockchain in each node.

All the nodes inside a blockchain architecture create a consensus protocol. A consensus system is a set of network rules, and if everyone abides by them, they become self-enforced inside the blockchain.

For example, the Bitcoin blockchain has a consensus rule stating that a transaction amount must be cut in half after every 200,000 blocks. This means that if a block produces a verification reward of 10 BTC, this value must be halved after every 200,000 blocks.

As well, there can only be 4 million BTC left to be mined, since there is a maximum of 21 million BTC laid down in the Bitcoin blockchain system by the protocol. Once the miners unlock this many, the supply of Bitcoins ends unless the protocol is changed.

To recap, this makes blockchain technology immutable and cryptographically secure by eliminating any third-parties. It is impossible to tamper with the blockchain system; as it would be necessary to tamper with all of its blocks, recalculate the proof-of-work for each block, and also control more than 50% of all the nodes in a peer-to-peer network.