At a fundamental level, all Crypto Currencies are based off of the technology known as Blockchain. Bitcoin is simply the first and most well-known application of this new technology. Although blockchain relies on cryptography and computation to function, it is NOT merely a new computing language, but a revolution in accounting and how we keep track of “things”–financial transactions, votes, or supply chains to name a few. The name “blockchain” is actually quite descriptive. Every transaction that takes place is recorded on a block of code. Each block of code is a link in a chain thus a blockchain is all these blocks of code chained together, chronologically, to make an unalterable ledger.
A quick google search for “What is Blockchain” returns:
a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.
So it’s a digital ledger for transactions in cryptocurrencies that’s recorded BOTH publicly and chronologically. That last bit–recorded publicly AND chronologically–is utterly important to understanding the power and functionality of all the different blockchain-based technologies popping up.
So…How Does it Work?
This is directly from the Satoshi Nakamoto Whitepaper in Section 5: The steps to run the (bitcoin) network are as follows:
1) New transactions are broadcast to all nodes.
2) Each node collects new transactions into a block.
3) Each node works on finding a difficult proof-of-work for its block.
4) When a node finds a proof-of-work, it broadcasts the block to all nodes.
5) Nodes accept the block only if all transactions in it are valid and not already spent.
6) Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.
Let’s break down the steps a little further. Keep in mind that by design, the blockchain is a decentralized network (of computers) and these are the most basic rules of how this network operates.
Steps 1 and 2 are simply the public announcement of a new transaction and time-stamping it so that it can be catalogued chronologically. Step 3 is where it gets into the weeds of cryptography and also how we can trust that the ledger is true. The nodes in the network are all collecting transactions to form a block. They are competing to solve the nonce (a word for another post) to show that they’ve done the computational work necessary to encrypt the transaction data and create a block. Once the block is created, the network node that solved the nonce is awarded bitcoins (this is how one mines bitcoins).
Creating a new block is useless unless it is accepted by the rest of the network. So step 4 is crying out to the world that “I did it! I created a block!” and publicly sharing the content of that block across the network. This allows all the other nodes to “fact check” this new block in Step 5. This allows other nodes to verify that this new chain (including the new block) matches the copy of the chain it has on file doesn’t contradict any previous transactions. Step 6 is the linking mechanism that leverages the unique hash value solved for in step 3 to link it to the next block in the chain.
How is it secure and trustworthy?
By requiring timestamps with computational proof of order of the transactions, anyone who wants to record a fraudulent transaction and have it be accepted by the wider network must, by definition, control 51% of the network. So not only would a malicious actor need to re-do the work for the block it is trying to alter, but it must then also catch up to the current chain by redoing the work and surpassing all subsequent blocks. The hash from the previous block is a small portion of the data in the next, thus linking the new block with the entire rest of the chain before it. If a new block tries to alter a previously created block, it won’t match up to the hash and will be identified as fraudulent
The blockchain began as just Bitcoin, but the underlying blockchain technology it introduced to the world has taken on a life of its own. Blockchain-based technologies will soon permeate our daily lives and provide far more functionality than they do today. We are seeing smart contracts with Ethereum, distributed ledgers from financial institutions, and who knows what’s next?