Blockchain Explained: All Your Transactions For Everyone to See! Except They Won’t Understand a Thing.
By: Watson Law
Tags: Blockchain, Dlt, Watson Law

WHAT ON EARTH IS BLOCKCHAIN?

One interesting thing about new technologies is that they typically have a name that helps ordinary folk like you and me better understand how the given technology functions. Consider for example a Proton Synchrotron Booster. Quite straight forward of a concept. It has a…

Source: giphy

Okay I got some looks from around the office so perhaps this is not the best example. A smartphone then! Pretty straight forward, no? You can call people with it and it is ‘smart’ which means there is a bunch of other things in there that make your life easier. The point to be made is that some tech is better explained simply by looking at its name.



Same goes for blockchain. In essence, a blockchain is simply tons of transactions chronologically grouped together into separate blocks. After a block’s storage capacity is filled, it is joined together to the next one via a connection ensuring the validity of the information from the previous block — the cryptographic hash function.



What makes blockchain distinct from previously developed means of record storage is that it is a type of a distributed ledger. This means that the stored information is not controlled by or vested into a central authority. Rather, it is distributed among a group of computers (called nodes) which simultaneously and collectively maintain the whole network. As a result, all participants have access to the same copy of the ledger and changing it would require the network’s collective effort, a 51% participation if we are being specific.



The process of maintaining a blockchain network through computing power is what is commonly referred to as mining. As it is quite dense on energy consumption and therefore expensive, it follows naturally for miners to seek incentives for their work and they indeed do receive such. Once an information block has reached its maximum amount of transactions, the miner whose computer managed to be at the right place, at the right time (the one solving the mathematical equation completing the block) receives an award — a fraction of the network’s underlying currency.



Up until now, people have normally made use of intermediaries to propel financial transactions. For example, you want to wire cash to someone abroad. Rather than starting your car and driving to their location, you will most likely go to the bank and pay a hefty service fee to send the money from there… and just wait. This is a typical scenario where the transfer can only be completed with the help of a trusted central authority in charge of the transaction.



What if you could just power up your computer and send the money right away by yourself, without a middle-man?

Blockchain makes this possible as it operates on a trustless non-centralized model. Once initiated, transactions are subject to the collective approval of every computer node working towards maintaining the network, not just the main one. No need to go to the bank anymore!

A visualization of centralized vs. decentralized storage showing how a central authority is in control of all input and output in such a system — Source: cyberoptix

Assume you own $100 and send $5 to the friend abroad who has $50. The system knows your $100 balance and you are broadcasting a message to the other participants that your own $5 will be added to your friend’s $50. Once the message has reached enough of the rest of the computers in the network, both balances are updated to reflect their respective new values. As the record is distributed, every validating node receives the same message.



The whole transfer can be realized globally in a matter of minutes, for a fraction of the costs we pay today. There is also no need to disclose heaps of personal information to a third party, you are always in control of your personal assets and can access them without limits.



The main force driving mass blockchain implementation is not only the move towards decentralization, but also the security and integrity behind the formation and subsequent connection of all building blocks. Ethereum founder Vitalik Buterin calls it “a magic computer”. To grasp this magic you need to understand what we previously meant by mentioning cryptographic hashing.

Whenever a transaction (or any type of data) is entered into a block by a network participant it is given its own personal stamp or a hash. For example, I sell my car to my neighbor for an X amount of money. ‘A sells CAR to B for X’ is the exact information being inserted to the block. However if someone wants to view the transaction in the block they will only be able to see the specific hash attributed to that particular data set which is a combination of letters and numbers. Similarly, if the inserted information reads ‘B sells BIKE to C for Y’, someone viewing the transaction will see a whole different combination of characters.

Source: stackoverflow

Every block contains different combinations of data with its own individual hash stamp which is additionally included in the succeeding block. Block 2 contains the hash of Block 1, Block 3 the hash of Block 2 and so on. Chronological placement massively simplifies the process of tracking down a transaction to its original point of origin. As blockchain transactions are made public for the network to validate, hashing reduces their content to a mere combination of numbers and letters rather than intelligible words.

Hashing is irreversible. Once a transaction has been imported into the blockchain and given its own stamp it cannot be undone. Although it is theoretically possible, one must be able to guess the exact combination of words and letters that chained a block with its predecessor. As much as this is a guarantee for the immutability of the data, it requires a significant degree of caution from the side of the regular user.