What is blockchain? How it works?

There is a lot of media attention lately on the blockchain projects. The blockchain was created, by Bitcoin’s creator Satoshi Nakamoto. This is a nickname, and nobody knows if it represents is a man, woman or a team. There is a huge misconception about Bitcoin and other cryptocurrencies. Most people think that it is data, going back and forth in the internet, so they could be copied and cloned easily. This happens, because most people, have not searched for the information needed, to have a good perspective. The coins in your software wallet is not data, but a result of the calculation on the blockchain data.

The Bitcoin’s blockchain, is a public blockchain. This means, that anyone can download a wallet, or mining software and use the Bitcoin blockchain. The blockchain is a ledger that keeps all Bitcoin transactions from genesis to today. It is called blockchain, because transactions are added in blocks, and they are secured and chained together, with special cryptography functions. The chain procedure, makes blockchain, immutable to changes. We will stick to Bitcoin’s blockchain, for simplicity, as other blockchains, are improved versions, created after Bitcoin’s blockchain. Ethereum blockchain, has the ability to run software on it’s network, called smart contracts. All related software, mining and wallets, must have access to the blockchain data. The miners, have the obligation to secure the blockchain network, and they get a reward, when they find a block.

Let’s start with an example: John sends to Mary 1 Bitcoin. The transaction is recorded on the blockchain. All wallet software reads the blockchain, so Mary, can see her coins recorded on the ledger. If her device is lost, she can install a new wallet software and find her coins. Then the question comes up, “What if a malicious user, wants to delete this entry, so the coins stay to John?”. Below, there is a table that shows a simplified view of blockchain blocks. The following assumptions were made:

The blockchain uses special cryptography hash functions, but in the example, the hash will be the sum modulo 100 of the block data. A blockchain block contains many transactions, but here there will be only one. The transactions use Bitcoin addresses, but in the table we will see user numbers 100-102. The previous hash is not contained in the block, but it is only calculated.

What makes blockchain special, is this hash chain, that does not allow any blockchain node, to make changes afterwards. Let’s suppose, that someone wanted to alter block 100002. The block data should be changed, but ALL subsequent blocks should be changed, because all hashes should be recalculated. When the modified blockchain of a node, tries to propagate through the network, the other miners, will reject it, because only the last block is accepted.

To be able to add blocks, you must run mining software. The strength of mining is called hash rate, and shows how many hashes can the processed by the software per second. To modify the blockchain, someone must have access to 51% hash rate of the total network hash rate. This is called “51% attack”.

Blockchain, is disruptive, because, it creates a trusted system, without the need of a trusted party. That’s why many people see this, as the future of payments, and you may see the blockchain called “trustless”. Not because it has no trust, but because it does not need someone trusted.

Image from Pixabay