A blockchain is, in the simplest terms, a series of immutable time-stamped records of data that is managed by a group of computers not owned by a single entity. Each of these data blocks (i.e. block) is protected and linked to each other using cryptographic principles (i.e. chain). The blockchain network does not have a central authority; it is the very definition of a democratized system. Since it is a shared and immutable ledger, the information it contains is open for all to see. Therefore, anything built on the blockchain is transparent by its very nature and everyone involved is accountable for their actions.
The Rise of Blockchain and Cryptocurrencies
Blockchain is a new technology that has the potential to completely transform a wide range of industries. This potential is mainly based on its ability to offer people a trusted channel to transfer value or real assets (tokenization) over the Internet. Blockchain has the ability to move us from the Internet of Information to the Internet of Value, potentially disrupting our existing financial systems. In many respects, blockchain is a revolution, much like the internet was when it first emerged. It is most definitely not a fad. This is because it offers a solution to a money problem that had not yet been handled. For the first time in history, we can establish trust in trust less environments (such as the Internet) without relying on an authority.
The potential impact of blockchain is enormous: it goes far beyond the mere decentralization of the financial sector. In fact, its ability to bypass intermediaries opens the door to redefine almost every field that revolves around technology, including the Internet, pushing us towards a world of equals.
Many people struggle to comprehend the principles and applications of blockchain technology. This is mainly because we don't have a clear idea of what problems it solves or what benefits it promises. Therefore, I think it is necessary to clarify from the beginning what problems are solved with blockchain.
From virtual currencies to cryptocurrencies
Blockchain did not appear out of nowhere. It was the result of the previous few decades' development in fintech and virtual currencies. The widespread usage of the Internet at the turn of the century aided in the development of digital currencies as an expansion of electronic payment systems. E-cash, E-gold, WebMoney, and Liberty Reserve, to mention a few, are just a handful of the many initiatives that were launched to build new digital currencies. Despite the enormous success achieved in the 1990s, these projects had ceased to exist at the beginning of the new century, either due to bankruptcy or by the authorities. A currency that is capable of disappearing overnight is a true financial nightmare, but this situation was unavoidable due to the centralized nature of such digital currency systems.
There was also always a need for a central authority to be involved to fight fraud and manage trust within the system. Due to this weakness, the opposite decentralized model was presented as a solution. However, it was difficult to build trust in such settings without a central authority. This contrast made the creation of a reliable digital currency a handicap. Fortunately, the progress of cryptography and the emergence of some clever solutions brought hope to break the deadlock.
The Invention of Bitcoin
In 2008 Satoshi Nakamoto rose to the challenge and introduced a digital currency called bitcoin. This new currency effectively took advantage of cryptography techniques to manage property and secure the system, hence the name Cryptocurrency. The aforementioned issues were resolved by Satoshi by inventing what he first referred Bitcoin as a blockchain. In his published white paper, he laid out his vision for a new peer-to-peer electronic cash system - bitcoin - and described its underlying machinery - blockchain - in detail.
Bitcoin was the first fully peer-to-peer distributed and trusted electronic cash system, backed by the following basic concepts:
- Encryption to ensure ownership and identity.
- A proof-of-work (POW) consensus mechanism to validate transactions and protect the network against double transactions.
- A shared, transparent ledger (a blockchain).
The bitcoin network acts autonomously, adhering to the consensus standards set out by the protocol (as long as more than 51% of the network are trustworthy), to validate a particular transaction. By using a shared blockchain, each player has the ability to check the transaction record history and creditworthiness of the sender, and then vote on whether or not the transaction made is valid. The vote depends on the overall hash power that the player puts into service to secure the network (initially, one CPU is one vote).
To use a Cryptocurrency, users need to install a specific client that creates a wallet, generates cryptographic key pairs (private/public keys), and synchronizes the blockchain with the network. The client (software) creates valid addresses using the public key, and money transmitted to a specific address is controlled by the private key that was used to create that address. In order to handle the property in this way, we rely on safe cryptographic concepts. The following image shows how transactions are processed on the bitcoin peer-to-peer network and added to a blockchain:
In a bitcoin network where users don't know each other, the blockchain is considered the only source of truth they refer to for past consensus results. The network can manage transactions without having a single point of failure thanks to the blockchain and consensus mechanism.
What is blockchain technology?
Often confused with bitcoin, blockchain is the underlying technology used by bitcoin to operate. Specifically, it is a database that grows only appendically and chronologically (time-stamped), which leverages basic cryptographic measures to protect stored transactions against tampering (in other words, the data cannot be deleted or modified).
This database, or ledger, collects and records the monetary transactions validated by the network in elementary units called blocks. Once validated by the network's consensus mechanism, these blocks are added to an existing sequential chain of hash-linked cryptographic blocks, to ensure data integrity, hence the name blockchain. If a single bit changes in one of the linked blocks, the hash link collapses, the chain is broken, and the network will reject it.
The following image shows the process behind the blockchain development services in a normal transaction between two parties.