Nov 25, 2020
Blockchain: the technology behind Bitcoin and cryptocurrency
Blockchain: Definition, what is Blockchain?
Blockchain: Different types of blockchain
Distributed Ledger Technology
Blockchain: examples of use cases
Let’s discover together how the Blockchain technology works; the famous recording and information sharing system behind the operation of Bitcoin as well as other cryptocurrencies.
Blockchain: Definition, what is Blockchain?
In August 2008, a character known as Satoshi Nakamoto registered the Bitcoin.org domain online.
Two months later, on October 31, 2008, Nakamoto shared a document entitled: ‘Bitcoin: a peer-to-peer electronic payment system’.
Being still available online, this document explains the concept of the decentralized digital currency: Bitcoin.
It turns out that this famous Bitcoin works thanks to a free software based on a technology called Blockchain, which contains a public ledger of all the transactions of the Bitcoin network.
This is the beginning of the history of the Blockchain, the technology behind Bitcoin.
The blockchain or chain of blocks refers to a technology for storing and transmitting information. It is a digital ledger of transactions or a system for recording information containing the history of all exchanges between its users since its creation.
Shared between several users, with a high level of security and operating without a central control body, the blockchain is difficult or even impossible to modify or hack.
Blockchain: the origin
Being a growing list of records, called blocks, that are linked and secured by cryptography, the blockchain is actually a digital database or ‘distributed public ledger’ that is cryptographically managed where the information sent by users is verified and grouped at regular time intervals into blocks, thus forming a chain.
Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.
By extension, the blockchain manages a list of records that are protected against tampering or modification by storage nodes; thus, it is a secure, distributed record of all transactions performed since the distributed system was started.
Being completely decentralized, the blockchain is maintained by a peer-to-peer community computer network composed of the users’ machines called ‘nodes’.
Hence the fact that with this technology, the ‘trusted third party’ for the exchanges carried out becomes the system itself:
Each distributed element of the blockchain contains the elements necessary to guarantee the integrity of the data exchanged (by a cryptographic algorithm: the cryptographic hash).
Blockchain and Bitcoin: Links and Interconnections
We already know that the blockchain allows Bitcoin to work, but how does it work in practice?
On January 3, 2009, the famous Satoshi Nakamoto gave birth to Bitcoin by mining the genesis block, generating the first 50 Bitcoins for its creator. Almost 11 years later, on November 25, 2020, digital gold or Bitcoin is traded worldwide at a record price of $19200 per unit.
Bitcoin is the very first so-called secure crypto currency because it was digitally confirmed by a process called ‘mining’.
Mining is a process in which all the information entering the Bitcoin blockchain has been mathematically verified using a very complex digital code that has been put in place on the network.
This blockchain network confirms and verifies all new entries in the register, as well as any changes to the register.
The blockchain is therefore the technology that allows cryptocurrencies such as Bitcoin to work.
In essence, any transaction that can be recorded can be based on the use of the blockchain.
Blockchain and Decentralization
When one evokes the term blockchain, it would be obvious to explain what decentralization is.
One of the ambitions of the Blockchain technology was to decentralize the international monetary system when it appeared in 2008.
Being one of the most frequently used words in the crypto-sphere, decentralization is the process of distributing and dispersing power away from a central authority.
Let us first recall that the Blockchain records the actions of each individual in a distributed manner over a network and thus allows large-scale coordination without a central ‘authority’ or control body.
However, most financial and government systems that currently exist are centralized, which means that only one higher authority is responsible for their management, such as a central bank or state apparatus.
The Blockchain therefore allows decentralization, as it offers each user the opportunity to become one of the many verification processors in the network.
In a decentralized architecture, it is difficult, if not impossible, to discern a particular node.
Blockchain and Peer-to-Peer (P2P)
The term peer-to-peer (P2P) is at the heart of the motivations behind encryption.
Bitcoin and blockchain are based on the principle of P2P.
Satoshi’s goal was to oust financial institutions from the financial transaction landscape and to provide individuals with a means to exchange money independently.
Peer-to-peer or P2P is a network in which two or more PCs share files and access devices such as printers without the need for a separate computer or server software.
In other words, it is a decentralized platform that directly connects the different parts of a transaction without the intermediary of a third party.
According to the Wikipedia definition: ‘Peer-to-peer is a model of computer network close to the client-server model but where each client is also a server. “
The P2P network differs markedly from the client/server network, where certain machines are designated as servers to meet the needs of the client machines. We can classify peer-to-peer systems according to their architecture.
Allowing for services such as payment processing, peer-to-peer in financial technology generally refers to the exchange of crypto or digital goods over a distributed network.
There are therefore P2P platforms such as Cartam.world that allow buyers and sellers to execute transactions without the need for intermediaries.
Blockchain: Different types of blockchain
When the blockchain was introduced to the world, it was a public type blockchain with a use case of cryptography that provided the concept of Decentralized Ledger Technology (DLT).
There are three main types of blockchain:
- Public blockchains such as Bitcoin and Ethereum.
- Private blockchains such as Hyperledger and R3 Corda.
- Hybrid blockchains such as Dragonchain.
Public blockchain
A public blockchain has absolutely no access restrictions.
Anyone with an Internet connection can send transactions to it and become a validator.
In other words, it’s the technology of an unauthorized distributed ledger where anyone can join and trade. It is a non-restrictive version in which each user (or ‘peer’) has a copy of the ledger. It also means that anyone can access the public blockchain as long as they have an Internet connection.
Transactions are verified by consensual methods such as Proof-of-Work, Proof-of-Stake and so on.
Invented in 1993 by Cynthia Dwork and Moni Naor, proof-of-work is a form of cryptographic proof in which one party proves to the others (the verifiers) that a certain amount of computational effort has been expended for some purpose.
Proof-of-stake (PoS) is a method by which the blockchain of a cryptocurrency aims to achieve a distributed consensus.
Proof-of-stake requires the user to prove possession of a certain amount of crypto-money in order to claim validation of additional blocks in the blockchain and to collect the reward.
At the kernel level, the participating nodes must perform the most cumbersome tasks, including transaction validation to make the public block chain work.
If a public blockchain does not have the required peers participating in transaction resolution, it will become non-functional.
Some of the most important and best-known public blockchains are:
- Bitcoin,
- Ethereum,
- Litecoin,
- NEO
Private blockchain
A private blockchain is allowed and operates in a restrictive environment, i.e. a closed network. It is under the control of one entity (or a very limited number of participants).
You cannot join it without being invited by the network administrators. Access by participants and validators is limited.
The private blockchain is somewhat centralized; it does not allow the link between the different participants. Although everyone can participate, access to the private blockchain is restricted and requires the manager’s approval.
However, the other participants may or may not deny access depending on the control mechanisms used. The Private Blockchain is therefore not of a decentralized theoretical nature.
Examples of private blockchain :
- Multichain,
- Corda
Hybrid Blockchain
A hybrid blockchain has a combination of centralized and decentralized features. The exact operation of the chain may vary depending on which parts of the centralized system are used.
The hybrid blockchain operates in a closed ecosystem without the need to make everything public, the rules can be changed as needed.
Examples: Dragonchain is an example of a hybrid blockchain.
Distributed Ledger Technology
Distributed Ledger Technology was mentioned earlier, but what exactly is it?
A Distributed Ledger (also called Shared Ledger or DLT) is a consensus of replicated, shared, and synchronized digital data geographically distributed across multiple sites, countries, or institutions.
Unlike a distributed database, there is no central administrator. Each block is validated by the network nodes represented by the ‘miners’ (people who use the computing power of their computer hardware to verify transactions).
Once the block is validated, it is time-stamped and added to the blockchain.
The transmission is then visible to the person who received the bitcoins as well as to the entire network.
A distributed ledger is opposed to a centralized ledger, which is the type of ledger used by most companies.
A centralized ledger is more prone to cyber-attacks and fraud because it has a single point of failure.
The underlying technology of the distributed ledgers is the same technology used by the blockchain, which is the technology used by bitcoin.
Blockchain: examples of use cases
As we now know, the blockchain records all transactions between users in the chain and allows value transfers to be carried out securely and without intermediaries.
What does the use of this technology actually allow?
The principle of the blockchain is not only applicable to cryptosystems.
It is also useful in various fields:
Blockchain in the banking and financial sector
International payments
The Blockchain is ideal for international payments and money transfers because it saves time and money for financial companies of all sizes.
It promises to facilitate fast, secure and inexpensive international payment processing services through the use of distributed and encrypted ledgers that allow reliable real-time verification of transactions without the need for intermediaries such as correspondent banks and clearing houses.
Blockchain within companies
Supply Chain Management
The Blockchain allows in particular:
- Real-time tracking of goods as they move and change hands throughout the supply chain.
- Data transparency by revealing a single source of truth. By recognizing data sources, the supply chain can build trust within the industry.
- A simpler and more automated logistics process
Blockchain and Healthcare
Health data that lend themselves to a blockchain include general information such as age, gender, and possibly basic medical history data such as vaccination history or vital signs.
As such, none of this information would specifically identify a particular patient, allowing it to be stored on a common channel that many people could access with little concern for their privacy.
Blockchain and real estate
The blockchain is also useful in the real estate market. It would speed up the sale of properties such as houses for example, reduce fraud through its encryption and provide transparency throughout the sales and purchase process.
Blockchain in the media
Media companies have already begun to adopt blockchain technology to eliminate fraud, reduce costs and even protect intellectual property (IP) rights in content — like music records.
With blockchain technology, claims are traceable and verifiable, forgery-proof consensus is distributed, and databases are secure. Without a central control body, its process is totally independent and IT resources are shared. The intellectual property of the creators is guaranteed and protected.
Blockchain in the energy sector
The blockchain is also applicable for executing energy supply transactions to provide the basis for metering, billing and clearing processes.
Other potential applications include ownership documentation, asset management, and guarantees of origin, emission allowances and renewable energy certificates.
Blockchain at the service of the government
File Management
One of the most surprising applications of the blockchain can be the improvement of administration. The blockchain could simplify record keeping and make data much more secure.
According to the New York Times, it can reduce millions of hours of paperwork each year, empower public servants with smart contracts, and ensure transparency by recording a public record of all activities.
Identity Management
Proponents of the identity management blockchain argue that with enough information on the blockchain, people would only have to provide the bare minimum (date of birth, for example) to prove their identity.
Blockchain and Voting
Blockchain could also revolutionize elections. It makes the voting process more easily accessible while improving security (other nodes cannot be affected).
Each vote would be assigned to an identifier, and since it would be impossible to create a false identifier, government officials would be able to count votes more efficiently.
Blockchain and taxes
The blockchain could make tax filing much more efficient with enough information stored in the supply chain.
We have seen what the blockchain is, a technology for storing and transmitting information that has a high level of security and operates without a central control body.
The blockchain allows data to be stored globally on thousands of servers while allowing any member of the network to see the entries of all the others in near real time.
This makes it difficult for a single user to take control of or play with the network.
With its ability to create more transparency and fairness while saving businesses time and money, this technology is having an impact on everything from how contracts are executed to improving the efficiency of government work — and what do you think of the blockchain?
Written by Laetisia Harson, Project Manager at Magna Numeris
