The blockchain, or chain of blocks originally designates the data structure used by Bitcoin to list all the transactions carried out by its users since its inception: transactions are grouped in blocks chained together, and blocks are added to the chain over time. This register is shared among the members of a network, hence the fact that it is sometimes referred to as a distributed register.
As of 2015, blockchain also refers to the decentralized consensus technology that Bitcoin is bringing back to the forefront. This technology refers to the set of methods that allow participants in a distributed network to reach an agreement without the need for a trusted third party. In this article, we explain the blockchain for dummies so that you can understand everything about this “revolution”.
Where does the blockchain come from?
The blockchain concept as we know it today was invented by Satoshi Nakamoto and described in Bitcoin’s white paper on October 31, 2008. However, Satoshi Nakamoto did not coined the term and this is thanks to Hal Finney, who first used it in his response to Satoshi on November 7, 2008, to refer to Bitcoin’s chain of evidence of work. He then spelled it “block chain” in two words. The term was later adopted by Satoshi in the source code of Bitcoin version 0.1 and gradually became popular in the community.
However, the technology behind the blockchain was not entirely created with Bitcoin, and the elements that make it up are much older than we think: the blockchain is the result of many years of research in economics, computer science, and cryptography.
The blockchain promotes the idea of decentralization, which, not surprisingly, is opposed to centralization. Today, we live in a world where most of the things around us are centralized. They are governed by States, banks, big companies? We trust them, or not, but we cannot do without them. These actors we refer to are what we call trusted third parties. The blockchain, on the other hand, operates without a central authority.
Bitcoin, which uses blockchain technology, makes it possible to do without trusted third parties for the transmission of value between two entities. This is the first concrete application of this technology. It is now possible, thanks to Bitcoin and the blockchain, to transfer value over the Internet between two entities without an intermediary.
This was much more complicated before.
For example, if you send a file to a friend over the internet, it is duplicated. You have a copy of the file and so does your friend: the file is not unique. The file does not start from point A and end up at point B. It stays at point A and a copy appears at point B. So it can’t work for currency. When you give 1 euro to your baker to buy a baguette, a copy of the coin does not stay in your pocket. The coin is not duplicated, it is unique, it leaves your wallet and goes into the baker’s cash register.
It was therefore impossible to use the existing value transfer systems on the internet in the context of the implementation of a web-based money system. The currency would have lost value, because at each exchange it would have been duplicated. The difficulty was therefore to succeed in creating a money on the Internet that could function as in everyday life.
Thanks to Bitcoin, this is now possible. A monetary system that is functional, reliable and without a trusted third party has been created.
We will see many other applications of the blockchain in this article, and you will also find them in many other articles on our site.
Before we go any further, we should not forget that the blockchain was originally only a component of Bitcoin. Keep this in mind 🙂
What's the blockchain?
The blockchain can be compared to a digital ledger that is maintained by a network of computers. Data is then added to this ledger in real-time and is visible to all participants.
When a transaction is performed on the blockchain, it is added to a block. This block contains all the transactions that took place during the last minutes (10 minutes for the Bitcoin network) and shared with the entire computer network.
Network participants are known as nodes. Some of these nodes participate in the registry check: they are the validators. Different protocols exist to secure the blockchain, which will affect the name given to these validators: they will be called miners if the blockchain uses proof-of-work or forgers if the blockchain uses proof-of-stake. To simplify things, we will focus here on proof of work and, therefore, miners.
Miners should not be confused with blockchain users.
In the case of Bitcoin, miners compete to solve “cryptographic puzzles” that validate transactions. The first miner to solve the puzzle receives a reward for his or her work, which should be remembered and helps secure and maintain the network. The puzzle is challenging to solve, and this difficulty increases over time. Therefore, miners must use powerful computers to solve the puzzle.
The validation of transactions corresponds to their inclusion and time stamping within a block. This will then allow the newly validated blocks to be linked to older validated blocks. A chain of blocks is formed containing each transaction performed on the blockchain.
This chain is updated and is accessible to all members of the network. The resulting decentralization allows for total transparency and immutability. Thus, everyone has the possibility to visualize the data available on the blockchain network.
Technology popularized with the appearance of Bitcoin, the blockchain or chain of blocks in French is a component of crypto-currencies.
Understand how a bitcoin transaction works on the blockchain
Let’s try to simplify things:
- The blockchain makes it possible to exchange units (money, tokens, etc.) without having to rely on a trusted third party (banks, states, etc.).
- The blockchain network can be compared to an Excel sheet in which all transactions are recorded in chronological order. It contains the times, amounts, recipients, etc. of all the transactions carried out.
- The blockchain is tamper-proof: it is not possible to modify a transaction once it is recorded in the blockchain. To falsify this book, more than half of the validators in the network would have to be “corrupted”. This is called a 51% attack.
- This network is easy to access, anyone can access it and view all transactions.
With the blockchain, we are moving from a centralized to a decentralized architecture:
Here is a summary diagram explaining how a public blockchain works during a transaction.
Blockchain: how does it work?
This part is more complex than the previous one. It explains in more detail how the blockchain works.
Each person who participates in the blockchain network has a copy of the database (grouping the transactions) and must keep it up to date.
Thus, people who participate in the Bitcoin network must copy the Bitcoin blockchain on a computer and update it regularly. Note that the Bitcoin blockchain currently weighs approximately 120 GB. These individuals involved in maintaining the blockchain are called nodes. As of April 2020, there are approximately 10,000 public nodes in the Bitcoin network.
In a public blockchain, all nodes have equal rights to maximize the network’s security and transparency. To corrupt, the network would require that more than half of the network’s validators be malicious. This would be called a 51% attack.
Similarly, as long as a node is present on the blockchain, the blockchain is always maintained.
The data on the blockchain is secured through the creation of hashes, called fingerprints. Fingerprints correspond to a sequence of hexadecimal numbers, i.e., in base 16. As a reminder, a hexadecimal number is a sequence comprising the following numbers and letters: 0, 1, 2, 3, 4, 5, 6, 7, 8, 9, a, b, c, d, e, f.
The data of the blockchain is included in hexadecimal footprints. This makes it possible to include a large amount of encrypted data in a format that always remains the same, with a specific length according to the blockchains. The number of characters and the fingerprints’ shape is always the same unless a change is made. This contributes to the security of the blockchain.
Thus, Bitcoin uses the SHA-256 algorithm, while Ethereum uses Keccak-256.
These fingerprints will be used in the signing of transactions. Different methods can be used to hash the transactions. In other words, to validate them, register them, and secure them in the blockchain. The two best-known methods are proof-of-work (often abbreviated to PoW) used by Bitcoin and proof-of-stake (often abbreviated to PoS) used by Tezos for example.
Let’s continue our immersion in the world of blockchain. Jean wants to transfer 2 Bitcoins 💰 to Nico and register the transaction on the blockchain. How do we know that Jean is the issuer of this transaction? We use a digital signature based on the combination of a public key and a private key. When John sends a transaction to Nico, he sends it to his public address. This public address is linked to the private key. To prove that Nico is the new owner of 2 Bitcoins, he will have to identify himself with his private key.
⚠ Your private key must always remain confidential, never share it!
In this article, we have deliberately assimilated a key to an address, to simplify understanding. In reality, it should be known that addresses (public or private) are generated thanks to keys (public or private) using mathematical functions.
We have seen above that for some blockchains, which use proof-of-work consensus like Bitcoin, miners build blocks and undermine them while trying to find the solution to a mathematical problem. Several blocks are mined at the same time. Miners working on two competing blocks stop their work as soon as the block is created. The following rule has been introduced: the valid branch is always the longest branch.
In the diagram below, the valid branch is the blue one, and the blocks in black are the ones that have been abandoned. All the miners who considered the black blocks valid at a given time are moved back to the blue blocks.
Note that all public blockchains work with a token, which is the equivalent of a programmable token.
What are the advantages of the blockchain?
Transparency in the use and allocation of funds
It is possible to track the use of funds by a company or association. In the case of foundations and charities, it would thus be possible to see what use is made of donations.
In the same way as for the tracking of funds, it is impossible to falsify the blockchain. It is therefore impossible to lie about the amount transferred, etc.
Towards the end of trusted third parties
With the arrival of Bitcoin, it is now possible to exchange value between two entities without going through banks or any other intermediary. This minimizes the costs and complications of having to rely on a third party.
Automation of contracts
Some crypto-currencies allow the use of so-called smart contracts. These contracts are programs running on the blockchain that trigger themselves when certain conditions are met. This use was made possible by the programmable nature of Bitcoin and was generalized by the creation of Ethereum in 2015. To learn more about this, you can read our article: What is a smart-contract?
What are the limits of the blockchain?
A complex world
You have to learn a new “language”, new ways of working, develop solutions… This takes time and requires specific learning.
A network at risk of saturation
As seen at the end of 2017, the massive use of a blockchain can lead to network saturation: they are subject to a scalability problem. Indeed, in the case of Bitcoin, at the end of 2017, transactions were too numerous to be processed within a reasonable timeframe. Thus, the too large number of transactions made it impossible to record all transactions in a single block every 10 minutes. Since then, solutions have been put in place to allow greater scalability of the Bitcoin network with, for example, the development of SegWit and the Lightning network.
Furthermore, when a network is saturated, transaction costs usually increase dramatically. The more users pay, the faster their transactions are validated.
It isn’t effortless to scale up blockchain networks without jeopardizing their decentralization.
In the case of decentralized networks, it is difficult to choose the rules for valid transactions and how they should evolve (they are not fixed). We can therefore see splits in the main blockchains, often called hard forks. In 2016, following TheDAO hacking, Ethereum split into two distinct chains: Ethereum and Ethereum Classic. In 2017, it was Bitcoin that underwent a major split in the scalability debate, giving rise to what is now called Bitcoin Cash.