Blockchain Basics

A blockchain is a chain of blocks that contains information. In 1991, researchers Stuart Haber and W. Scott Stornetta described this technique, which was originally intended to timestamp digital documents to prevent backdating or tampering.The concept remained largely unused until it was implemented in the creation of Bitcoin by Satoshi Nakamoto. 

What is Blockchain?

A blockchain is a distributed ledger that is openly available to anyone.

Blockchain, often referred to as Distributed Ledger Technology (DLT), ensures that the history of any digital asset is unalterable and transparent through decentralization and cryptographic hashing.

One of its key properties is that once data is recorded in a blockchain, it is very difficult to change.

Parts of blockchain

1. Data of the block

2. Hash of the block

3. Hash of previous block

1. Data of the block

The data stored in a block depends on the type of blockchain used. For example, the Bitcoin blockchain records the sender, receiver, and amount of coins. Each block also has a unique hash, which can be compared to a fingerprint, identifying the block and its contents. Once a block is created, its hash is calculated, and any changes within the block will alter the hash.

2. Hash of present block

The hash can be used to trace back the information stored in a block. If the hash changes, it indicates that the block is no longer the same. Tampering with the data in Block 2 would change its hash value, rendering the entire blockchain invalid. Therefore, the hash of the current block (Block 2) must equal the hash of the previous block (Block 3). 

3. The Hash of previous block

The third element of a block is the hash of the previous block, linking the blocks together.

What is the Genesis block?

Every block has its own hash and the hash of the previous block. In this way, Block 3 points to Block 2, and Block 2 points to Block 1. The first block, however, cannot point to a previous block because it is the first one, which is why it is called the genesis block. 

We cannot solely rely on hashes, as tampering with any block will recalculate the hash of the entire blockchain, potentially making it valid again. This is where the concept of "Proof of Work" becomes relevant.

What is proof of work?

Proof of Work (PoW) is a form of cryptographic proof where one party (the prover) demonstrates to others (the verifiers) that a certain amount of computational effort has been expended. PoW is a mechanism that slows down the creation of blocks. In the case of Bitcoin, it takes approximately 10 minutes to calculate the proof of work and add a new block to the chain. If a block is tampered with, it takes time to recalculate the hash and create a new block, making tampering very difficult.

If one block is tampered with, the proof of work for each subsequent block must also be recalculated. The security of blockchain relies on two main factors: hashing and the proof of work mechanism. 

Note: Blockchains enhance their security through decentralization, which operates on a Peer-to-Peer (P2P) network model. When a new participant joins this network, they obtain a full copy of the entire blockchain. 

What happens when someone creates a new block?

When a new block is created, it is sent to everyone in the network. Each node verifies the block to ensure it has not been tampered with. If everything checks out, each node adds the block to their copy of the blockchain. All nodes in the network create a consensus, agreeing on which blocks are valid and which are not. Tampered blocks will be rejected by other nodes. Therefore, to successfully tamper with one block, one would need to tamper with all blocks in the blockchain and redo the proof of work for each block.

Achieving control of nearly 50% of the P2P network is necessary for a tampered block to be accepted by everyone in the network, which is virtually impossible..

Blockchains are continually evolving, with one of the most recent innovations being "Smart Contracts." These contracts are simple programs stored on a blockchain that automatically execute transactions based on specific conditions.

Advantages of blockchain

What needs to change?

Operations often waste effort on duplicate record-keeping and third-party validations. Record-keeping systems can be vulnerable to fraud and cyberattacks. Limited transparency can slow data verification, and the rise of IoT has led to an explosion in transaction volumes. All of this slows business and drains the bottom line, necessitating a better solution—enter blockchain.

1. Greater trust

   With blockchain, members of a private network can be assured that they are receiving accurate and timely data. Confidential records will only be shared with network members to whom access has been specifically granted.

   
   

2. Greater security

   A consensus on data accuracy is required from all network members, and all validated transactions are immutable, recorded permanently. No one, not even a system administrator, can delete a transaction. 

   
   

3. More efficiencies

   A distributed ledger shared among network members eliminates time-wasting record reconciliations. Additionally, a set of rules—called a smart contract—can be stored on the blockchain and executed automatically to speed up transactions. 

   
   

Types of Blockchain

1. Public Blockchain Network:

   A public blockchain is one that anyone can join and participate in, such as Bitcoin. Drawbacks might include substantial computational power required, little or no privacy for transactions, and weak security. These are important considerations for enterprise use cases of blockchain.

   
   

2. Private blockchain networks:

   A private blockchain network is similar to a public blockchain but is governed by one organization that controls who can participate, execute consensus protocols, and maintain the shared ledger. This can significantly enhance trust and confidence among participants. A private blockchain can operate behind a corporate firewall and even be hosted on-premises.

   
   

3. Hybrid blockchain networks:

   Businesses that set up a private blockchain typically establish a permissioned blockchain network. It is important to note that public blockchain networks can also be permitted, placing restrictions on who can participate in the network and in what transactions. Participants must obtain an invitation or permission to join.