In simple terms, a blockchain is exactly that, a chain of blocks. Blocks are containers that hold records of transactions, with multiple transactions included per block. These blocks are chained together using digital fingerprints, whereby the latest block depends upon the information contained within the preceding block, which itself depends upon the information in the previous block to it, and so on. This ensures the sequence of the chain is also recorded, and is incorrupatble.
The blockchain is a layer of technology that sits upon the internet, just as the World Wide Web does. But whilst the WWW uses the foundational protocol TCP/IP to communicate over the internet, the blockchain – being decentralized, distributed, and cryptographically-secure – can be thought of as a protocol of trust.
The blockchain is analogous to an advanced, distributed database. Imagine a communal spreadsheet, or ledger, which is held by, viewable by, and editable by thousands of users. Any user can make a change, but all other users must agree to the change before all copies of the spreadsheet are updated. Changes can be made by individuals, then, but only incorporated by consensus. Blockchain technology such as Ethereum takes this a step further, by offering programs to create executable ‘smart contracts’, analogous to macros in spreadsheets. These macros are also possessed by everyone on the network, so ensuring trust.
These smart contracts are building out new opportunities on the blockchain. Whilst Bitcoin can be thought of as blockchain-based money, Ethereum can be thought of as programmable, blockchain-based money.
10 – the number of properties exhibited by blockchains identified by William Mougayar in his book The Business Blockchain: Cryptocurrency, computing infrastructure, transaction platform, decentralized database, distributed accounting ledger, development platform, open source software, financial services marketplace, peer-to-peer network, trust services layer.
Did You Know?
The first block of a blockchain is referred to as the Genesis block. It is unique in not referencing a previous block, and the tokens produced with it tend to be un-spendable.
3 – the number of types of permissioning method used to decide who can engage in the consensus process: public (proof of work, proof of stake, delegated proof of stake), private (limited access to a secured private blockchain), and semi private (consortium based access).
What is Proof of Work?
Proof of work is a consensus algorithm that requires nodes (individual computers on the blockchain network) to do some work; solving mathematical puzzles in the case of bitcoin. Participants are known as miners, and they compete with each other to be the node that solves the puzzle. Whilst doing so they also validate the transactions contained in the latest block.
The first miner to complete the task submits the block to the network. Then, assuming it gains the consensus of the other nodes, the block is added to the end of the blockchain, and so the chain continues. The successful miner receives a reward in the form of both the transaction fees for that block and some additional cryptocurrency (bitcoin in the case of the bitcoin blockchain).
This computational work consumes a huge amount of electricity. This means that, as well as producing information, significant amounts of heat are generated. The need to invest in powerful, cooled ‘mining rigs’ (often collected into larger mining pools) to cope with the demands of the work, along with the cost of the electricity used, ensure participants are motivated to play by the rules. If they don’t, the rest of the network will simply fail to meet consensus and the block will be rejected.
3 – the number of concepts upon which cryptographic science depends; keys, digital signatures, and hashing. Keys are typically used in pairs, one being public (used by the sender to encrypt) and one private (used by the recipient to decrypt, and known only to them). Digital signatures are mathematical computations used to confirm the authenticity of the digital document or message being received. Hashing uses a kind of digital fingerprint (a hash function) to verify the integrity of the information being sent, by confirming that it has not been changed in any way. A cryptographic hash works in one direction only; the input data cannot be recreated from the output data.
What is a Mempool?
New transactions on a blockchain are first verified by the nodes on the network and then passed into the Memory Pool (shortened to Mempool). Here they sit until they are picked up by a miner and added into a new block for processing.
5 – the number of hardware methods that can be used to mine blocks: CPU mining (no longer financially viable, the low hashrate of CPUs meaning the value of the bitcoin created is now less than the cost of the power used to produce it), GPU mining (using faster graphics cards), FPGA mining (short for ‘field-programmable gate array’ and offering a superior alternative to GPU mining by being much more energy-efficient whilst maintaining relatively high hash rates), ASIC mining (short for ‘application-specific integrated circuit’, being a microchip manufactured to suit particular uses, in this case bitcoin mining; they are far faster than GPU and FPGA options), and cloud mining (a service offered by ‘mining contractors’ who rent mining capacity at a set fee and duration with performance specified by contracts).
2013 – the year in which bitcoin ASIC chips were introduced.
William Mougayar, The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology (John Wiley & Sons Inc, 2016)