Blockchain in a Nutshell

What is Blockchain?

A blockchain is a distributed digital ledger that can be used to record transactions and other data across a decentralized peer-to-peer network made up of a cluster of computing devices. We can also define a blockchain as a distributed encrypted database like a spreadsheet that is duplicated thousands of times across a network of computers. This network is designed to regularly update this spreadsheet. It is a subset of distributed ledger technologies.

The Blockchain Network

The blockchain network is a peer-to-peer decentralized Network.  The peers, also known as nodes, are connected to this network in a synchronous way. The node can be a desktop, a laptop, a mobile phone, mining rig, servers or any other electronic devices. These nodes form the foundation of the blockchain network. They provide computing resources such as disk storage space to keep the network alive and to maintain its integrity and security, and they do it voluntarily.

The main feature of the blockchain is decentralization. To understand what decentralization is, first we need to understand the traditional centralized operation mode. For example, if you go to the supermarket to buy something, you pay with a credit card when you check out. This process requires the approval of a third party, the bank. The transaction is completed after the bank approved it. However, if you use the blockchain platform to perform a transaction, you do not need a third party. The buyer and the seller can trade directly and seamlessly in a transparent and secure blockchain ecosystem.

Another feature of the blockchain is that all participants in the network do not need to establish any trust relationships to perform transactions. It relies on a cryptographic authentication technology, a decentralized network, and a consensus mechanism to ensure the security and integrity of funds and information. Therefore, the information of the blockchain is highly transparent and not easily falsified. Thus, the blockchain system is particularly suitable for a financial industry.

Decentralized Network Vs Centralized Network

Let’s examine the diagrams below to see the difference between a centralized network and a decentralized network. A centralized network has an authoritative central point of control. All the clients are connected to this single point and all their data are stored in the central server. The client has not much control over how the central authority will use his or her data.   

A good example is your bank account, the bank keeps your money and manages your account and they record all your transactions. They can also lend your money to other clients. Although this system has been quite reliable, it is prone to the vulnerability of a single point of failure. For example, if a bank’s central server is hacked by a hacker, all the accounts will be compromised.

On the other hand, in the peer-to-peer decentralized network, all the peers work together to upkeep the network via a consensus mechanism. The peers have 100% control of their data and how the data could be used. In addition, they don’t need a third party or a middle entity to perform transactions.

More importantly, it eliminates the vulnerability of a single point of failure. If a node is being hacked, only the data belong to that particular node would be compromised while all other nodes still keep a copy of the ledger. moreover, the cryptographic hashing algorithm makes it extremely difficult to hack the blockchain.

To ensure the nodes are motivated to maintain the network, blockchain incentivizes the nodes through a mechanism known as mining. By engaging in mining activities the successful miners will be rewarded with some cryptocurrencies such as Bitcoin, Ethereum or other coins. I shall explain mining in another article.

Centralized Network
Decentralized Network

The Composition of Blockchain

A blockchain comprises a chronological chain of blocks. The first block is known as the genesis block. A block refers to a set of transactions that are bundled together and appended to the blockchain.  The second block is appended to the genesis block, the third block is appended to the second block and so forth, as shown in the following diagram:

blockchain

Every node in the network stores a copy of the distributed ledgers, or the blockchain, as shown in the figure below.

The Blockchain Network

The Block Structure

A block consists mainly of the block header containing metadata and a list of transactions appended to the block header. The blockchain metadata are as shown in the following figure:

Moreover, there is other information in the block, such as rewards, transaction fees and so on. I will explain them one by one in future articles. If you want to find out the latest Bitcoin block information, you can browse the following link:

https://www.blockchain.com/explorer

The following figure shows the real data of Bitcoin block #546717:

Block #546717

Block Height

Block height represents the length of the blockchain, which is the total number of blocks so far. It also represents the position of the block in the blockchain. The height of block 546717 is 546717 (refer to the figure above).

Nonce

A nonce is a random number the miners used to solve a mathematical puzzle in the mining process, which is also know as proof of work.  The nonce in the bitcoin block is a 32-bit (4-byte) field whose value is adjusted by the miner to make the hash of the block smaller than or equal to the current target of the network. The concept of proof of work is explained in the following section.

What is Proof of work?

On the Bitcoin blockchain network, the miner nodes bundle unconfirmed and valid transactions into a block. Each block contains a given number of transactions. In the Bitcoin network, every miner must solve a cryptographic puzzle to propose the next block. This process is known as ‘proof of work’.  Proof-of-work is a mechanism that existed before the first blockchain was created. It prevents abuses by requiring a certain amount of computing work. That amount of work is key to prevent spamming and tampering. Spamming is no longer worth it if it requires a lot of computing power.

Difficulty

Difficulty is a value that measures the degree of difficulty to find a hash value for a given target, which represents the difficulty of mining. The value of difficulty will be changed once every 2016 blocks, the value will usually increase.

What is Timestamping?

According to Wikipedia, a timestamp is a sequence of characters or encoded information identifying when a certain event occurred, usually giving date and time of day. In the olden days,  the term derives from rubber stamps used in offices to stamp the current date, and sometimes time, in ink on paper documents, to record when the document was received, as shown in the diagram below:

Image adapted from Wikipedia

In this digital age, the term has been expanded to refer to the date and time information attached to digital data. For example, computer files contain timestamps that tell when the file was created and when was it last updated. Digital cameras add timestamps to the pictures by recording the date and time the pictures were taken.

The Unix timestamp is the number of seconds passed since midnight on January 1, 1970 (UTC / GMT), ignoring of leap seconds. When I wrote this article, the Unix timestamp is 1540130658.  You can check the current timestamp from the links below:

https://www.unixtimestamp.com/

Timestamping is an important feature of blockchain technology. Each block is timestamped, with each new block referring to the previous block using the cryptographic hash. Combined with cryptographic hashes, this timestamped chain of blocks provides an immutable record of all transactions in the blockchain, as shown in the figure below:

What is Hash?

A hash or hash value is the result of a hash function. A hash function takes an input of any length, perform some algorithmic transformation, and produces an alphanumeric value of a predetermined length. The input could be a spreadsheet file, a music file, video file, image file, financial statement, invoice, contract etc.

A hash value comprises  a 256 bits(64 characters) random letters and numbers , as follows: “4373c7fb1437035365d9228c77eca2cfd240523e274163e78c1eba11effd8b38”.

You can generate a hash online using the following link:

https://passwordsgenerator.net/sha256-hash-generator/

A hash has the following properties

  • A given input has a precisely predictable output of a specified length, usually, but not necessarily much shorter than the input.
  • Even if the input is only slightly changed, the output differs dramatically.
  • If the hash function is of the cryptographic variety, it is very difficult, if not practically impossible, to infer the original input, given only the output. The degree of difficulty/impossibility depends on the strength of the encryption used.

 Every transaction occurring on the blockchain network is encoded with a hashing algorithm to produce a hash that is impossible to decrypt. Hashes are used to represent the current state of the blockchain. It means all the transactions that have taken place so far have been hashed, and the resulting output hash represents the current state of the blockchain. The hash is used for all parties to agree that the state is the same.

Hash is for validation purpose. Data on the blockchain is “hashed” in each block. Each block is linked with the previous bock via the hash value. If someone tampers with a block, everyone will know the block is corrupted. Therefore. It preserves the integrity and immutability of the blockchain.

What is a Digital Signature?

According to Wikipedia, 

” A digital signature is a mathematical scheme for presenting the authenticity of digital messages or documents. A valid digital signature gives a recipient reason to believe that the message was created by a known sender (authentication), that the sender cannot deny having sent the message (non-repudiation), and that the message was not altered in transit (integrity).

A digital signature is generated using asymmetric  cryptography, which is more secure than handwritten signatures that can be easily forged. It is used as a way to prove that a message originates from a specific individual and not from someone else.

Asymmetric cryptography, also known as public key cryptography (PKI), uses public and private keys to encrypt and decrypt data.  In the asymmetric encryption system, a user generates the key pair, which comprises a public key and a private key using some known algorithm. The public key and private key are associated with each other via some mathematical relationship.

The public key is meant to be distributed publicly to serve as an address to receive messages (including cryptocurrencies) from other users, like your Bitcoin or Ethereum address. The private key is meant to be kept secret and is used by the sender to send digitally signed messages to other users. The signature is included in the message so that the recipient can verify using the sender’s public key. This way, the recipient can be sure that only the sender could have sent this message key pair, which is a public key and a private key using some known algorithm. For examle, every transaction on the blockchain is digitally signed by the sender using their private key. This signature ensures that only the owner of the account can move money out of the account.  

The steps can be explained below:

Signing the message with the private key

To create a digital signature, the user can use a signing software to create a one-way hash of the electronic data. The private key is then used to encrypt the hash. The encrypted hash, along with other information,  is the digital signature.

Verifying the message with the public key

To verify the message, the receiver uses the sender’s public key to decrypt the hash. If this decrypted hash matches a second computed hash of the same data, it proves that the data has not changed since it was signed. If the two hashes do not match, the data has either been tampered with in some way or the signature was created with a private key that does not correspond to the public key presented by the sender.

To sum it all together, blockchain could not exist without hashing and digital signatures. Hashing provides a way for everyone on the blockchain to agree on the current world state, while digital signatures provide a way to ensure that all transactions are only made by the rightful owners. We rely on these two properties to ensure that the blockchain has not been corrupted or compromised.

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