What is a blockchain?
A blockchain is proportionate to a database that does not adhere to anyone. At the same time belongs to everyone. With these and other special features, the blockchain solves trust issues that often appear in our economy and society. Hence, a blockchain is often referred to as a “layer of trust” or “trust machine..”
Blockchain is a technological development that can fundamentally change the way we communicate and interact around the world. Due to its properties, it is said to alter entire industries and branches or even build them useless.
This upsetting approach is based on the way it works. Blockchain should make it possible to guarantee a limitless exchange of information, values , and goods of any kind without having to resort to intermediary institutions such as corporations, banks, or governments. For this, technology replaces the task of this, namely to minimize uncertainties and create trust.
The idea for the blockchain was first published in 2008, although the underlying technological concepts go back further. The original idea was to use blockchain to create a decentralized currency free from the influence of banks and governments. This currency was called Bitcoin and is still representative of the technology today. To date, no one knows who wrote the publication (“White Paper”) on Bitcoin, as only the person or group under the pseudonym Satoshi Nakamoto was responsible for it as the author.
Everything you need to know about Bitcoin
In our comprehensive Article about bitcoin, you will find out and understandably how Bitcoin works and what advantages it has.
Bitcoin was the first decentralized currency that dealt with blockchain technology.
In the meantime, blockchain has become a phenomenon that affects individuals, governments, public institutions, and companies alike. Both the technological potentialities, disruptive ambitions, and financial investment opportunities of the blockchain arouse great interest. The latter, in particular, create a gold rush atmosphere and billions in investments, which is why there is often talk of a speculative bubble. However, these background noises often drown out the real potential of this innovative achievement. Due to its worldwide fascination, the blockchain will also emerge with the emergence of the internet. Compared to the early 1990s. So it’s worth taking a close glance at the technology and its properties.
In brief, blockchain is a decentralized peer-to-peer network that uses cryptography to generate a secure, transparent, and optionally anonymous system. It minimizes uncertainties and transaction costs, trust in participants in the system becomes obsolete, preventing people from being excluded.
To make this definition easier to understand, we should examine the individual points in more detail below:
Properties of a blockchain
The move away from centrality is one of the most important properties of the blockchain. It portrays the power relations within the system, which are uniformly distributed. The objective is to prevent the emergence of major parties. As a result, one is no longer forced to trust them and be exposed to their possible abuse of power. Institutions that are in such apex positions today are, for example, banks, governments, or companies that are in industries with a monopoly or oligopoly.
All information that ever occurs within a blockchain is stored irreversibly (unchangeable). The naming of the blockchain, i.e., blockchain, also comes from this principle. A block represents a consolidation of the most current information in the system. Being connected one behind the other and forming a blockchain is constantly expanded by different blocks with new information. Once a new block has been chained to the previous one, its stored data is saved and cannot be changed.
The blockchain is transparent means that all accesses and interactions in the system are openly visible and irreversibly documented. So it is possible to see any information, but not to change it. No information is removed, but information about the change in circumstances is added to mark every change and access system back to the origin. Since the control over this is distributed decentrally, there can be no non-transparent processes.
One of the most talked-about properties of the blockchain is the anonymity of its participants. At the same time, we can trace all accesses and activities of the participants transparently. A cryptographically encrypted series of numbers only represent the participants themselves. Banking on the type of blockchain, it is very difficult or sometimes impossible to understand what real identity a participant is.
The advantages that result from the properties mentioned above are manifold.
Advantages of a blockchain
The combination of decentralization, irreversibility, and transparency theoretically creates a perfect and fraud-proof system. The blockchain always keeps and updates the complete history of information that has ever taken place within the system. The special feature stays in the principle of decentralization, which means that this history is not stored centrally, but separately for many individual participants. To manipulate this system, every blockchain of information would theoretically have to be conducted simultaneously for countless participants to become what is considered to be as good as impossible and not very worthwhile. The more members a blockchain has, the more protective it is usually.
The security of the system builds trust in the other participants (intermediaries/brokers) superfluous. Any interaction is thus free from uncertainty or fear of fraud. What was previously the task of intermediaries such as governments, banks or corporations is now being taken over by blockchain technology. Because of this property, blockchain is also known as the ” Trust Protocol, “i.e., the protocol of trust.
Low transaction charges
The apply of intermediary institutions usually leads to transaction charges. The costs are raised for a service that consists of creating trust and security between actors. Or there are costs in the course of the processing of administrative effort. Blockchain technology makes some of these services superfluous and allows direct P2P interaction (P2P = peer to peer) without transaction costs in the form of fees or contributions. Buying a used bike, sending money, or booking a flight can all be done without the prices that are due today. We can minimize the transaction charges for participants within a blockchain.
The requirements for participating in a blockchain system are relatively low. All you want is a device with an internet connection. More than four billion people around the world now meet this requirement. There are far more people than, for example, those who currently meet the criteria to use a financial service or insurance from a central institution. Blockchain opens up a large part of the world population, previously excluded from participating in international exchange and trade.
How does blockchain work?
Blockchain is dealt with on a simple P2P database. Within this, participants can interact directly with one another. There is no important part that takes care of adjustment, control, control, or account administration.
This property seems trivial at first, but it is extremely important. Many applications today seem to allow direct interaction as well, but they don’t do so. Whether with a messenger service like Whatsapp, a payment service like PayPal, or an online marketplace like eBay – a major party is always interposed here, which stores information, charges fees, or determines which participants are allowed to participate in the system when opening an account.
The private key and public address
The peer-to-peer (P2P)system leads, among other things, to decentralized account management.
In the apex system, we open the account via the intermediary. For example, with a bank account or creating an email address, the intermediary can avoid duplicate addresses by comparing them and thereby collecting information and data from the person. In the decentralized system of the blockchain, accounts are randomly generated using cryptography without being compared with one another. Each participant receives an automatically generated ” private key ” when an account is created.
With the private key, all of your transactions in the blockchain network are digitally signed to prove that you own the Bitcoin you are sending. Put; the private key can also be referred to as a password for your credit on the blockchain. The private key consists of a combination of 64 numbers and letters and looks like this, for example:
A so-called ” Public Address ” is then received from this. It relates to the private key, like the mail address to the password, and represents your account in the system. This derivation only works unidirectionally. We cannot derive the private key from the public address. If information, for example, about the possession of Bitcoin, is to be transmitted, it is addressed to a person’s public address.
If Sarah wants to transfer two Bitcoin to Karl, she automatically signs the transaction with her private key and defines Karl’s public address as the new owner. Only Karl can now access it using his private key and make further changes.
Regardless of this, everyone can see the transactions between all addresses. This transparency is dealing the principle of the distributed ledger and will be discussed in the below section.
Following that, we are in a Peer Peer system in which participants collaborate using cryptographically encrypted accounts.
A special task of the system is how information is processed and documented. It is done using a so-called distributed ledger, which can be translated as a distributed ledger. It virtually replaces the system’s central server. Two features of this are crucial.
On the one hand, all new information gets an entry in the account book, even if previous information has only been changed or made null and void shall be. (Entries in the ledger that have been written once are unchangeablele – more on that later.) Instead, the previous information is added to the new entry. For example, if Sarah has transferred two Bitcoin to Karl.
We will enter the data. If Karl returns the two Bitcoin to Sarah, everything will be the same, and the old entry remains as it is. Instead, they transferred two bitcoin—the addition of a new one, with the information from Karl to Sarah.
On the other hand, the entire account book is updated, copied, and made available separately to everyone involved in operating the blockchain with each new entry. It ensures an aspect of decentralization. In our example above, if Sarah now wants to cheat and says that she never received the repayment of the two Bitcoin from Karl, she can now be convicted of this lie. There is a decentralized and publicly accessible account book in which all information or information is available. They document the transactions.
Let us state that we are in a tamper-proof and transparent P2P system in which information is documented in a decentralized manner and participants interact using cryptographically encrypted accounts.
Why the name blockchain?
Let us now dedicate ourselves to the entries in the ledger that give the blockchain its name. Each entry contains several pieces of information which, when put together, form a block. These blocks are lined up one after the other by cryptographically concatenating the newest block with the old one. It creates an endless chain where we cannot alter the older entries due to this kind of connection based on unidirectional cryptographic chaining. Certain information is added to each block when created, including a header, an ID, a time value, a so-called hash value, and a reference to the previous block’s hash value.
Source: ben. co
Hash values and cryptography
The hash is a value that results from digital content using complex mathematical processes, such as the information of a block. The hash value is always similar if the content does not change, and we can always calculate the same hash value from the content. However, the other way around, the hash value cannot provide the content.
The checksum provides a simplified example here. If the content of a block contains the numbers 1, 3, 4, the checksum, quasi the hash, is 8. The content can easily give the hash. However, it does not occurs the other way around since checksum 8 can also consist of different number combinations such as 2,2,4 or 1,1,6.
In reality, the functions for calculating the hash value are significantly more complex so that a change in the content is immediately noticeable. Bitcoin, for example, uses the SHA-256 method. What is important here is the matter that the hash function used results in what is known as collision resistance, which makes it impossible for different content to create the same hash value.
Each block has a kind due to the hash digital fingerprint that uniquely identifies it and unalterably links it to the neighboring blocks. If the information from an old block were to be changed, all subsequent blocks would “notice” this since the respective hash changes for each one.
Building a blockchain
Let us state that we are in a tamper-proof and transparent P2P system that has decentral data. And unalterably documented, and participants interact using cryptographically encrypted accounts. The blockchain represents the blocks linked using hash values, which contain the data from the distributed ledger.
Mining – blockchain reward system
Therefore, the value of the blockchain lies in the secure documentation of information within the blocks, among other things. A certain amount of computing power is needed to make such a block, including its hash value. The larger a blockchain becomes, the more complicated the process becomes. The question arises, who provides the computing power to generate the blocks and thus keep the system going? For this, we turn to the ‘miners.’
The ‘miners’ are participants in the blockchain network who willingly provide their computing power to validate the information and create blocks. They are existential to the system. To ensure that there are enough miners, they are offered a financial incentive. Each miner will receive for his performance a certain amount of Systemcoins, better known as a cryptocurrency that we can monetize again.
What are cryptocurrencies?
A competition arises since several members within a blockchain want to do worthwhile arithmetic work. On the one hand, this assures that only one block attaches to the chain once a time. On the other hand, the clash determines which participant wins. This agreement between the ‘miners’ is called consensus. There are different ways to reach a consensus.
Proof of work of blockchain
In the present case, we refer to the variant on which Bitcoin is also based: Proof of Work (POW). Here the effort determines who gets the contract award. To do this, participants (or their hardware) have to perform complex computing tasks consisting of guessing complicated hash values (the calculations run automatically through computing power). Whoever fixes the task first is awarded the contract to create a block. As soon as the champ has made the block, he forwards it to other miners in the system for control. After a certain amount of checks, the block and the underlying information are considered valid views. This process initiates a new for each block.
The POW algorithm (and the final computing effort) also protects against so-called Sybil attacks. In a Sybil attack, uncountable fake participants generate to influence majority votes (e.g., whether a block is valid or not) within the blockchain. More details on Proof of Work on Wikipedia.
In conclusion, let us state that we are in a tamper-proof and transparent P2P system in which information leads to decentralization. And unalterably documented, and participants interact using cryptographically encrypted accounts. The blockchain represents the blocks linked utilizing hash values, which contain the information of the distributed ledger. The participants create blocks in the system (so-called “miners”) who gets cryptocurrencies (e.g., Bitcoin) as an award. A consensus algorithm (like Proof of Work) uses a special process to determine which participants are to select.
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