Getting a grasp on Blockchain and other concepts.
History:
There are many people within the cryptocurrency space who think blockchain is a completely new concept created by Satoshi Nakamoto (Bitcoin’s creator), unfortunately, they would be wrong. The concept and theory of the blockchain, as a database, has been around for 27 years with the theory being developed by some cryptographers named Haber and Stornetta. Haber and Stornetta were looking to create a cryptographically secure system where documents could not be tampered with. Then a year later, in 1992, those same cryptographers added Merkle tree designs which improved the efficiency, and allowed multiple documents to be collected into one block.
The blockchain never really got much attention or traction until Bitcoin used their ideas in its implementation for a currency. Satoshi Nakamoto borrowed heavily upon some well known measures in cryptography to develop and secure Bitcon’s blockchain. Nakamoto added some other necessary components to make Bitcoin work as a currency in a trustless environment – like proof of work, decentralized ledger, and consensus methods. But Nakamoto’s implementation was a huge step forward in using blockchain to change our world.
Blockchain – as a database:
Blockchain technology is merely just a database as said above. It’s a unalterable, cryptographically secured database that is tamper resistant. The blockchain is linear in function as each block is linked by each other through a hash.
Source: Bitcoin’s white paper, Satoshi Nakamoto
But, unlike other databases, a blockchain is often public. This means that anyone can verify that you’ve placed info because the transaction is signed with your signature. With an application this would work by storing the information inside but only the owner would be able to access what’s inside with his signature. With a wallet, the information inside is your crypto balance. However, it could be other information too.
The blockchain could be seen as a software design approach too. The blockchain could bind together computers all on the same network which obey some predefined consensus process.
But in order to really understand the blockchain, we need to understand other things too; decentralized consensus, smart contracts, trusted/trustless computing, and proof of work. The hope is that the blockchain and these other concepts will enable developers to build decentralized applications to replace the centralized apps in our current system. But first let’s tackle these concepts, real fast.
Decentralized consensus:
Decentralized consensus breaks the old tradition of having one central database used to validate transactions. But the protocol (or code) behind bitcoin transfers this power and authority to nodes (or computers working to validate transactions) across the network. It enables the new validators to record transactions upon receiving transactions on a public ledger. Each new transaction contains a unique “hash” (or a fingerprint) of the previous hashed transaction. This secures the transaction because we are sure that each transaction followed each other, further, this can have the added benefit of removing the middleman from the process. Finally, the combination of cryptography (the hashing process) and the blockchain database together ensures that there is never a duplicate transaction or double spending in the ledger.
Basically, consensus is the first layer of a decentralized structure. You need the basic cryptography and decentralization of nodes in order to have this first layer.
Smart contracts:
Smart contracts are another possible component of a blockchain but are mainly used for decentralized applications. The idea with a smart contract is they are a little program that both contains value and has a set rules about how they operate. So smart contracts enable contractual agreements between two or more parties that are coded and verified by the blockchain. This negates the need for a central authority because these parties can agree between themselves, create terms and conditions, set money release dates, or incur penalties if certain conditions aren’t met, and it’s all programmable in code.
We assume that most smart contract users feel there is no need for a third party intermediary to conduct the transaction. Rather, the parties (two or more) agree on the rules and self manage those rules between computers. Those computers act on behalf of the parties and enforce the rules of the contract. Further, one can also put smart properties or digital assets on the blockchain too.
Trusted computing:
All of these concepts, combined together, are working towards one goal – making computers trust each other. These concepts enable spreading of resources, transactions, trust, and authority in a flat, peer to peer manner. Thus developing trust between each computer.
A lot of centrally planned companies and governments have trusted authorities, these people could be replaced by a smart contract and the above concepts. This is mainly due to blockchain’s role as the unique, and unchangeable validator. But each person on the network can trust each other with Blockchain because, at least in public blockchains, everything is open for anyone to look at.
Proof of work:
Finally, at the heart of the blockchain’s operations is the concept called “Proof of work.” The proof of work is merely a system by which consensus happens. The “Proof of work” system operates by a set of rules. The computers are trying to find one number that completes a mathematical computation. The answer to that problem is called a “nonce” and completes the problem. But the computers are working towards finding the “nonce” because it will add a block (a set of transactions) to the blockchain. Once a computer finds the nonce then the answer finder will send the completed block to other members on the chain. If the other members verify that it’s correct, and that member who submitted the nonce has the longest work put into that block, then the block is added to the chain.
And the idea is it requires effort and a majority of the hashing power to overpower the “proof of work” process in order to double spend. Bitcoin’s designer (and first example of proof of work being used) thought this would prevent and discourage any large scale, network ending, attacks. As gaining a 51% hashing power would require a huge, infeasible investment in resources.
Conclusion:
If we combine proof of work, trusted computer, smart contracts, and blockchain together we have a full idea of what a working cryptocurrency platform needs. Smart contracts are a necessary step in building decentralized applications and working towards a more decentralized economy. As time progresses we will hopefully see more decentralized applications and a flatter hierarchical society being utilized because of cryptography.
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Sources:
https://link.springer.com/article/10.1007/BF00196791
https://link.springer.com/chapter/10.1007/978-1-4613-9323-8_24
