Blockchain elements
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Bitcoin and Blockchain are the buzzwords that span around the globe nowadays. Everyone talks about it. Have to admit, I am late to the train to take advantage of it. But it’s never too late to understand the technology behind it.
Mostly I am worried about non technical people, particularly ones that have little understanding in Information Technology. There is a lot of persuasion, picturing it as “the future” of new economy, however, at least I am observing the technology closely and looking at it with a grain of salt.
I will attempt to explain concepts through analogy of real life to help better understand the technology and what makes it tick.
Intro
In real life it’s simple, if John buys a book, he has exchanged money for the book. John doesn’t own money anymore. Instead he acquired a book. The trade happened. Naturally and based on laws of physics.
It was good enough for a long time. Then computers, internet, ecommerce and smartphones have emerged. The whole digital space has opened and it has become widely integrated in our daily lives.
Today, items purchased in e-shops are sent at your doorstep and money goes from your bank account to the e-shops owner bank account. It’s just a record in the digital systems. Banks take care of every aspect of your money, identity of involved parties and integrity of transaction.
Nowadays the major money percentage are digital money. It is very convenient in comparison to physical money. Digital money are kept at bank systems and cards work as gateway to your bank account.
Banks
It has become apparent that banks have a major drawback. They have created a monstrous ecosystem that tends to profit on our expense. Every intermediary involved as well.
Banks have to participate in global currency systems, exchange currency if needed, ensure the identity of the parties and many more that follows before and after. The whole process is even more complicated, especially those parts that are not directly related to the transaction.
Be that as it may, everything there is, is just a mere digital systems that create several records of the transaction from whom to who money has been transferred.
Quest for innovation
Internet connected countries, cities, institutions, corporations, companies, people.
A bank is just a credible institution regulated by government which administrates digital ledgers or in short - everyones money. And banks do have governments blessing.
People noticed that virtually it is possible to replicate what banks do. But there were no technology to solve the so called double spend problem.
Double spend problem is ability to give electronic entity while keeping the original. In a sense, make multiple copies and manipulate them without affecting the original. Actually, once copies are made it’s practically indistinguishable from the original.
Physical world does not have this problem. It is literally impossible to create identical copy of the physical object. However, in digital space it’s very easy. Virtual world’s greatest strength becomes it’s greatest weakness. People thought so for quite long time.
Bitcoin and Blockchain
Silently, around ten years ago, bitcoin currency was created. Main users of it were not those ones from legal world. It has a history of being quickly adopted by the notorious marketplace where drugs, guns, porn and even people were traded.
How Bitcoin and Blockchain are related? If bitcoin is a car, blockchain is an engine.
Bitcoin is a currency based on Blockchain technology. Blockchain has solved the double spend problem. How?
Blockchain is a block plus chain. There are many blocks. Imagine a simple book. Pages are the blocks and page numbers are the chain. Blockchain has an addition: every page has a previous (except first) and a next page (except last one) numbers. It’s needed so that pages wouldn’t be mixed accidentally. In a book it is natural to follow pages incrementally. In a blockchain it’s a bit different story.
Blockchain in simple terms is just a ledger. If there is only one maintainer, it is very easy to tamper it as someone wish. But once the ledger is distributed and empowered by a majority voting mechanism — it is mostly unhackable.
How Blockchain works
In Blockchain page number is not a simple number. It is a hash. Hash is calculated. There are various hashing algorithms, Bitcoin uses SHA256 hash algorithm. Hash’s purpose is to always give the same limited output given the same input. Applications vary, but mainly it is used to ensure integrity. Even 1 bit change in the input will give completely different hash.
For instance, when file is downloaded hash could be calculated if the provider has supplied hash value and algorithm it used to calculate the hash and then compare; if it matches then the file is downloaded correctly, if it does not — it’s better to re-download the file.
Another important hash’s attribute is that it’s impossible to calculate the other way around. It’s impossible to calculate original data from the hash. Real life example:
1kg of jam and 1kg of pure 💩, mix it up and result is 2kg of 💩.
Having 2kg of 💩 it is then impossible to get 1kg of jam and 1kg of pure 💩
This example just gives a feeling of what hashing does. But it’s not very accurate. Imagine that jam is the input which can vary in size and is unlimited, a 💩 is the hash and there is the hashing algorithm in between. And that it always gives limited output or hash; specifically 64 alphanumeric string.
Even one bit change gives completely different hash value:
Attempt to extract what data was given to calculate such hash values is almost next to impossible.
Hence, if block has a calculated hash, even the slightest change will completely change hash value of the block. Making the previous and next blocks point to a block that does not exist anymore. That invalidates a Blockchain, it has been cut now, the order is not continuous anymore.
Distribution
If one entity managed the Blockchain it has to be undoubtedly trusted. But how to trust an entity having no trust guarantee? With one entity it’s impossible, but it is with multiple entities.
A very simple tactics was devised and implemented. Multiple parties have to agree on transaction correctness. In general, it’s a ledger that is distributed between parties that is written in synchronised fashion.
Imagine, there are 10 people. Six of them have to agree on received transaction in order to achieve majority and accept the transaction to their ledger. If there are less agreeing parties, the transactions is not accepted to the party’s ledger. It is dismissed.
There might be various reasons behind it. The most reasonable is to safeguard from intentional change that could have been made by a third party.
Risks
If someone gets ahold of majority party, the Blockchain could be compromised easily. The very same attack could be replicated in real life. If someone can force six from ten people to vote for a change, someone is said to control the majority, therefore change will be accepted.
Incentivization
It happened so that I was talking about incentivization in my previous article. Enjoy!
https://medium.com/@justinjus/blockchain-is-not-the-future-2bb0622d650
