The Blockchain Basics

It is important that when you become interested in new ideas, or movements that you spend the time to learn about the fundamentals of that idea. It is important that you have a good grasp of all the different workings so you can explain to others.

The rather ironic part about the crypto boom is that not a lot of people, even in the industry, know what Blockchain actually is. You have hundreds of thousands of individuals who are purchasing various cryptocurrencies completely in the dark, without any knowledge at all about the technology backing those assets.

To initiate the conversation about what blockchain is, we need to start with a unique phenomenon that occurs with digital money: The Double Spend Problem.

If you think about traditional fiat money, you have a physical note that you can transfer to vendors, people etc. That physical note also has various security features attached to it, allowing the accepter of that money to verify its authenticity. A mechanism like PayPal works similarly but just behind the scene. PayPal acts as a central authority that will verify ownership as well as facilitate the means of transaction. The central authority will also ensure that a payee has the required funds to make a transfer. It can subject individuals to their respective nation’s laws, including anti-money laundering, etc.

A digital coin, unlike a traditional currency, is intangible. Similarly, to fiat, there is no intrinsic value besides that value that is exogenous based on relative environmental/market factors. Essentially, since there is no central authority in place to verify a transaction for digital tokens, there is no evidence of ownership, therefore it is simple to replicate a digital coin. After replication, an individual can use the copy as a means of payment while retaining the value of the original coin (double-spend). Hopefully, you understand that this ends up being a serious issue.

Now enter blockchain. Not too dissimilar to the banks or PayPal acting as a centralized authority, blockchain acts as a decentralized authority that can validate transactions. The key difference here is a decentralized authority over the traditional centralized power.

Blockchain works through a system of nodes (computers) relying on and validating information. Fundamentally, the nodes interact with each other to establish consensus within the community. For example, with the Bitcoin blockchain, nodes are trying to garner consensus that a transaction from one individual to another is occurring at a given time. When that transaction occurs, a block is created. This block is verified by the network of nodes (miners), and if a consensus is formed, that block is created in an immutable form. This creates a transparent and unbroken chain that is timestamped.

I’m sure at this point, you might be wondering why you need to have a decentralized ledger when centralized ledgers are already being used (banks). One of the biggest statements that go against the centralized system is based on the giving your information to a single entity. Centralization in some cases actually makes the individual more vulnerable to manipulation. Decentralization, at least in the context of the blockchain, allows the authority to remain with many people, rather than just one. By leveraging a consensus mechanism, transactions can then be democratically validated preventing any one bad actor from compromising a public record of account.

Now that we know what value digital currencies can provide, and how the Blockchain actually functions we must talk about complex concepts to do with mining — the verification system.

Hash is a fixed number of letters and numbers that is used to resemble a certain function, but in a way that is undetectable and non-reversible. The hash function needs to be extrapolated from the block in order for it to be mathematically solved. In comes the miner and their mining rig. The solving of the hash function is incredibly difficult. This is somewhat due to the deterministic aspect of a hash. This means that regardless of the inputs, the encrypted hash function given the same inputs will always produce the same hash. Any changes at all will establish a vastly different function.

How this works is that a miner is given certain information used in a previous block. This includes the block header. The block header consists of a version number, a timestamp, the hash used in the previous block, the hash of the Merkle Root, the nounce and the target hash. A miner’s job is to determine if the previous nounce which is hashed again is equal to or less than the targeted hash. If so, that miner receives a reward. Just to clarify, a nounce is pseudo-random number issued in an authentication protocol to ensure that old communications cannot be reused.

Now it is almost impossible for a miner to get this on his/her first attempt, so the miner needs to produce a larger sample of basically what is trial and error. Those miners whose rigs are more powerful can produce these tests much faster and more efficiently than those with lesser computational power. Once successful, that miner will receive their earned reward.

Although it may seem somewhat complicated, mining is actually just trying to solve randomly adjusted letters and numbers similar to a cipher. A common hash function, used for both creating hash as well as blockchain wallet addresses, is Secure Hash Algorithm-256bit (SHA-256). SHA-256 can resemble almost any collection of data and is commonly referred to as a fingerprint of information.

There are many viable use cases for blockchain. Currently, the interest has exploded, infecting almost every traditional industry, forcing them to start finding out how blockchain can be implemented into their current business model. One aspect that has been very attractive for business to implement blockchain in is record keeping. The ability to keep track of information in a way that cannot be edited is very attractive for sectors including banking, logistics and insurance. The important point about this is how will these companies successfully transition into blockchain — which is a whole different story in its own.

Blockchain is disrupting many industries and will soon be a common household term. It is important that everyone interested has at least a broad understanding about how the blockchain works, and how the verification system helps us move from centralized authorities to a decentralized world.