Blockchain Series — Part 1: Understand what blockchain is for once and all and how you can apply it to your business.

Part I: What is Blockchain?

In this series we are going to talk about blockchains and why this technology is becoming so important and rising in a velocity the world has never seen before.

We’re going to start by explaining what is the blockchain, why it is so important, how the merchandise is seeing it today, the predictions of blockchain to the future, what it is and how the technology behind it works and how you can apply it to many different areas, including your own company.

The first mistake people have in mind is the relation between cryptocurrency and blockchains. Although Satoshi Nakamoto created the blockchain technology in 2008 to make decentralized transactions using crypto coins, blockchain is much more than that. So the first step here is to understand the potential of this technology and how it could be applied in so many different areas, including health care, science, IT and etcetera. But as blockchains were first created and are nowadays used to record crypto coins transactions, most of the examples I'm going to use in this article, are related to the blockchain of crypto coins. But just keep in mind, that this is not a technology that can only be applied to cryptocurrency. It can be applied in so many different areas, but people still discovering it, and the most didactical way to explain blockchains, is using the crypto coins blockchains.

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My goal here it’s to explain blockchain to you in the easiest possible way, and in order to do so, I’m going to start by the basics and then get into the technical part of it, so everyone, from simple users to software developers, can make use of this series of articles.

A brief history of blockchain

Satoshi Nakamoto created the blockchain in 2008 from a study/research they named: “Bitcoin: A Peer-to-peer Electronic Cash System” when the internet was passing through some real changes. The first goal they were trying to hit with this new technology, was to create a peer to peer network based on trust. So, for example, let’s suppose I want to transfer you 1.000 dollars. To do so, I would need to go to a bank and make an entire process to transfer you that amount of money. So basically I would need an intermediate agent (in this case a bank, a financial institution) to transfer you this amount of money. By making this we would be using a centralized process because banks hold your bank account and the money you have. So you need their actions to make your own actions because they are on the top of the hierarchy of control to permit or deny the access to the money that it holds.

Nowadays, with the idea of blockchains, I would transfer you this money directly, without any intermediates and with so much security. So that’s one of the big keys and powers of blockchains. They were designed to make this kind of transactions decentralized, so you wouldn’t need any intermediates. It’s only a user to user connection, making it decentralized. You are your bank.

What is blockchain?

Well, to be honest, I would say that we would need more than a series of articles to discuss what blockchain is. It’s a complex technology, but once you get it, you get it. There’s no mystery. But although blockchain is an extensive topic, it’s not rocket science.

First of all, the blockchain has a lot of layers. It’s not an item, a thing, a tendency or a feature. It is many things. And blockchain englobes three important fields: technical, corporative and legal.

Technically, the blockchain is a back-end database that maintains a distributed register that can be openly inspected.

In business models, blockchains are a network of exchanges for transactions, values, and actives between pairs without the need of an intermediate.

Legally speaking, blockchains valid transactions, replacing entities that were reliable before.

So the capabilities of blockchain = technical + corporative + legal.

Blockchain is not a new version of the famous TCP/IP protocol and it’s not a completely new and different internet. It’s more like a new internet protocol that relies on top of the internet, just like the World Wide Web relies on top of the internet with its technological processes.

Blockchain is part database, part development platform, part network maker, so consequently, we need many variations and instances of it. As a layer on top of the internet, it can have many forms of implementations.

It’s important to know that there are more than a type of blockchain. There are hybrid and native blockchains. We’re going to be talking about them later.

But now that I’ve explained briefly to you what a blockchain is, we need to understand what makes it so different and better than a normal database.

Cryptography

First of all, one of the principal powers of blockchain is the cryptography. Cryptography is not a new technology. Many systems nowadays use cryptography to protect their data. So what makes blockchain cryptography so different? It has three basic concepts: hashing, keys, and digital signatures. Those are not new technologies as well, but the way they're applied and combined in blockchains makes it unique.

So let me break this down for you:

Hash: it is a unique digital fingerprint that helps to verify that a piece of information was not altered, without the need of seeing it.

Keys: usually we have two of them, the public and the private ones. The public encrypts the information and the private decrypts it. So only the person who has the private key can see the information. So the private key can never be revealed.

Digital signature: it is a mathematical computation used to prove the authenticity of digital a message or document.

So the cryptography behind blockchains relies on a public-private hegemony where we have public visibility with a private inspection.

It’s like your address: you can make it public to everyone, but only those who have a private key can enter the house and see what’s inside of it, and once you’ve declared that that’s your address, no one can declare to have the same address as you.

Database

In a blockchain database, the blockchain network is responsible for making the authentication, validation, and transfer with or without a crypto coin in the middle of it.

Every computer inside a blockchain network is known as a nonce, miners or endpoint. Picture a blockchain as a network of connected computers where every computer is responsible for validating and transmitting the entries.

So let’s suppose I’m going to send my best friend Tove Lo, 1.000 dollars for her birthday, from my digital wallet. This is the step by step process:

1. I'm going to make the solicitation of the transaction;
2. The solicitation is transmitted to the network;
3. The network validates or excludes the transaction;
4. The transaction is added to the actual block of transactions;
5. The block of transactions is chained to the older transaction blocks using the hashing technology;
6. The transaction is confirmed.

But you might be wondering how this works technically. As I said at the beginning of this article, I'm going to try to cover up all the subjects around blockchain, so everyone, from a simple curious internet user to an IT professional, can understand the basics and complexities of this technology. So let's dive in a little bit.

The blockchain structure

Blockchains are made by three principal parts:

1. Block: a list of transactions registered in a ledger for a determinate period of time. The size, the period and the event generator for blocks are different for each blockchain.
2. Chain: a hash that connects one block to another, chaining them together mathematically. The blockchain hash is created from the data the was in the previous block. The hash is a digital fingerprint of that data that is responsible to block the blocks in order and expiration date.

Although hashing is not a new technology, in blockchains they are used because they create a unilateral function that cannot be decoded. A hash function creates a mathematical algorithm that projects data of any size in a fixed size bit chain.

Usually, a bit chain has 32 characters of extension, what in this case, represents the data that had passed through the hash functions. The Secure Hash Algorithm (SHA) is one of the cryptographic hash function used on blockchains. SHA-256 is a common algorithm that generates almost a unique hash, with a fixed size of 256 bits (32 bytes) and 64 characters. Think of hash as a digital fingerprint of the data, used to block the data into the right position inside the blockchain.

Let's take the message below:

Ana

20 BTC

To Tove Lo

After passing through a complex mathematical formula, this message is transformed into this hashing code:

5B3541961E0479B87A593BD00650FAE7A03463BC2539C26E7C0652434431BADA

Now let's suppose the message is:

Tove Lo

10 ETH

To Ana

The hash would be totally different:

EFD262BD7F237A681829CE0BAD16147CCE4D969135AAF24D09D999E769D5246E

In this case, I changed a lot of stuff from the original message, and the hash was totally different. Even if I changed a single character in the message, the hash would be totally different. It's math. And if I decrypt the hash, I'll have the message the exact way it was written. That's the power behind hashing. If the message changes, the hash changes. So you'll always know the authenticity of the message. Simple.

If you want to learn more about hashing, a big and important principle for understanding the blockchain, I recommend you to watch this video.

3. Network: the network is made up of full nodes. Think of them as a computer executing an algorithm that is protecting the network. Every node contains a complete register of every transaction that was registered in that blockchain.

The nodes are located on the entire world and can be managed by anyone (those who managed it are known as miners). However, managing a full node is hard, expensive (because of energy consumption for computer processing and equipment investments) and consumes time, therefore, miners don't do it for free. They are encouraged to manage a node because they want to earn crypto coins. The underlying blockchain algorithm rewards the miners for their services, usually with a token or a crypto coin like the Bitcoin.

Although the examples I gave are using the blockchain of Bitcoin, they're two different things. Bitcoins transactions use the blockchain technology, but Bitcoin is a crypto coin and blockchain is a software class. Blockchains had its origin with the creation of Bitcoin, that's the reason why people always write articles, books, and etcetera by giving examples with crypto coins. The original Bitcoin network was created to protect the bitcoin crypto coin.

What is behind blockchain

After all this information, you might be wondering: what a blockchain block look like?

A blockchain block. Source: blockchain.com

At bitcoin explorer, you can see all the blocks with all the transactions in it.

So blockchain block contains:

1. Transaction data;

2. The signature of the previous block (hash);

3. The signature of the next block (hash);

4. A nonce (numbers).

Transactions inside a blockchain block. Souce: blockchain.com

Because the transaction data and metadata (block number, timestamp, etcetera) need to stay the way they are, a small specific piece of data is added to every block that has no purpose except for being changed repeatedly in order to find an eligible signature. This piece of data is called the nonce of a block. The process of repeatedly changing the nonce and hashing the block’s data to find an eligible signature is called mining and is what miners do. Miners spend electricity in the form of computational power by constantly changing the block composition (nonce) and hashing it until they find an eligible signature (output). The more computational power they have, the faster they can hash different block compositions and the more likely they are to find an eligible signature faster. It is a form of trial and error.

Now how the blockchain looks like:

Representation of a transactions blockchain. Source: Blockchain School.

Note that we have: the name of the block (header), the transactions (including number, name, and value transferred) and a unique signature (hash) responsible for chaining the blocks together. Remember what we talked about hashing? So now, picture this first block, take all the content inside of it, apply the hashing formula, and you'll have the hash code. This hash code will be the block signature, therefore, it cannot be altered without altering the hashcode. If the content inside the block changes, the hash changes, so that invalid the block and all the blocks connected. That's why and how the hashing keep the blocks chained.

Remember that we're talking about blockchains of the Bitcoin technology. Not all the blockchains blocks look like this, although the ideas and principles still the same, the data inside a block can be different from a type of blockchain to another.

Conclusion

So, to sum up, blockchains definitions are:

1. Blockchain is a layer on top of the internet;
2. A shared database managed by a computer world network, where the computers (usually called nodes/nonces, miners or endpoints) are responsible for validating and transmitting entries. The entries, in turn, are the data published by the users on the network. The data can be anything, not necessarily crypto coins transactions;
3. We have three different types of blockchains: public, private and permissible;
4. The cryptography proof is a method of trust that blockchain uses to confirm the validity and finality of transactions between the parts;

Blockchain has ten characteristics:

1. Digital crypto coins: crypto coins usually are an economic stimulus to enable the operations and security of the blockchain. Usually, they're represented as a token or an underlying crypto coin. A crypto coin can play two roles: production and consume. The role of crypto coins as production is to reward miners for the transactions they valid. And as consume, is to pay a little tax to generate a smart contract or a transaction tax.
2. A computational infrastructure where a number of computers obey the same process of consensus to give or record data they have, where all the transactions are verified using cryptography. The developers don’t need to configure the blockchain servers because the network makes a request to the blockchain;
3. The blockchain is a giant transaction platform capable of dealing with micro and macro transactions.
4. Decentralized database: blockchain is a space where you can keep semi-publicly any data in linear space (a block). Anyone in the blockchain network can see the block, but only you, with your private key, can see what's inside of it.
5. Distributed accounting record: it's an active record with time-stamped (a sequence of characters or encoded information identifying when a certain event occurred), public and distributed, that controls every processed transaction to make sure there's no double counting. This register can be shared between some parts and it also can be private, public or semi-private.
6. Development platform: to software developers, blockchains are, in the first place, a set of software technologies. Blockchain includes technologies to build new types of applications that are decentralized and encrypted. So, blockchains are a new way to build applications. They also can have a variability of APIs, including a new script language for transactions, a P2P nodes communication API and an API client to verify transactions in the network.
7. Open source software: blockchains software code are open-source, so the innovation on the initial software can be collaborative. The more open a software code is, the stronger is the ecosystem around it.
8. Financial services market: the crypto-coin based blockchains can offer a new innovative environment for the new generation of financial services. With the reduction of the crypto coins volatility, they're going to popularize, therefore, derivatives, options, swaps, synthetical instruments, investments, loans, and other traditional instruments, will have their version in crypto coins, creating a new financial trading market.
9. Peer-to-peer network: the basic layer of blockchain is a peer-to-peer network, making blockchain decentralized, by processing between parts though nodes. The user verifies the transactions on the level peer-to-peer, eliminating the necessity of an intermediate agent. Besides creating a P2P network, the networks and applications create their own economy (distributed), with a variety of sizes and intensity, therefore, blockchains bring a new economic model.
10. Trustable services layer: all blockchains have trust as its atomic unit of service. Trust is applied to data, services, processes, identity, business logic, terms of an agreement or physical objects. It can be applied to almost anything that can be digitalized and consumed as an
    smart asset with a inherent value or related, connected to it.

On the next articles, we are going to be talking about the potential blockchain platforms, the predictions of this technology to the future, the law vision on it, and how you can apply it to your own business.

I really hope I can help you understand this technology and clearing up things for you. If you like the content you're reading and if you're learning something from it, please don't forget to give it some claps.

References

MOYGAYAR, W. (2018). The Business Blockchain. [Place of publication not identified]: Skillsoft.

LAURENCE, T. (2019). BLOCKCHAIN FOR DUMMIES. [Place of publication not identified]: JOHN WILEY & Sons.

Blockchain.com. (2019). [online] Available at: https://www.blockchain.com/ [Accessed 4 Jul. 2019].

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