The Fundamentals of Blockchain: An Overview
Blockchain Technology, a profound anonymous invention, is undeniably one of the most incredible after the internet. It has been growing so rapidly, that people who haven’t heard of what it actually is or know its workflow, want to invest and explore this field.
By the year 2025, the Blockchain market will bloom to $41 billion dollars. We see the technology trend and how this blockchain is climbing up the ladder to become the topmost secure technology of the present day scenario.
Entrepreneurs, business tycoons, global economists and even some of the government organizations are looking forward to this top trend technology finding its way in their domains, although the technology’s fundamentals and working is yet to be known by them.
The insight here is to discuss and understand some of the very basics of Blockchain and what makes it stand out among other existing technologies. Let’s get our Blockchain enthusiast fellow mates on the same pace.
What is Blockchain? How is Blockchain different from Bitcoin?
About Blockchain, the first thing that strikes our mind is Bitcoin, isn’t it? Bitcoin is a unique crypto-currency secure digital payment system. It is the brainchild of an absolutely clever and secretive Japanese Software programmer, Satoshi Nakamoto, in January 2009. Bitcoin is like the usual currency but physically doesn’t exist. It is quite similar to the “digital cash” that exists in cloud-like Paypal or Citrus.
Blockchain technology was developed and brought to the spotlight through Bitcoin cryptocurrency. In layman’s language, it is a decentralized and tamper-proof data management system, shared across a network of computers known as peers and each computer is called a node. At the ground level, Blockchain allows a group of peers in a public or private network to authenticate and record the transactions in a distributed ledger within that network, without an intermediary or a central authority. Since it is a distributed and immutable ledger, anything that is built on the blockchain is by its very nature transparent and every node of the peer network is accountable for their actions.
The ledger permanently records the transaction data in a sequential chain of cryptographic hash linked blocks defining the word Blockchain. Blockchain acts as a single source of truth of the asset exchange in the peer to peer network. The members of the P2P network are permissioned to see only appropriate transactions.
Bitcoins cannot be created whenever needed, unlike other normal currencies. According to the research, only 21 million Bitcoins can be created, of which 18 million have already been created until now. Bitcoin gets created whenever a block consisting of valid transactions is added to the Blockchain. This is the conventional means for creating Bitcoins and through various mathematical encryption algorithms, it is ensured that no fake Bitcoins are created or circulated. Bitcoin uses this system for monetary transactions but Blockchain can be deployed in many other real-world applications.
What makes Blockchain stand out: Properties
1. Increased Capacity: Since there is a network of many computers working together, it offers a great source of computing power in total, than a few of devices that are centralized.
Foldingcoin is the best example of this property. This project started at Stanford University has possibly managed to create a distributed supercomputer that stimulates protein folding for medical research. The supercomputer barely takes microseconds for a protein to fold, much faster than the processing power of a regular computer. What requires a multi-million dollar supercomputer was managed to build in a cost-effective manner through a distributed network.
2. Better Security: Blockchain provides better security as there is no single point of failure or network shutdown. The existing financial system even at the highest level is vulnerable to hacks. Bitcoin has been one of the most secure transactions as of now. It is possible to hack if one’s private key is not safely stored. The transactions are secured by a number of miners (computer) called nodes that confirms the transaction by validating it on the network.
3. Immutability: Is one of the unique properties of Blockchain. The centralized database is more likely vulnerable to hacks. This property builds trust in the third party to keep the database secured. The transaction data is made secure and immutable using cryptography. The blockchain distributed ledger only appends time-stamped data, no historical transaction can be changed or deleted.
4. Faster Settlement: Traditional and centralized banking transactions can be slow, as they need a lot of time for transaction processing. Adapting to blockchain the monetary transactions can be settled at a faster pace, in a safer mode and is convenient to use by the client.
5. Decentralized system: Decentralized meaning there isn’t any governing authority rather a group of nodes maintaining the network. In simple, this technology makes it uncomplicated for its users. It allows you to store the assets in the network, that can be directly accessed further using the internet. This property of blockchain technology works remarkably. Through this the owner gains control over the assets, the owner will have control over his asset using his private sign-in key. Thus, decentralized system is giving the right on the assets to its rightful owners.
6. Minting: Minting process is mining of data by the miner, node or validator. It is done using new methods of minting, also called as consensus mechanism. The miner has to create the block containing recent transactions with the encrypted data. The most frequent methods introduced for this is Proof of Work (POW) used in Bitcoin.
Types of Blockchain:
1. Public Blockchain: A public blockchain is completely open, hence called as a permissionless blockchain. It allows anyone to join and participate in the network, make a transaction, employ the mining protocols and maintain the distributed ledger. Public blockchain works seamlessly in a trustless network due to immutability of the records. Every single node is treated impartially and rewarded for performing computations truthfully.
2. Private Blockchain: A private blockchain requires permission and validation either by the network beginner or by the set of rules put in place of the network beginner, hence called as permissioned blockchain. The businesses blockchain are generally permissioned and currencyless blockchain.
Permissioned blockchains are also decentralized ledgers, but here a ledger only needs to be shared within the organization. Some nodes in private blockchain will have the limited capacity within the organization, whereas nodes are treated impartially in a public blockchain.
3. Consortium Blockchain: Combining the best features of both public blockchain as well as private blockchain. This is a semi-decentralized network, assigning the same tasks to nodes of multiple organizations rather than most tasks to a single organization. There are multiple validator nodes instead of a single validator node as discussed previously. A consortium blockchain is permissioned, yet more decentralized than a private blockchain.
4. Hybrid Blockchain: All the transactions and hashing is generated in the private blockchain network, while the data is stored in a ledger in the public blockchain without any data piracy.
Let us walk through some of the Essential Concepts.
What is an Asset?
Asset is something that has value. In blockchain the term asset transfer is used. Assets which can be digitized are used in blockchain. Any blockchain transaction always includes a specific asset in its transaction.
Based on the design of the application specific scenario, assets are classified as follows:
1. Tangible assets: In simple words tangible asset is anything that one can see and touch physically. These include buildings, machinery, land, property and money. These assets are owned by an individual or a company and has some value. Tangible type of assets provide some economic benefits in future that helps in the smooth functioning of the company. The value of tangible asset may get depreciated in future. The liquidation of these assets is not tedious. These type of assets have residual value, they are accepted as collaterals by the creditors. Other examples of tangible assets are currency, real estate property, art, agriculture, certificates.
2. Intangible assets: Intangible assets simply means those assets which do not have a physical value. It cannot be touched. Intangible assets include patents, trademarks, copyrights, and brand recognition. These type of assets also have an economic value. They are in abstract form and their value can be amortized. The liquidation of intangible assets is more difficult than tangible asset. These do not have residual values, therefore are not accepted as security by the creditors. The government record, valuable certificates, health care comes under intangible asset.
3. Hybrid assets: The parameters have physical value and can be felt, hence there are type of tangible assets. The parameters which do not have any economic value makes it intangible. Together they can be called as hybrid assets. Temperature and humidity can be called as hybrid assets.
Thus, asset tracking assures that the asset is in the intended environment. It provides data for analysis and optimization, real time access to the properties of owned assets.
Before we learn how does the blockchain system work, let us walk through some of the important concepts and terminologies in the operation of blockchain technology.
What is a Transaction?
In technical terms, the basic definition of transaction is an event that is executed on the underlying protocol. Fundamentally, transaction is like a record stored in a database. You would know this if you are familiar with database. Blockchain itself is a database. Transactions get appended in the form of blocks and then form a chain. In Bitcoin blockchain, the transfer of money from sender to receiver is recorded as a transaction. In other blockchain applications, transaction may be a transfer of any type of assets as discussed above.
What is a Smart Contract?
A smart contract allows you to exchange the valued assets with transparency and non-conflict service of the middlemen. All the contractual conditions and business terms are encoded in this smart contract. This smart contract, under which corporate bond transfer occurs is the brain of the Blockchain system. It is a computer protocol modelled to digitally enforce the negotiation or performance of the entire application. Smart contract, also referred as Business logic specifies the parametric conditions to be met. These legal and binding terms embedded in the transaction database are self-triggered and self-executed when the specified parametric conditions are met, during the transaction processes.
What is Consensus (minting) mechanism?
The consensus being the root of blockchain technology, determines which participant publishes the next block of the chain. It basically means that all nodes in a decentralized network must come to an agreement with true data analysis. In case of Bitcoin, Proof of Work (PoW) algorithm ensures that all the honest nodes reach consensus on the true history of transactions.
Consensus involves a significant amount of computational work, maybe solving a computational intensive puzzle, which after the approval of all the nodes in the network leads to creation of a block. In order to be the first to broadcast their block to the recent block on the top of blockchain, nodes compete among themselves. The node responsible for block creation is rewarded financially in terms of transaction fees. It is important to note that if two valid blocks are presented, the ‘longer’ block is considered as most amount of computation is put into it.
In a block creation, every block is linked to the previous block by including the previous block header’s hash except for the first block. The first block is the genesis block. Since genesis block does not has a previous block, the hash of previous block header is set to zero.
What is Hashing?
Hashing is generating a value from an arbitrary data by applying mathematical functions. In blockchain the arbitrary data can be any number of bits while the output is of fixed length. In Bitcoin, SHA 256 (Secure Hash Algorithm) is used for hashing, no matter what the input length is, the output is fixed 256 bits or 64 bytes.
Since a hash is very sensitive, the sequence of block is tamper-proof. A change in any single variable of any of the hashes in a block would cause a domino effect, mutating the previous transactions in the given block. The same input will produce the same output hash each time as blockchain hashes are deterministic.
What is Digital Signature?
Digital signatures help to authenticate that the transaction is from the rightful owner. Unlike manual signatures, digital signatures cannot be forged or tampered easily. Issuing of digital signature involves concepts of cryptography and secp256k1 based Elliptical Curve Digital Signature Algorithm (ECDSA). A pair of public key and private key is generated by applying the ECDSA mathematics.
The private key is a randomly generated secret number known only to the person who generated it. In Bitcoin, a private key is a 256 bit unsigned integer (32 bytes) used to sign in to authorize a fund transfer. The number corresponding to private key is the public key, this need not be a secret. Each participant’s public key is known to the fellow participants in that network. Public key is a authentication that the signature is genuine without divulging the private key. Calculation of public key from private key is possible, but not vice versa. A public key size is 33 bytes, followed by 256 bit integer x and 1 bit y. This 1 bit y is for public key recovery. The signature size is 64 bytes or 65 bytes with 1 bit for recovery of public key.
Transaction authentication
The transaction are initiated from the client/sender/signer in the blockchain technology. The following description illustrates how the transactions are authenticated prior to block formation and consensus mechanism.
Senders’ Side:
Signing in with private key:
1. Hash the data value.
2. Encrypt this hash with the sender’s private key to obtain the digital signature. Attach this digital signature with the data to obtain digitally signed data.
Receivers’ Side:
Verifying message with public key:
1. Take the digital signature, use the signer’s (sender’s) public key and generate the decrypted hash. The output is HashA.
2. Now take the digitally signed data and separate only the data part. Hash it. Now the output is HashB.
If both HashA and HashB are the same it is a valid transaction else, the message has been tampered and is not a valid transaction.
One important note, the same message signed by the same key always generates the same signature.
Blockchain Conceptual Operation.
In blockchain there is a transfer of value from client to the system unit. In other words a transaction needs to be initiated by the client to the blockchain design unit. Let us assume that the transaction to be sent from the client to the design unit is transfer of pharmaceutical good from the manufacturer unit to the distributor. Now a transaction has to occur, with the manufacturer as the client and the distributor as the receiver. So here the sender manufacturer sends the consignment to the receiver distributor. (Sender à Receiver) The design system exists as a P2P network system here.
The manufacturer (sender) requests the transaction here. This transaction message will have details of ordered pharmaceuticals, manufacturer’s public key and the distributor’s public key. The manufacturer initiates the transaction with the digital signature, signing in with his private key. The distributor verifies that the transaction is genuinely sent by the authorized manufacturer using the manufacturer’s public key.
Once the transaction is authenticated it is connected to the participating nodes. The transaction invokes the smart contract, if all the conditions of the contract are met, the transaction is updated.
A number of authenticated and updated transactions are bundled together to form a block. This forms the input to the consensus mechanism or the mining unit. The transaction is combined with other transactions to form a new block. The request to order the transaction bundle is the basic operation of the consensus mechanism. Once the nodes receive the correct authenticated block information, all of them agree to update this information in their respective distributed ledger. This is how all the participating nodes in the P2P network have the same data at a given time.
The blockchain technology is ready to disrupt all the operative industries. Blockchain can dynamically bring all the businesses towards decentralization.
Some of the sectors having the use cases of Blockchain:
Blockchain Technology is ready to disrupt all most every industry. Some of them are:
Banking
Automotive Industry
Supply Chain Management
Health Care
Real Estate
Government
Manufacturing Industry
Education
E-commerce
By using blockchain technology, businesses can benefit from a more efficient transfer of goods and services. It creates interesting research areas, especially from the perspective of technical challenges and its limitations.
This was a quick start to the fundamentals and operation in the Blockchain.
Have a great learning!
Author: Vandana Mansur
