In my last post, I introduced a reference to a cryptocurrency known as Bitcoin. Now I wanted to take some time to explain from my knowledge what Bitcoin and by extension Blockchain is. I am going to try to make this post as simple as possible so that it’s easy to understand but please know I’m not an expert.
Blockchain technology emerged in 2008, during the financial crisis and was first introduced via the ‘Bitcoin Whitepaper‘(a document explaining the technology) by some person/group of people known as Satoshi Nakamoto (to this date, Satoshi Nakamoto is still unknown). Satoshi proposed that a new peer to peer cash system called Bitcoin be implemented through a new form of technology called Blockchain.
Now this all seems confusing but don’t worry I will break it down further. It is however important to understand that, Blockchain and Bitcoin are two separate things (Blockchain is a technology and Bitcoin is a use case of that technology). For example, an analogy can be drawn to milk and cheese, cheese is a product derived from milk; so, it would be incorrect to assume the two words are interchangeable. Great, now that we have a clear distinction between the two, let me break them down separately. This may be quite a lengthy discussion so to avoid bombarding you with information, I decided to split this into two posts. Now let’s talk Blockchain!
Blockchain is at its core is similar to a digital ledger. A ledger (for those not aware) is a means of record keeping which first appeared around 3,000BC, there can be accounting ledgers (to track money), a logistics ledgers (to track shipping), a supply-chain ledgers (to track stages in a supply chain), etc. In this post, I will use some graphics to help build this concept of Blockchain for you to understand.
A Blockchain starts with something known as the Genesis block (effectively the block 0) which is integrated into the code for the Blockchain, simply put, think of it as the cover for the ledger book. It contains no transactions but is still part of the ledger.
Now we move on to the first block, which contains the first set of transactions on the Blockchain. This can be in the form of money transactions (as in the graphic example below), stages in a supply chain, health care records, etc, depending on the nature of the Blockchain. It is important to note that each block can hold a certain number of transactions so for this analogy we will compare a block to a sheet of paper.
Once the maximum number of transactions has been recorded on a Block, the contents of the block is then verified and added to the Blockchain. But how does a technology verify its own data?!?! This is where the role of nodes come into play. What on earth is a node!?? Well, long story short, nodes are computers or in some cases mining rigs (obviously controlled by humans) which have a high processing power in order to run complex algorithms and code, in order to verify the data. Now, there are many different ways in which nodes get selected to perform this verification task for each block – Proof of Work, Proof of Stake, Delegated Proof of Stake, etc, but getting into the specifics of the node selection carries us a bit beyond the scope of this article. All that you need to understand, is that the many nodes compete to provide a means of confirming all of the transactions on a block (ledger sheet in the visualization below) and the selected node verifies the block and gets rewarded for doing so. For example, if a transaction involves sending money, the selected node makes sure you have the appropriate funds to do so, and once you do, your transaction is approved. Think of them as Guardians of the Blockchain! It is important to bear in mind, that the selected node for different blocks, changes based on the selection criteria specified by the Blockchain.
Further to this, Blockchain utilizes something know as cryptographic hashing which ensures that a unique identification number is assigned to each block. Cryptographic hashing links all of the blocks sequentially together, by encrypting a combination of the unique identification number of one block to the previous block and the signature of the node that has verified the transactions (as shown below). In a nutshell, block X’s Unique Identification Number contains block (X-1)’s Unique Identification Number embedded in it. This procedure is also done via the selected node and occurs after all of the transactions on a block have been confirmed. It is this process that forms a chain of blocks all linked together that cannot be changed.
Moreover, Blockchains work through a distributed mechanism to ensure a high integrity of the ledger. This works by the Blockchain ledger being broadcasted to all participants of the Blockchain (in plain terms, those who store a copy of the Blockchain on their computers, phones or any other storage device) after each block is added to the chain. Therefore, supposing one copy of the ledger is tampered with, the integrity of the Blockchain remains unaffected due to the many copies of the correct version of the Blockchain being kept. This distributed mechanism ensures that the Blockchain acts as a “Add-Only” technology; meaning blocks can only be added to the chain, not removed or edited.
Let’s make this even simpler to understand with an example. Imagine that during the Covid-19 lockdown, you need to get items from the grocery, but you aren’t sure which grocery is open, so you decide to write a list and send each member of your family who will all need an identical copy. Every time a new addition is added to this list, it is broadcasted to the entire group via WhatsApp, so everyone updates their list to be consistent to make sure they have all the items on the list. If one person adds an item that is not approved by all other members of the family, it is rejected, and the item is not added to all lists. Similarly, with a Blockchain, when every block is added, this is broadcasted to the entire network to ensure all members of the network have an updated version of the ledger.
Now this all seems very complicated and I assure you that Blockchain at its core is a VERY complex technology to understand. Just as there are multiple ledgers as described above, similarly there exists multiple Blockchains which serve different purposes. For example a food supply chain has been in the works by Walmart and IBM using the Hyperledger Blockchain. This initiative aims to solve the problem of food wastage and protect the livelihood of farmers in the event of a food-borne disease (a bad few within a batch). In this instance, Blockchain offers faster traceability of the supply-chain from ‘Farm to Shelf’ for food items to ensure only the affected produce is disposed of, instead of the entire batch. This is an example of a private Blockchain for commercial use, i.e. it is managed by a smaller number of nodes and is not for public viewing. The greatest advantage that this initiative provides, is a quick and simple way of managing all stages of this supply-chain (product manufacture, product packaging, delivery, etc) whilst also ensuring immutability (inability to be tampered with).
The Blockchain itself can also be used to do different things, meaning even though at its core Blockchain is used to maintain records, the copies of these records can be utilized, for example as cash – Introducing Bitcoin and Cryptocurrencies…….
*Vector Illustrations Credit: Vecteezy and Freepik