Blockchain

How Does The Technology Behind The Blockchain Work

How-Does-The-Technology-Behind-The-Blockchain-Work-Sebfor

HOW DOES THE TECHNOLOGY BEHIND THE BLOCKCHAIN WORK

Ever wondered what technology underlying the newest buzzword in finance is? Want to find out how the miners voted during the fork? Keep reading!

THE IDEA of DECENTRALISATION

Decentralisation is not a new idea. It has actually been around for a couple of centuries. In 18th and 19th centuries decentralisation was dominant because of the absence of means of communication. In 20th century when devices like telex, the telephone and the computer entered the network, the world shifted towards centralisation.

Nowadays, we are making a great shift again. Digital information can be distributed over the blockchain, but cannot be copied. It can be programmed to record literally anything of value. The blockchain is durable, robust and transparent because the open source code allows to embed the data within the network.

Therefore, blockchains will prove some of the established transaction processing aspects of commerce payments unnecessary. Then p2p network will manage those payments, which imposes higher morale and less risk.

decentalized-network

TECHNOLOGY 101

Essentially, blockchain is nothing unseen either. It is a bundle of 3 well-known technologies.

But what makes it so revolutionary then? It is the way those 3 technologies are packed.

Cryptographic keys

Cryptographic-keys

It provides a powerful ownership tool for authentication and identification. If two people want to transact over the Internet, they will need a public key and a private key. The combination is creating an extremely useful digital signature. And in turn, digital signature provides good control of ownership. But the strong ownership control (authentication) is not enough.

Peer-to-peer network

Security is best justified with authentication and authorisation. Cryptographic keys solve the authentication issue. But then we need means of authorisation.

  • System of record (SoR)

SoR is an information storage and retrieval system widely used in data warehousing. It is a source of a particular data element in a system containing multiple sources of the same element.

In the context: when the keys combine with the network, a form of digital interaction emerges. The process begins with (think of bitcoin) Paul taking his private key and announcing he will pay 0.5 BTC to Lenny, and then attaching it to Lenny’s public key.

  • Distributed network (DN)

DN can be understood through the thought experiment “if a tree falls in the forest, would it make a sound provided there is no one to hear it”. The conclusion of the experiment would be that there is no sound because sound is human perception. But what if we put a couple of voice recorders or a few cameras? Then we will have the proof of the tree making a sound.

In the context: blockchain’s value consists of the large network where validators reach a consensus that they witnessed the same thing at the same time, so the network size is crucial to security. In place of cameras, here we use mathematical problems.

Program (the protocol)

Why would people want to put a few cameras there in the first place? How do you attract computing power to “witness” the blockchain?

The answer would be incentives. For open blockchains that is mining. The tragedy of the commons is the underlying approach of mining.

[It is a situation within a shared-resource system, where individual users are acting independently according to their own self-interest behave contrary to the common good of all users by depleting or spoiling that resource through their collective action]

In the context: by offering your computing power to service the network, a reward is available to only one of the computers. Self-interest is used to keep the public need.

Taking bitcoin’s example, its network protocol’s goal is to eliminate double spending (the same bitcoin token used in two transactions). Tokens ought to be unique to be owned and to have value.

To succeed in this, the nodes of the network record and maintain history of transactions by solving PoW (Proof of Work) mathematical problems. The nodes vote with their CPU power, agree on new blocks and reject the invalid ones. When a majority announces the same solution, the new timestamped and data containing block can be added to the network.

You can read more on how bitcoin mining works over here.


Note: miners voted in a similar fashion during the forks. During the most recent fork, the miners voted by accepting the SegWit blocks (which locked in). They had 26 activation periods. SegWit needed a 95% acceptance in a single period. SegWit locked in the 20th period and will activate on the network during the next period! You can check it here.


PUBLIC vs PRIVATE BLOCKCHAIN

public-vs-private-blockchain

Public blockchain

The public network is fully decentralised. Miners are free to join, to exit and to return at any time. Everyone can read the chain and create new blocks according to the rules.

Private blockchain

Here you need a permission to read the chain, to set who can serve the network by writing blocks. Only limited parties can transact. Private blockchain is a mix-and-match. That means the devs can choose the chain to be readable by everyone, but only a limited amount of people can be part of the nodes verifying, mining and securing in the chain.

This type of blockchain may or may not require PoW (Proof of Work).

For example, Ripple is such network. The owners determine who to validate transactions (like CGI, MIT and Microsoft), while they are building their own nodes around the world.

Blockchain is still in its early adoption’s phase, where the major bit of R&D is consisted of experiments, tests and innovation. In the next 5 years, we will be able to witness what the network truly is capable of.

by Ana-Maria Yanakieva

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