Blockchain untangled I – a basic understanding

To begin with, there’s no such thing as THE blockchain, but there are numerous systems based on the blockchain technology. The best-known is the Bitcoin blockchain which is all the rage right now (again). But let us begin from scratch…

TL;DR: scroll down for a 30-second roundup with all the info you need but won’t fully understand until you read the whole thing. Still better than not learning anything, isn’t it?

The idea of a blockchain

I would like to use financial transactions to depict blockchain technology (and it is a quite common use case of blockchains). If you want to transfer values in existing payment systems, you must rely on a central institution like a bank or services like PayPal who process and verify the transaction. Both parties involved in a transaction, you and the recipient, need to trust these intermediaries involved. With a bank transfer there is the bank of A and the bank of B and in between the banks there is the clearing process, conducted by a clearing house. With PayPal (given you have some money stored directly with them) you and the recipient still have to trust PayPal to deduct an amount from your balance and add it to the recipient’s balance. The transaction then simply causes two entries in PayPal’s database to change - there is no physical transaction of course as it would if you would just hand over a banknote to the recipient and he then owns it while you don’t.

With digital goods, there are only copies when you hand them over to someone, regardless of them being text files, music files or any other kind of files, really. We trust intermediaries like PayPal or banks to keep track of the users’ balances in their database according to the transactions we have made. But with blockchain we can leave out the intermediary completely while assuring secure processing of any transaction – with absolute certainty regarding the correctness of anyone’s balance throughout the whole time. So is it magic? Not quite.

A blockchain is basically a distributed database which is free of any affiliation to commercial, political or private institutions and which is not located anywhere centrally, for example on a single physical hard drive or server. This type of database is organized de-centrally, meaning it exists in identical copies on devices distributed all over the world belonging to all the people who are part of the blockchain network. Each of these users has equal rights to view and access past transaction recorded at any point in the database and can also make changes to the database by prompting a transaction which is then stored in the database and becomes visible to all users again.

Blockchain networks have the ability to permanently and transparently log transactions of information. This information can be value transactions (like the Bitcoin) from one user to another or a contract, a deed of ownership, and so on. These transactions, once performed, are immutably stored in the database and can then be seen and accessed for ever by any participant in the network. This way, the participants control each other and no alteration to the database happens unobserved, everything is recorded by anyone on their own device.

As mentioned above, there is no other entity involved in a transaction between two users which could potentially control transactions or charge any fees. The users conduct transactions directly between each other, storing the information in the database where others can keep track of what they have transferred and if it aligns with former changes and balances in the database. Users do this pseudonymously with a user address which does not allow any inferences to be drawn about the person behind it.

Secured: block by block by block

You can imagine that this is a huge database and that it will be virtually impossible to check it manually for invalid information. Therefore, the information about transactions is stored in blocks regularly (every few seconds or minutes with most blockchains). There you have the source of blockchain’s name: the blocks!

If you make a transaction to another user, the information about this transaction is broadcasted to the whole network, waiting for confirmation. So-called miners then gather a certain amount of transactions and save them in a new block. Only then it is immutably stored and becomes a valid change to the distributed database.

The trick: each block contains a hash sum of the preceding block which contains a hash sum of the preceding block which contains a has sum…you get it. Therefore the exact order of all blocks and, accordingly, all transactions ever made, is irreversible and completely transparent. The miners creating the blocks function as supervising authority for the network, as the work they perform shields the database from manipulation.

To really understand the process of compiling transaction data in blocks and linking them to preceding blocks, check out this great video by Anders Brownworth:

The verification process of the blocks requires serious amounts of (costly) computing power from the miners. The information does not only need to be gathered and stored, but the miners need to solve a highly complicated computing operation to find the correct hash sum and therefore proof that the new block is valid. For each block they create, the miners receive a reward to make up for the computational work which uses A LOT of energy (in the Bitcoin blockchain this reward is, of course, Bitcoin). This is the essence of the Bitcoin blockchain: through its value, the Bitcoin is the only incentive for the miners to generate new blocks and thereby secure the network from corruption. Without a real value the mining would not pay off at all and the database would only be ... drum roll ... a very insecure database. But as the miners also secure the information about them receiving brand-new bitcoin, they want to make sure this information cannot be changed afterwards (understandable with a bitcoin being worth 3000$ at the moment).

TL;DR and a little more

A blockchain stores information about transactions between users or other changes to its database (conducted without intermediaries) in a way that they can be tracked by any user forever for maximum transparency Some participants, the miners, gather information about transactions and compile them in so-called blocks, using huge amounts of costly energy, and thereby secure that the order of all transactions ever made is immutably documented in the de-central database of which any user has a copy on his device. In exchange they receive precious bitcoin as incentive for protecting the network from corruption. Within this network, users can transfer values and store information without a chance of them being altered or contested ever again. The documentation of a transaction happens fast instead of taking several days, like e.g. a foreign bank transfer does. No government and no corporate in the world could ever influence or sabotage a blockchain network the size of the Bitcoin blockchain, as only the majority of participants can decide changes to the rules. Intentional falsification of data by a group of people is virtually impossible.

This was a first glance and the attempt to trigger a basic understanding of THE IDEA of a blockchain. You don’t need to understand how it works exactly, yet (and there are certainly many points in this article that would need much more explanation to be called 'exact' – but everything stated here has the sole purpose of conveying a rough understanding). The following article will reveal in detail how a transaction between users in a blockchain like the Bitcoin blockchain works, which steps need to be taken in the process and how security is assured. Stay tuned.

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