Blockchain 101

Contents

Overview

What is a blockchain?

A Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital record of transactions that is duplicated and distributed across the entire network of computer systems around the world.

Blockchain’s core advantages are decentralization, cryptographic security, transparency, and immutability. It allows information to be verified and value to be exchanged without having to rely on a third-party authority. Rather than there being a singular form of blockchain, the technology can be configured in multiple ways to meet the objectives and commercial requirements of a particular use case.

Understanding what blockchains are and how they are utilized will give your organization the tools needed to employ innovative tools and stay ahead of your competition. 

Origins

It all began on October 31, 2008. On that date, Satoshi Nakamoto released the “white paper”, that described a technological system. The system was a peer to peer network system designed to allow payments without a financial intermediary.

A combination of events occurred following the release of the paper that led to the creation of the original bitcoin system in 2009. Bitcoin was designed to record transactions in a ledger and nothing more and used a tool called “blockchain” to ensure validity and security.

 

A Trustless System

Blockchain protocol employs incentive structures predicated on game theory mechanisms to encourage the players (users and miners) in the system to act honestly. The users in this system do not trust each other, and they do not know each other. The objective for those players is to increase their chance to receive the incentive of mining new blocks in a trustless decentralized system.

This new paradigm shift for trust was introduced in 2008 when Satoshi Nakamoto published a paper that discussed the need for an electronic payment system to solve the weakness of a trust-based payment model that relies on a trusted third party and replace it with a cryptographic proof-based system. Nakamoto proposed a public blockchain-based decentralized payment system (Bitcoin) for financial transactions without relying on trust and he incorporated incentive models from game theory to encourage nodes to stay honest while using the system. [Reference]

Benefits of blockchain

Public verification – Any user can check if the system is working correctly. Each transaction is confirmed by the verifiers who are peer users of a blockchain.

Transparency – All updates to data and transactions must be verified by other network users. While not every participant has access to data, a copy is stored on each device of the network at all times.

Privacy – Despite a blockchain being a decentralized system with a high level of transparency, all transactions and interactions between network members are anonymous.

Integrity – A blockchain guarantees that no data is changed.

The ethereum blockchain

Ethereum is an open software platform based on blockchain technology that enables developers to build and deploy decentralized applications (“dapps”).

Dapps on Ethereum are web applications backed by Smart Contracts. Instead of using a centralized server or database, these applications rely on the blockchain as a backend for program logic and storage.

Traditional application stacks are clientsservers, and databases. In contrast, blockchain application stacks are external accountssmart contracts, and the blockchain. To add new data to the blockchain, we submit transactions to nodes in the network.

Webapp:  Client => Server => Database
Decentralized Applications:  External Account => Smart Contract => Blockchain

Summary

  • Blockchain is a shared, immutable record for documenting transactions, tracking assets and building trust.
  • No participant can change or tamper with a transaction after it’s been recorded to the blockchain. If a transaction record includes an error, a new transaction must be added to reverse the error, and both transactions are then visible.
  • Blockchain can drive significant cost reduction. Cost can be taken out of existing processes by removing intermediaries or the administrative effort of record keeping and transaction reconciliation.
  • The Ethereum blockchain signficantly expanded upon the original blockchain design by enabling Dapps, applications built on the blockchain, and Smart Contracts that automatically execute a set of pre-defined rules.

Deeper dive

To use a blockchain application you need to have a Digital Wallet.

A Digital Wallet is a product that allows you to manage your blockchain account, like view your account balance, send transactions and more. Your wallet lets you connect to any decentralized application using your Ethereum account.

Instead of using an account you created on an application’s website, i.e. email address and a password, your wallet contains an Account Address that is unique to you.  Connecting your wallet to an application will link the dapp with your Account Address.

It’s like a login you can use across many different dapps. 

Just as an email address is created from a username and password, an external account address is created from a public key and private key. One is secret while the other is not. Like websites, dapps provide the user interfaces to the smart contracts that exist on the blockchain. Each account has a public key, a private key, an address and a balance. You receive payment by providing the sender with your account’s public address so that they can initiate the request from their end.

User => Email Address   => Website => Server => Database
User => Account Address => Dapp => Smart Contract => Blockchain

Notice the string of numbers on the front of your credit card? It’s necessary for banks to determine where they should send money when the card is swiped. Your Account Addresses are similar identification numbers that identify where to debit funds.

As mentioned above, in this system, there are two main components that users need for identification: the public key and the private key. Usually represented as a scrambled string of numbers and letters, the two keys are linked together by cryptography.

The public key can be sent to others so that they know where to send your money. If you want people to send you ether, you need an address: a scrambled string of letters and numbers derived from the similarly scrambled public key, for people to send coins to.

To spend ether, you need to sign over the funds with your private key, which, as the name implies, is similar to a password. In the credit card analogy, it’s similar to the pin used to unlock your funds at the ATM or in a store.

smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart Contracts allow the performance of credible transactions without third parties.

When a transaction occurs, the smart contracts runs the formula or logic coded into its terms and automatically processes the transaction on the blockchain. 

A token is a digital representation of a unit of value, including digital assets or digital representations of real-world assets. This digitization of value enabled through blockchains unlocks opportunities for enterprises. For example, the traditional financial system is in many ways less fast, fluid and flexible than the internet.

By tokenizing value, businesses gain the capacities for secure, scalable and fast asset transfer across borders, fractionalized ownership of real-world assets, tokenized micro-economies, and accountable, transparent governance systems

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