Blockchain: The Technology of Cryptocurrency

In this article, you will learn about the technology that is behind cryptocurrency (blockchain) in simple terms.

Blockchain is a growing list of records called blocks that are linked using cryptography.

Every preceding block contains a cryptographic hash of the previous block.

The blockchain is designed to resist any form of modification to it data. This happens because once data has been recorded in a given block, that data cannot be changed deliberately without all subsequent blocks’ alteration.

The blockchain is managed by a peer-to-peer network that collectively adheres to a protocol for inter-node communication. This peer-to-peer network also helps to validate new blocks.

Indeed, blockchain records cannot be altered; a blockchain system is considered secure by its design. It typifies a distributed computing system that has high Byzantine fault tolerance.

In a nutshell, blockchain is an open distributed ledger that records transactions between two parties efficiently and in a verifiable and permanent way. 

The history of blockchain

A cryptographer David Chaun was the first to propose a blockchain-like protocol in his 1982 dissertation titled “Computer Systems Established, Maintained, and Trusted by Manually Suspicious Groups.”

In 1991, Stuart Haber and Scot Stornetta further described a cryptographically secured chain of blocks. Their mission was to implement a system where document timestamps could not be tampered with.

In 1992, Stuart Haber, Scott Stornetta, and Dave Bayer incorporated the Merkel tree into the design. This incorporation improved the efficiency of the system by allowing several documents to be collected into one block.

Blockchain was invented by Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the Bitcoin cryptocurrency.

Interestingly, Satoshi’s identity has remained a mystery till the time of writing this article. The blockchain system made it possible for Bitcoin (the first cryptocurrency) to solve the double-spending problem without a trusted third party.

In August 2014, the Bitcoin blockchain file size that contained all transactions that have occurred on the network reached 20 gigabytes (GB). The file size increased to 30 GB in January of 2015.

Meanwhile, the file size grew from 50 GB to 100 GB between January 2016 and January 2017. By early 2020, the Bitcoin file size has exceeded 200 GB.

In Satoshi’s original paper, block and chain were used separately but were later popularized as a single word in 2016.

Different industry trade groups joined to create the Global Blockchain Forum in 2016, which was the Chamber of Digital Commerce initiative. 

Blockchain Architecture

The architectural components of blockchain have been generalized and then modified by different companies.

This modification leads to different blockchain projects like Bitcoin, Ethereum, Hyperledger, etc.

To keep it simpler, you will learn about the Bitcoin blockchain architecture since other blockchain projects are an offshoot of the Bitcoin blockchain.

Below are the main components of the Bitcoin blockchain:

Transaction 

This is the smallest building block of a blockchain system, and it consists of the recipient’s address, the sender’s address, and a value. It is akin to a standard credit card statement.

The owner of the “value” transfers the value by digitally signing the hash produced by adding the previous transaction and the public key to the recipient.

This transaction will be publicly announced to the entire network, and all the nodes will independently hold their copy of the blockchain.

The current known state is then calculated by processing the transaction as it appears on the blockchain.

All transactions are bundled and delivered to each node in the form of a block. Every new transaction is distributed throughout the network and is independently verified and processed by each node.

Each of these transactions is timestamped and collected in a block. 

Block

Blocks are simply data structures that bundle sets of transactions that are replicated to all nodes in the blockchain network.

A miner creates every block in a blockchain system. We shall discuss the concept of miners in subsequent lessons.

Mining is the process of creating new and valid blocks that will be accepted by the rest of the blockchain network.

These different nodes take all pending transactions, verify that they are cryptographically correct, and then package them into blocks to be stored on the blockchain network.

Peer-to-Peer Network

The blockchain system runs on a peer-to-peer (P2P) network that works on the IP protocol. A peer-to-peer network has no centralized node, and all the nodes equally provide and can also consume services while collaborating through a consensus algorithm.

These peers contribute to the computing power and storage required for the upkeep of the network.

Unlike a centralized network, the P2P networks are generally more secure because they do not have a single point of failure or attack.

The blockchain network can either be a permission-based network or a permissionless network. The permissionless blockchain is also known as a public blockchain network because anyone can be a part of the network.

On the other hand, a permissioned blockchain network requires a pre-verification of the network participants, and these parties usually know one another.

The permission-based blockchain network is also known as a consortium or private blockchain.

Every individual node in typical blockchain architecture maintains a local copy of the blockchain.

The decentralization of blockchain architecture is the foundation of the P2P network. 

The Consensus Algorithm

The consensus algorithm ensures that all the copies of a single ledger are synchronized.

It ensures that every individual party’s local copy is consistent with each other and is also the most updated one.

The consensus algorithm arguably forms the core of every blockchain architecture.

Some of these consensus algorithms include the proof-of-work (PoW) and Proof-of-Stake (PoS). We shall discuss more on these consensus algorithms in subsequent articles on this blog. 

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