What is Blockchain & why do we even care?
Recently, cryptocurrencies like Bitcoin have been the rave on the street. We will explore the underlying Blockchain technology that makes cryptocurrency possible and the significance of such a technology.
We can think of Block Chain as a decentralized and distributed ledger that stores data in blocks linked by chains.
In order to explain what a blockchain is we will consider an application of it, namely in cryptocurrency. At a fundamental level a Blockchain is really just blocks chained together one after another.
In cryptocurrencies like Bitcoin, a block stores information about a transaction such as:
- Sender of the transaction — aka the public key (more on this later)
- Amount of money
Okay, so how are these blocks linked? Why do we care?
A block also stores a unique hash value.
hash_of_current_block = someCryptoFunction(hash_previous_block, data_of_current_block)
In other words, the hash of the current block is dependent on the hash of the previous block.
This means that if someone tries to maliciously change one block, all the following blocks will become invalid.
Alright, so how is this form of storage of transactions secure?
A block also stores a digital signature to verify the legitimacy of the transaction.
The transactions on the blockchain are done either pseudonymously or anonymously, meaning no one really knows who is performing any transaction. How then do people send money? People are identified with something known as a public key. But how do we know if someone really is who they are? I mean if someone knows someone else’s public key then they can just use it to make transactions. The individual that “owns” the public key(kind of like a public address) is the only one with a private key.
And how do we prove that we have the private key that corresponds to the public key we are using without revealing the private key itself? Here comes the genius of cryptography. And it comes in the form of a digital signature.
A digital signature is used to verify that the details of the transaction weren’t tampered with and that we do indeed own the public key we are using to create a transaction. It’s how we prove that we are indeed who we say we are. But we quickly run into a small problem. What’s preventing someone from just fraudulently using someone else’s signature? We make the digital signature dependent on the contents of the transaction by generating it using the transaction information and the private key. That way, the digital signature required for each transaction will be different.
Okay, so we have now figured out a way to prevent others from using our public key. But how do we ensure that the private key we own corresponds to the public key we are using? To answer this question, let’s talk about the steps of a transaction and what it takes for it to be successful.
There are two components involved:
create_transaction(transaction_data, public_key, digital_signature) -> generates a block
create_signature(transaction_data, private_key) -> digital_signature
At a basic level, the digital signature is simply what we get from using the private key to encrypt our transaction data.
Thus, when a node so by making the digital signature only able to be decrypted using the public key that corresponds to the private key,
By doing so we ensure that:
- the contents of the transaction weren’t tampered with
- the sender owns the public key he is using
Another way it is secure is that it’s distributed and decentralized and unanimous.
Usually, data is centralized and distributed. What I mean by that is it’s stored in one location. However, in the blockchain, each machine has the same copy of the ledger/data and each machine is connected with every other machine.
So what’s preventing one machine from simply changing the blocks of data?
Blockchain is unanimous consensus-based. It means that each machine is accountable to every other machine. When it creates a transaction, every machine on the blockchain network has to validate and verify the legitimacy of the transaction.
Here is a high-level complete outline of what happens when a transaction is created and sent.
Okay, that’s great. But why do we care?
Significance
Why do people care?
Enhanced security through encryption and decentralization. Blockchain creates a record of tamper-proof data that is encrypted end-to-end and prevents fraud and unauthorized activity. On a blockchain, everyone in the network can see everything. The decentralization of blockchain allows for a transparency and thereby accountability like no other, further eliminating fraud.
Instant Traceability.
Blockchain enables companies to reliably and efficiently track and share the provenance of anything at every step of its lifetime with its customers, which can increase the efficiency and quality of goods and services.
Why do I care?
Blockchain enables us to perform economic transactions without a central entity enforcing trust in the interaction. This removes the need for a middle man, which will drive down the cost of economic interactions. Though I do not know the full details, blockchain can help us secure data and prevent data breaches of sensitive information as well as place the control over one’s data back into the hands of people, increasing trust between organizations and its users. Furthermore, blockchain’s decentralization will enable an increased traceability of products and services by increasing the transparency of a process at each step, making it easier to investigate and solve problems.
