Blockchain For Dummies: Why Blockchains Matter. Photo by Clint Adair on Unsplash

Blockchain For Dummies: Why Blockchains Matter

This is an edited extract from Blockchain For Dummies, second edition, by Tiana Laurence (Wiley, 2019).

Why Blockchains Matter

Blockchains are recognized as the “fifth evolution” of computing because they’re a new trust layer for the Internet. Before blockchains, trust was established by central authorities that would issue certificates. One you may be familiar with is Secure Sockets Layer (SSL) client certificates. An SSL certificate is the “green lock” that is next to a web domain. It lets you know you’re on a secure website.

SSL certificates have proven to not be foolproof. Certificates have been stolen from the domains of the Central Intelligence Agency (CIA), the U.K.’s Secret Intelligence Service (commonly known as MI6), Microsoft, Yahoo!, Skype, Facebook, and Twitter. Relying on a third party allows for a single point of failure.

Blockchains, on the other hand, establish trust in novel ways. Proof-of-work (POW) blockchains require miners to have a full and accurate history of their transactions to participate on the network. Proof-of-stake (POS) blockchains create trust by requiring nodes that are processing transactions to “stake” some cryptocurrency that may be forfeited if they’re caught defrauding the network. Private blockchains build confidence by distributing data across a network of connected but independent participants that are known by each other and can be held accountable. Each type of blockchain uses different incentive systems to establish trust that each participant in the network will cooperate in keeping a full and unaltered history of each transaction or entry that is made within the database they share.

When data is permanent and reliable in a digital format, you can transact business online in ways that, in the past, were only possible offline. Everything that has stayed analog, including property rights and identity, can now be created and maintained online. Slow business and banking processes, such as money wires and fund settlements, can now be done nearly instantaneously. The implications for secure digital records are enormous for the global economy.

Blockchain For Dummies

Blockchains are important because they allow for new efficiency and reliability in the exchange of valuable and private information that once required a third party to facilitate, such as the movement of money and the authenticity of identity. This is a big deal because much of our society and economy has been structured around establishing trust, enforcing trust when it’s broken, and third parties that facilitate trust. You can imagine how this simple software can be utilized to fix areas that have proven to not be foolproof, such as voting, supply chain management, money movement, and the exchange of property.

The Structure of Blockchains

Each blockchain is structured slightly differently. However, Bitcoin is a great blockchain to study because it was used as a template for most subsequent blockchains. The data on Bitcoin is structured so that each full node (the computers running the network) contains all the data in the network. This model is compelling from a data persistence point of view. It ensures that the data will stay intact even if a few of the nodes become compromised. However, because every node has a full copy of the history of transactions, since the very beginning, and every transaction in the future, it requires that the entries be as small as possible from a storage capacity point of view.

Comparatively, other distributed networks you may have heard of like Napster and Pirate Bay are an online index of data. Individual files are shared from specific nodes in the network. This allows sharing of large files. However, because the data you may be interested in is not available on all the participants in the network, obtaining the data you’re interested in is problematic. It’s also difficult to know if the data that you’re pulling down is intact and has not be corrupted or contains information you don’t want, such as a virus.

The way that Bitcoin coordinates the organization and input of new data comprises three core elements:

Block:

A list of transactions recorded into a ledger over a given period. The size, period, and triggering event for blocks is different for every blockchain.

Not all blockchains are recording and securing a record of the movement of their cryptocurrency as their primary objective. But all blockchain do record the movement of their cryptocurrency or token. Think of the transaction as simply being the recording of data. Assigning a value to it (such as happens in a financial transaction) is used to interpret what that data means.

Chain:

A hash that links one block to another, mathematically “chaining” them together. This is one of the most difficult concepts in blockchain to comprehend. It’s also the magic that glues blockchains together and allows them to create mathematical trust. The hash in blockchain is created from the data that was in the previous block.

The hash is a fingerprint of this data and locks blocks in order and time. Although blockchains are a relatively new innovation, hashing is not. Hashing was invented over 30 years ago. This old innovation is being used because it creates a one-way function that cannot be decrypted. A hashing function creates a mathematical algorithm that maps data of any size to a bit string of a fixed size. A bit string is usually 32 characters long, which then represents the data that was hashed. The Secure Hash Algorithm (SHA) is one of some cryptographic hash functions used in blockchains. SHA-256 is a common algorithm that generates an almost-unique, fixed-size 256-bit (32-byte) hash. For practical purposes, think of a hash as a digital fingerprint of data that is used to lock it in place within the blockchain.

Network:

The network is composed of “full nodes.” Think of them as the computer running an algorithm that is securing the network. Each node contains a complete record of all the transactions that were ever recorded in that blockchain.

The nodes are located all over the world and can be operated by anyone. It’s difficult, expensive, and time-consuming to operate a full node, so people don’t do it for free. They’re incentivized to operate a node because they want to earn cryptocurrency. The underlying blockchain algorithm rewards them for their service. The reward is usually a token or cryptocurrency, like Bitcoin.

The terms Bitcoin and blockchain are often used interchangeably, but they’re not the same. Bitcoin has a blockchain. The Bitcoin blockchain is the underlying protocol that enables the secure transfer of Bitcoin. The term Bitcoin is the name of the cryptocurrency that powers the Bitcoin network. The blockchain is a class of software, and Bitcoin is a specific cryptocurrency.

This is an edited extract from Blockchain For Dummies, second edition, by Tiana Laurence (Wiley, 2019).

About the author:

Tiana Laurence is a blockchain pioneer, an investor, and a serial entrepreneur. She co-founded Factom, Inc., a software company that builds technology within the blockchain space. She is currently a columnist for TechTarget with writings focusing on blockchain and IoT and managing partner of Laurence Ventures, a firm investing in technology initiatives.