What Is A Blockchain?

The Problem Of Trust And Agency

A blockchain is a new way to store data. Rather than centralising information, and the control over it, in one place, blockchains store it across a network where no one point has the authority to change records, This is called decentralisation. Blockchain's record data - in blocks - and securely store this data by chaining those blocks together using cryptography, hence a block-chain.

Monarchs, generals, governments or multinational institutions have the final say on, and control over, what's fair,who owns what assets, and what those assets are worth. This arrangement has been more practical than optimal.

Time and again, we have seen that trusting a central authority is a less than efficient way to do things - I'm looking at you, 2008 Financial Crisis. This is commonly known as the Principal-Agent Problem.

Agents make decisions that impact other people who's interests they should be serving. Their powerful position and the absence of accountability mean their decisions that serve their own interests and adversely impact those they should be serving.

The Unique Characteristics Of A Blockchain

Each block in a blockchain (barring the genesis block or first block) contains three things. Data - The data recorded on a blockchain can vary depending on what is using the technology. For example, as a currency, Bitcoin uses a blockchain to record it's transaction data - which is why its referred to as a ledger.

Other uses include supply chain data management, healthcare data and identity records; the sky's the limit, so long as the information can be digitised. The point is that blockchains can securely store many different types of data.

Cryptographic Hashes - A cryptographic hash is essentially a coded representation of a piece of information. It uses a mathematical function to generate this representation linking the meaningful information to the hash. Thus, if I were to change the information, the corresponding hash would change, as the two things are inextricably linked by the hash function.

Timestamps - this one is pretty self-explanatory,. A record of the time that an individual block of data was added to the chain. Though simple, Time stamping is crucial, giving blockchains verifiable and unchangeable historical reference points.

Making The Chain Unbreakable

The innovation of blockchain technology is that by design, blockchains are resistant to retroactive modification and can store data securely without a centralised authority. The process starts with the cryptographic hash function. Each block has a hash function for its own data and a hash function for the last block's data.

By encoding the previous block's data into each new block, the hashes create a chain that is it grows becomes ever harder to corrupt.; to tamper with, or modify any particular block's data, you would also have to modify all subsequent blocks to keep the chain valid.

Enter Proof-Of-Work

Essentially, proof-of-work is a mechanism that slows down the creation of new blocks by requiring work/effort be exerted before a block is produced. You can think of it as a way of discouraging people from trying to mess up the blockchain. You’d have to spend or exert more effort than could be justified by doing it.

This proof-of-work process is regulated to ensure blocks are created at an average time-period called the block time (this period differs from chain to chain). Bitcoin uses Proof-of-Work as its consensus mechanism but there are two common approaches Proof-of-Stake and Delegated-Proof-of-Stake.

These mechanisms are slightly more complicated and are aiming to be a more efficient way of making blockchains reliably secure but without the requirement for the work, which essentially comes down to computing power and energy consumption.

How Is Consensus Achieved?

The final way that blockchain's ensure security is by being distributed. Blockchain's run on what's called a peer-to-peer network. That is a network of users that communicate directly with each other and share the same privileges.

Rather than being centralised and run by a single entity - such as government - P2P networks are made up of a distributed network of computers all following the same set of rules (protocol)., In this way, everyone of those computers connected to the blockchain has access to the full record (or chain) but behaves in a predictable way.

Each time a new block is added to the chain, everyone has the chance to verify this block’s data as accurate. Any computer that connects and runs a blockchain is called a node. For a block to be added to the chain at least 51% of all nodes, have to agree that it is accurate.

To successfully corrupt a blockchain you need to tamper with all the blocks on the chain, redo the proof of work for every block and take control of more than 50% of the P2P network.

Blockchain Use Cases

The most famous application, and what the technology was initially invented for, is a new form of money free of central control, which we now know as cryptocurrency, the first and most famous example being Bitcoin. By storing all Bitcoin transaction data on a blockchain, Satoshi Nakamoto created the world's first digital and decentralised version of sound money.

In 2013, programmer, Vitalik Buterin, proposed that blockchain technology could be used to create what he termed smart contracts in a white paper. In 2015, the Ethereum blockchain was launched to build these contracts on top of, complete with a programming language and native currency.