About Blockchain

The first blockchain application is the now well-known virtual currency, ‘Bitcoin’. People often describe blockchain as a trust-free technology because of its expected potential to replace trusted third parties, such as banks. Banks ensure that one cannot spend the same money more than once in the digital world. For the first time, however, the cryptocurrency Bitcoin managed to address the double spend-problem for electronic transactions without the need for a trusted third party.

Even though blockchain received the most attention because of its applications within the field of fintech, there are many other possible ways that blockchain can be deployed. Think of using blockchain for debt assistance or for the automatic allocation of subsidies.

About Blockchain

What is blockchain?

Blockchain is essentially a distributed database structure, a so-called ‘distributed ledger technology’ (DLT). What does this mean? Well, blockchain is a distributed ledger to which data can be added in blocks that are cryptographically linked to each other. As opposed to traditional databases, in which control is often centralized, blockchains are distributed, because control is distributed among equal participants within the network. The ledger is collectively shared and synchronized by the participants in the network. Instead of registering data or transactions in one or more physical ‘ledgers’, blockchain does this digitally ánd in a distributed way, without the need for the involvement of a central trusted third party to manage the ledger. The participants in the distributed network verify transactions and collectively guarantee the immutability of the data stored onto the blockchain.

Transactions with keys  

In blockchain terminology, a transaction is not necessarily the transfer of value, but can also be the mere registering of data. Transactions among individuals within the networks occur under pseudonyms (for example, HWd29J), which are called addresses. Each pseudonym holds a digital private key, that is necessary for transactions, and a private key, that proofs the ownership of the concerning pseudonym. Each private key comes with a related public key, which allows other participants in the network to verify a transaction on its validity without revealing the related private key. All the transactions are recorded onto a ledger, which is shared among the nodes within the network. These nodes are the basic units of the blockchain data structure. Each node holds a (partial) copy of the ledger, which makes the data registered onto the ledger transparent.

How a chain of blocks is created

Blockchain consists of a sequence of confirmed blocks. Each block consist of block data and a block header. These blocks are linked to each other through cryptographic links created by hash functions. Hash functions create hashes, which are like “virtual fingerprints”,  and it is very difficult to recreate its original input. The cryptographic links are displayed in the block headers and each header refers to the previous block.

This creates a chain of blocks; a blockchain! To achieve agreement among participants in the network about transactions, a blockchain has a consensus mechanism, which is a set of rules and procedures about when a transaction is validated. Changes to the data recorded on the ledger occur only by means of this consensus mechanism. New blocks can only be added to the chain(append-only), and not removed. So, once transactions are registered in the blockchain, they become immutable and can no longer be tampered with.

Public vs. private networks

Blockchain networks can be categorized as public or private, referring to whether everyone or only a select group of actors has access to the blockchain. Additionally, blockchain networks can be permissionless, meaning that everyone can perform any particular activity within the network, or permissioned, which means that authorization is required to perform a particular activity.

What are smart contracts?

Blockchains can be accompanied by smart contracts, which are deterministic ‘If a, then b’ algorithms. The combination with smart contracts increase the potential range of blockchain applications.

Don’t be surprised but ‘smart contracts’ are not smart, nor necessarily contracts in a legal sense. So, what are they then? Well, rather than smart they are deterministic, since its outcome is predetermined by predefined rules, ‘if a, then b’ algorithms. ‘If’ you meet a certain condition, for instance if you isolate your house, ‘then’ you receive a subsidy. This is also referred to as ‘code is law’.

Blockchain-based smart contract technology enables that these ‘if a, then b’ rules are automatically executed and collectively validated by a distributed network without the need of an intervention of a trusted intermediary.  Actually, a smart contract does not need underlying blockchain technology, nor does it even has to be executed in a distributed manner. The notion ‘smart contract’ was coined by Nick Szabo already in the midst of the nineties when blockchain did not yet exist!

 

 

 

Videos

Knowledge clip – What is blockchain?

Knowledge clip – What are smart contracts?

CJIB Blockchain Animation

De Tafel van Martinus