Blockchain Unlocked: A Simple Guide to Understanding the Basics of Blockchain Technology
- Gladys wairimu
- Oct 13, 2023
- 6 min read
Blockchain! This has been one of the biggest buzzwords for the last decade. Given its popularity, there have been a large number of industry players who have acquired the skills of utilizing blockchain technology, and therefore profiting from it. But if you’re like me and are just beginning to dip your toes into this exciting world, welcome to Blockchain 101. This article gives a brief introduction of what blockchain is, discusses its architecture, and some of its security mechanisms.
A blockchain is a distributed public ledger that consists of encrypted data chained together. It keeps a record of transactions from nodes in a decentralized network while ensuring security, transparency and immutability of data. Blockchain is the underlying technology for cryptocurrencies like Bitcoin and NFTs, however, their use cases goes far beyond crypto as blockchain can be applied in almost any industry. Before we look at how blockchain works, let us inspect its core attributes.
Distributed – blockchains are fundamentally designed to work in distributed networks where there is no central ownership or management of network assets. Instead, control and authority is distributed across several nodes in the network. This distributed nature prevents single points of failure, and reduces the risks of altering information held by a block. Therefore, in blockchain, each device in the network contains and maintains a copy of the ledger.
Immutable – depending on the application of blockchain technology, a block can hold all sorts of information like financial transactions, medical records, voting information and so on. The information held in a block cannot be altered once added to the network. This is achieved through cryptographic mechanisms like hashing and the decentralized nature of blockchain.
Transparent – transactions carried out in a blockchain and data are all recorded identically to all devices in a particular blockchain network. Hence, all nodes within a network can see the same information at the same time, giving them full access and accountability. This feature allows anyone in a blockchain network to verify the authenticity and integrity of data in the blockchain. All transactions and data are also recorded with a time and date stamp.
Secure – data recorded in blockchain cannot be changed thanks to various cryptographic mechanisms and end-to-end encryption. Security concerns are also addressed by the need for permissions when one wants to alter data in a blockchain or create a new block. This can be achieved through one of the consensus mechanisms like Proof of Work or Proof of Stake. Additionally, the distributed nature of blockchain that stores information across several nodes in a network eliminates the possibility of a single point of failure, making it difficult for hackers to access data.
Now, let’s take a look at the architecture of blockchain technology to understand how it works.
Architecture of Blockchain
Block
A block contains 3 main components, namely
Data – data held depends on the type of block e.g., transaction information in a cryptocurrency.
Hash – this is a cryptographic algorithm that secures a block. Each hash is unique, like a fingerprint. A hash is created by a nonce. Data in the block is considered signed and forever tied to the nonce and hash unless it is mined, the process of creating new blocks on a chain.
A nonce is a random number generated each time a block is created. It is unique and used only in a single instance. In blockchain, nonces are used as input by miners to find hashes that when combined with a block’s data leads to a valid block that can be added to a chain.
Hash of previous block – a block also contains the hash of the previous block hence creating a chain.
Smart Contracts
It’s a computer program that automatically carries out an agreement when certain conditions are met, hence they are self-executing. They eliminate the need for intermediaries, like lawyers, to oversee contractual agreements which makes processes faster and transparent. They are transparent, decentralized and immutable.
Proof of Work
This is a consensus mechanism used to secure a blockchain and validate a transaction. In a PoW system, miners compete to solve a complex mathematical problem in order to validate and add new blocks to the chain. In order to solve the complex math problem, miners change the value of nonces and then calculate the resulting hash of the block’s data until they find a hash that meets the required criteria. The process of finding the correct nonce that leads to a valid hash is iterative and computationally intensive. When a miner finds the correct hash, it is broadcast to the network for other nodes to verify that it is correct. In PoW, several nodes can team up in mining pools to work together to find the correct hash. This inevitably creates a concept of centralization. PoW is used in blockchains like bitcoin.
Some of the drawbacks of PoW that PoS attempts to address are that PoW is computationally intensive and expensive, and creates an opportunity for centralization within a blockchain network.
Proof of Stake
It’s a consensus mechanism used by validators/stakers to create and validate a new block to a chain. In PoS, only a selected number of nodes can participate in creating a block making it less computationally intensive than PoW. This selection is determined by the amount of ‘stake’ or collateral a user puts. The higher the stake the higher the chances of a node being chosen to be a validator by a deterministic algorithm. The collateral/stake serves as a motivating factor for miners because they risk losing their staked coins if they approve fraudulent transactions. PoS is used in blockchains like ethereum and cardano
Now that we understand what blockchain is and how it works, let’s take a look at some of the security mechanisms integrated into the technology.
Security in Blockchain Technology
Blockchain technology uses a number of features to keep it highly secure. While there are many ways of securing a blockchain, this article discusses three main cryptographic techniques, namely hash functions, asymmetric encryption and consensus mechanisms.
Hash functions – mining a block requires one to solve a complex mathematical problem that will result in generating a nonce that will lead to an accepted hash. Such a nonce is called a golden nonce. Hash functions contain a complex mathematical algorithm that maps any length of input data to an output of fixed length called a hash. Hash functions are one-way meaning that it is easy to compute the hash from the input but difficult to work backwards by finding the input from the hash. This way, they can be used to find integrity and authenticity of transactions and data in a blockchain. Hash functions are also responsible for creating unique identities for each block. A common example of hash functions used in blockchain is SHA-256, used in cryptocurrency.
Asymmetric encryption – unlike symmetric encryption that uses the same key to encrypt and decrypt data, asymmetric encryption uses a pair of keys, a public key and a private key, to encrypt and decrypt data. The public key can be accessed and viewed by anyone on the network. Think of it like an email address. An email address does not necessarily compromise the security and privacy of your information. A private key, on the other hand, is secret and known only to the owner. Think of it like a password to your email address. Data to be sent over the blockchain network is usually embedded with the sender’s private key and a hashing algorithm as a way to indicate the data truly came from a specific sender and not a fraud. This information is then transmitted using the receiver’s public key and decrypted using the receiver’s private key. Once a transaction is validated, it can be added to the chain.
Consensus — a consensus mechanism is a set of rules that dictates how nodes in a blockchain network validate and accept the addition of new blocks on the chain. Two of them have been discussed above, namely Proof of Work and Proof of Stake. Consensus mechanisms ensure all nodes have a consistent and synchronized view of the blockchain. They also prevent fraudulent transactions by agreeing to accept only valid transactions and data to be added to the chain. Otherwise, participants that authorize invalid transactions may be penalized by losing their blockchain assets such as their staked bitcoins.
There you have it! In conclusion, as this article has illustrated, blockchain offers a fascinating world of possibilities, providing a secure, transparent, and immutable way to handle data and transactions across a distributed network. Its core attributes of distribution, immutability, transparency, and security make it a versatile technology with applications spanning across various industries. Understanding the architecture of a blockchain, with its interconnected blocks and the use of smart contracts, reveals the elegance of this technology. Additionally, the consensus mechanisms, whether through Proof of Work's computational prowess or Proof of Stake's staking and validation, underscore the robust security features that underpin blockchain. The security of blockchain technology is further fortified through cryptographic techniques like hash functions and asymmetric encryption, which ensure data integrity, authenticity, and confidentiality. These techniques work in tandem with consensus mechanisms to create a trustworthy and tamper-proof ledger.
Here is a video to aid in your understanding of blockchain.
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