- What is a blockchain?
- A simple use case of blockchain technology
- Bitcoin, the first blockchain application
- Footnotes
- References
A blockchain is an immutable, sequential chain of blocks. Each block can contain transactions, files or any data you like. But the important thing is that they are chained together using hashes.
- It is a type of distributed ledger.
- It is like a network of replicated databases, which are synchronized via the internet, and are visible to anyone within the network.
Blockchain networks can be :
- private with restricted membership similar to an intranet (eg: OBCS)
- public, like the Internet, accessible to any person in the world. (eg: bitcoin)
Imagine you and I bet $50 on tomorrow’s weather here. I bet it will be sunny, you that it will rain.
Today we have the following options to manage this transaction:
- We can trust each other. Rainy or sunny, the losing one will give $50 to the winner. However, one can easily not pay the other.
- We can turn the bet into a contract. With a contract in place both parties will be more prone to pay, however, should any of the two decide not to pay, the winner will have to go with legal processes which is not cool.
As we can’t trust strangers and also enforcing a contract requires time and money to pay for legal proceedings, there is a new better alternative - which is to use blockchain technology to power this betting game.
Blockchain allows us to write a program (in this case a betting program) and install that code into the chain. To participate in bet, both of us can send $50 to the program. This program will keep the $100 safe and check tomorrow’s weather automatically on several data sources based on our code's logic. Sunny or rainy it will transfer automatically the whole amount to the winner. Each party can check the contract logic, and once it’s running on the blockchain it can’t be changed or stopped.
The most known and discussed application of the blockchain technology is the digital currency called Bitcoin. As Bitcoin is the first application of blockchain technology, it makes sense to learn how a blockchain works by understanding bitcoin.
If I want to send some of my bitcoin to you, I publish my intention and the nodes scan the entire bitcoin network to validate that I
- I have the bitcoin that I want to send, and
- I haven't already sent it to someone else.
Once that information is confirmed, my transaction gets included in a "block" which gets will be attached to the already existing previous block in the chain - hence the term "blockchain
This is a sample of blockchain network in the picture, where each node represents a computer connected to the blockchain network. Each node stores a file called the ledger, which keeps track of all Bitcoin transactions. Scanning this ledger file gives us clear knowledge on the amount of Bitcoins each of us owns.
If David wants to send Bitcoins to Sandra,
- David broadcasts a message to the network that describes about the transaction : David 5 BTC → Sandra. David would encrypt this transaction with the private key of his wallet, so that this could be decrypted by other nodes only through David's public key. Thus other nodes ensures that this particular transaction request is initiated by David, only if this message can be decrypted using David's public key. This verifies source and authenticity of a transaction.
- Each node in the network will receive the message and apply the requested transaction to their copy of the ledger, and re-broadcast message to other nodes.
- Thus on the blockchain everyone can see everyone’s else
transactions. In fact it is this feature that enables blockchain
network to check how much Bitcoins do a person possess when he try
to make a transaction.
In our bank system we only know our own transactions and account balances.
In simple words a transaction flow looks like this :
•David creates a transaction message
•David encrypts the transaction with his
own private key
•David broadcasts the encrypted message to network
•Network decrypts the transaction with
David’s public key.
•Network verifies source &
authenticity of transaction
•Network verifies balance in David’s
bitcoin account
•Network apply the transaction to
ledgers
•Network order this transaction into a
block
•Network performs mining - the proof of
work
•Network verifies the proof of work
•Wow! A new block is added to blockchain.
During a transaction, the sender has to generate a transaction request that includes links to previous incoming transactions (known as inputs) as shown in the picture. The total balance of inputs should be >= number of Bitcoins being sent out (known as output). i.e, input >= output. Nodes verify “balance” of sender by checking if each inputs embedded in that transaction request has been redeemed yet or not.
To know your wallet balance, blockchain need to analyze and verify all the transactions that ever took place on the whole network connected to your wallet. This is because ledger in fact does not keep track of balances, it only keeps track of every transaction that is broadcasted within the Bitcoin network.
The Bitcoin network orders transactions by putting them together into groups called block, each block contains a definite amount of transactions and a link to the previous block. Each block contains within itself, the hash of the previous Block. This link is crucial because it’s what gives blockchains immutability. If an attacker corrupted an earlier Block in the chain then all subsequent blocks will contain incorrect hashes. Blocks are organized into a time related chain, that gives the name to the whole system: blockchain.
From the pool of unconfirmed transactions, those transactions happened at same time period are put into a block. Each node can group transactions together into a block and broadcast it to the network as a suggestion to include it as next block in the chain. In order to be added to the blockchain, each block must contain the answer to a complex mathematical problem. The only way to solve such mathematical problem is to guess random numbers that combined with the previous block content generate a defined result (usually a number below a certain value). It could take about a year for a typical computer to guess the right number and solve the mathematical problem. However, due to the high number of computers in the network that are guessing numbers a block is solved on average every 10 minutes. Nodes get together in groups that divide the number of guesses each one has to try. These nodes are called miners. The node that solves such mathematical problem acquires the right to place the next block on the chain and broadcast it to the whole network. And if two nodes solve the problem at the same time and spread their blocks to the network simultaneously, nodes will adopt only the longest chain.
Here’s an example of what a single Block looks like:
a block
{
'index':1,
'timestamp':1506057125.900785,
'transactions':[
{
'sender':"8527147fe1f5426f9dd545de4b27ee00",
'recipient':"a77f5cdfa2934df3954a5c7c7da5df1f",
'amount':5,
}
],
'proof':324984774000,
'previous_hash':"2cf24dba5fb0a30e26e83b2ac5b9e29e1b161e5c1fa7425e73043362938b9824"
}Bitcoin creators wanted to limit the “growth” of the blockchain by introducing complex mathematical calculations, implemented through hash functions (cryptography). Mining is the process performed by nodes to solve a complex mathematical puzzle (that is part of the bitcoin program), and to include the answer in the block. The puzzle that needs solving is to find a number that, when combined with the number mined previously for last block when passed through a hash function, produces a result that is within a certain range. This number is called a "nonce", which is a concatenation of "number used once." In the case of bitcoin, the nonce is an integer between 0 and 4,294,967,296. The resulting hash has to start with a pre-established number of zeroes. The first miner to get a resulting hash within the desired range announces its victory to the rest of the network. All the other miners immediately stop work on that block and start trying to figure out the mystery number for the next one. As a reward for its work, the victorious miner gets some new bitcoin.
Hash(previous nonce, nonce) = X, where
nonce < 4,294,967,296 && nonce > 0
X < certain value, and
X is prefixed with certain number of zeroes
Puzzle
- Find a number p that when hashed with the previous block’s solution a hash with 4 leading 0s is produced.
Simple Proof of Work Algorithm:
- Find a number p' such that hash(pp') contains leading 4 zeroes, where p is the previous p'
- p is the previous proof, and p' is the new proof
Network verifies the solution to puzzle as follows :
- Validates the Proof: Does hash(last_proof, proof) contain 4 leading zeroes?
A conflict occurs when one node has a different chain to another node. To resolve this conflict, every nodes reach consensus with other nodes in a network by following a rule that the longest valid chain is authoritative, reject others.
One of the core concepts of Bitcoin is that it has a decentralized transaction ledger. This means that every (full) node in the network has a copy of this ledger (as opposed to VISA for example where only one centralized party has a copy of the transaction ledger). When new transactions have to be added to the blockchain, this results in a problem. The nodes in the Bitcoin network need to agree (or reach consensus) about a new state of the blockchain. The problem boils down to "Which block of transactions will we all add to our blockchain next?". Now, say all of the full nodes would have your proposed software routine that says "I will create a new block of all the transactions of the past 10 minutes". The result will be that different nodes will have different blockchains. Transactions can't be propagated instantly across the entire Bitcoin network. So a given transaction could fall within the 10 minute time-span for some nodes, but arrive late to other, more distant nodes. The nodes are now in disagreement and it's unsure which blockchain is the true blockchain of the network. So to prevent this, a consensus algorithm is needed, which allows all the nodes in the network to agree on the next block to add, so there is only one version of the truth. One node will have to propose the next block to be added, and the other nodes will need to be able to easily verify that the block is valid.
PoW is just one example of a consensus algorithm, and it's indeed known to consume a lot of energy. Other consensus algorithms exist that are more energy-efficient, e.g. PoS (Proof-of-Stake), PoC (Proof-of-Capacity), etc. But without one of these algorithms, there is no way of keeping one and the same decentralized blockchain.
- Open your wallet and scan the address to which you want to send money.
- Select the amount of money and send the transaction.
- The wallet secures the payment so you know the sender of the money.
- The transaction is validated by the network and made part of the mining process.
- Mining is in progress and is done when a miner earns a bitcoin.
- The network validates the result of the mining process.
- The receiver of the money gets a confirmation of the successful transaction.
- There is intention to send money from A to B.
- The transaction is put into a block.
- The block is send to all members of the network.
- The network validates the block.
- The block is added to the chain.
- The money is moved from A to B.
- Alice wants to sent 1 bitcoin to Bob.
- Alice uses her wallet software to achieve this.
- The wallet software (which can also be referred to as a client) searches other clients on the P2P network and connects to them. This means it can now send and receive information from all connected clients.
- Alice confirms that she wants to send 1 bitcoin to Bob.
- Her client then informs all connected clients of this transaction.
- All connected clients inform all of their other connected clients of this transaction and so forth. This is called a broadcast.
Hash functions are often used for proving that something is the same as something else, without revealing the information beforehand. Here’s an example.
Let’s say Alice is bragging to Bob that she knows the answer to the challenge question in their Math class. Bob wants her to prove that she knows the answer, without her telling him what it is. So, Alice hashes her answer (let’s say the answer was 42) to produce this hash:
Alice gives this hash to Bob. Bob can not find out what the answer is from this hash – but when he finds the answer himself, he can hash his answer and if he gets the same result, then he knows that Alice did indeed have the answer. Hashes are often used in this context of verifying information without revealing it to the party that is verifying.
SHA256 is always 256 bits long, equivalent to 32 bytes, or 64 bytes in an hexadecimal string format. You can even use char(64) instead of varchar(64) since the size won't change.
A wallet is a program that allows you to store and exchange your Bitcoins, and you need it to perform a transaction. A wallet is cryptographically protected by a pair of keys - a private and a public key.
If a message is encrypted with public key, only the paired private key will be able to decrypt and read the message. Similarly, on the other way, if you encrypt a message with your private key, only the paired public key can be used to decrypt it. When a user David wants to send Bitcoins, he needs to broadcast a message encrypted with the private key of his wallet, so he and only he can spend the Bitcoins he owns. Each node in the network can cross check that the transaction request is coming from David by decrypting the transaction request message with the public key of his wallet.
When encrypting a transaction request with your wallet’s private key you are generating a digital signature that is used by blockchain computers to double check the source and the authenticity of the transaction. The digital signature is a string of text that is the result of a combination of your transaction request and your private key, therefore it cannot be used for other transactions. If you change a single character in the transaction request message the digital signature will change, so no potential attacker can change your transaction requests or alter the amount of Bitcoins you are sending.
To know your wallet balance, blockchain need to analyze and verify all the transactions that ever took place on the whole network connected to your wallet. This is because ledger in fact does not keep track of balances, it only keeps track of every transaction that is broadcasted within the Bitcoin network.
The blockchain does not know about temperature changes, elections, sporting events or whether or not a consumer was shipped the correct goods they ordered. For the blockchain then to factor outside information, the data must be mapped from the real world to the blockchain by some mechanism. This process of integrating data outside the blockchain network is known as oraclization. An oracle provides a service which integrates outside data onto the blockchain and is required for much of the most interesting use cases of smart contracts.
- https://www.coindesk.com/information/how-do-bitcoin-transactions-work/
- https://www.coindesk.com/information/how-bitcoin-mining-works/
- https://bitcoin.stackexchange.com/questions/1600/where-are-the-users-bitcoins-actually-stored/1604\#1604?newreg=934ac833da9c4d86b322046a960e4ced
- https://www.ness.com/bitcoin-block-chain-proof-of-work-and-how-they-are-all-connected/
- https://cryptohelp.ch/understanding-blockchain
- https://dev.to/damcosset/blockchain-what-is-in-a-block-48jo
- http://www.ledgerprojects.com/how-a-blockchain-works-the-proof-of-work
- https://www.danielefavi.com/sha256-hash-calculator