Blockchain 101 Part 1: What is It and Why Should I Care?

At the base of all of the hype behind cryptocurrency like Bitcoin, Ether, and others is the technology that makes it all possible: Blockchain. First and foremost I want to dispel a common misconception that Bitcoin = Blockchain. This is not the case! Bitcoin is a proof-of-concept application built on the protocol that is blockchain, but the two are not synonymous.

Now that we have that out of the way… what exactly is blockchain? Blockchain is defined as a peer-to-peer digital ledger of immutable transactions that are organized into timestamped blocks and can only be confirmed by network consensus. Each block that is created contains a reference to the previous block, forming a chain of blocks called the blockchain. On this blockchain, these transactions represent the transfer of value, either tangible (a product) or intangible (currency). In plain English; the blockchain is a digital ledger composed of transactions that are organized into timestamped blocks, and each new block is appended to the previous one, forming a chain of blocks… also known as a blockchain. So as transactions are created and submitted to the blockchain, they go into a queue, and from that queue, special nodes (the word to describe users on the blockchain, each computer is a node) called miners take those transactions, verify them and organize them into blocks as they simultaneously compete to solve a really difficult math problem. The miner that solves the problem first wins the right to append their block full of transactions to the previous one, thus continuing the chain of blocks. Keep in mind that when I say a miner wins, I mean their computer solves the problem and wins, there’s not some smart person behind the keyboard solving math problems. Makes sense right? If the whole miner situation doesn’t make sense yet, that is OK! My next post is all about how mining and the network works.

There are a handful of crucial details to consider that make blockchain unique:

Blockchain transactions are immutable, meaning they cannot be modified after they are confirmed and written to a block

The blockchain stores the entire history of transactions, meaning that these immutable transactions exist as a record on the ledger forever, which is of significant benefit to audit requirements

Transactions are peer-to-peer, meaning there is no intermediary or trusted 3rd party facilitating the transaction, rather the verification is done by peers on the network through a process called consensus (I will explain consensus in the next post). When I think blockchain, I always think disintermediation. For example, Venmo, the popular payments app, can be thought of in this context; instead of payments going through banking systems (ding ding ding, intermediary!), the payment can be directly peer-to-peer with no 3rd party on the blockchain.

Finally, on the blockchain, each node on the network keeps a full copy of the ledger (yes, every transaction that occurs). This means that the blockchain is fault tolerant, in other words, if my node goes offline the network still operates as normal and when it comes back online, the other nodes feed mine the information it’s missing.

Blockchain, like many other technological innovations of this century, is built upon technologies and concepts that have existed for decades. I like to think of blockchain as the culmination of four distinct pieces consisting of technology, cryptography and economics: peer-to-peer networking, proof-of-work, public key cryptography (asymmetric encryption), and game theory.

Peer-to-Peer Networking – peer-to-peer networking has existed since the 1990’s, and gained immense popularity through file sharing platforms like Napster. The concept of peer-to-peer computing/networking is that instead of a file or information being shared with another individual by being uploaded to a server and then distributed to the recipient from there, each individual’s computer becomes a node that acts as both a client (receiver) and a server (sender) on a big network of other nodes, allowing the sharing to occur directly peer-to-peer. However, opening one’s computer and file system to the world is not the most secure way to share files, and malicious actors often abused these networks to distribute malware. Blockchain, though, has reinvented the usage of peer-to-peer networking, and instead of file sharing that opens each computer up to one another, each computer becomes a node on a distributed network for peer-to-peer transactions.

Proof-of-Work – proof-of-work is a concept invented by cryptographers in the 1970’s that can be defined as a piece of data that is exceptionally difficult to obtain (like a really hard math problem), but very easy to verify for correctness. Using proof-of-work, the blockchain protocol can establish that a miner has done the work necessary to verify transactions and create a new block. This is an essential part of the consensus process, which I will discuss at length in the next post.

Public Key Cryptography – public key cryptography, otherwise known as asymmetric encryption, can be traced back to its first invention in the 1970 through the work of a British cryptographer James H. Ellis. The idea behind public key cryptography is that using mathematics, one can both authenticate users and encrypt data with a pair of digital keys: a public key and private key. The public key is openly and publicly available on the network and is both used to authenticate a user as well as to encrypt data, while the private key is kept completely secret/secure and is used to decrypt data. The two keys are mathematically paired with one another, meaning that a message encrypted by the public key can only be decrypted by its paired private key. In blockchain, these key pairs are what represent a node on the network and are the method by which transactions are encrypted so they are secure and only accessible by the holders of the keys.

Game Theory – game theory can be defined as the study of human behavior when faced with opportunity for conflict or cooperation and tasked with logical decision making. For example, game theory plays heavily into the idea of supply and demand in economics. Economists often study human behavior and decision making to understand trends in demand relative to the supply of a product, as most decision making is done based upon predictable models or in reaction to controllable environmental factors. This study of human decision making and predictive models therein is a big part of game theory. Game theory is crucial to blockchain because without intermediaries that are paid to do the work for the network, i.e banks to verify transactions, the network needs to operate like a miniature economy in which everyone is incentiveized to play their part and play by the rules. Think back to the brief description of mining that I mentioned before. These mining nodes are all competing to verify transactions and create new blocks, and for that work (nudge nudge, proof-of-work) the winning miner is being paid with a reward of Bitcoins or whatever cryptocurrency the network uses. This reward is the incentive for the miners to expend the time and electricity it takes to verify transactions without having to have an intermediary like a bank to do it for a fee. The fact that the miner is paid in network tokens like Bitcoin also dis-incentivizes the miner from trying to verify invalid transactions or otherwise cheat the system because a failure of the protocol would mean the devaluation of the very network token that they are being paid with. As you can see, economics and game theory are just as important, if not more important to blockchain than the technology itself. Keep that in mind!
Why should you care? That’s easy. It’s a disruptive technology that’s all over the news, and (news to some of the haters) it is not going anywhere. I estimate that five years down the line, a significant amount of products we use every day will have integrated a blockchain component, if not sooner. One day, it is likely that almost every system we use will in some form or fashion rely on blockchain for a crucial process. This is the future; along with other notables like artificial intelligence, process robotics, IoT, etc., blockchain will be a part of the technology stack of the future.

I will be posting an in-depth part 2 to this trilogy of Blockchain 101 posts that discusses consensus and how the network runs at a deeper level. If you have any questions please feel free to comment below and don’t forget to head over to YouTube and subscribe!