2. Blockchain Guide


Origin

In the year 2008, the concept of Blockchain first appeared and was defined in a Cryptocurrency white paper, Bitcoin, published by a developer by the name of Satoshi Nakamoto. Satoshi Nakamoto is widely believed to be a pseudonym for a person or group of individuals whose identities remain unknown to this day.

 

What is Blockchain?

A blockchain is a decentralized, transparent ledger of all digital transactions and is securely connected publicly using cryptography technology. Newest transactions are recorded and added in chronological order onto the blockchain, it enables users and groups that do not trust one another to share information and allows market participants to keep track of digital transactions securely without the need of a facilitating central administrator or middleman, nor the interference of any central authority.


Think of blockchain as simply, a chain of blocks. Transaction data is written into a block and consists of a hashed record of recent valid transactions, block timestamp, creator address and previous block hash. A hash is a set of characters eg. 018A34B341H derived from information stored in a block.

Blockchain Block Diagram

The only way to update a Blockchain is to add a new block and every successive block will contain the hash of the previous block, chaining all blocks together. This binds them and ensures transaction cannot be modified without modifying the intended block as well as all following blocks, which mean that can only be achieved by modifying the entire blockchain which is believed to be impossible for hackers to achieve because of the distributed consensus security process.


Blockchain Process


Cryptography ensures as well, that every user can only modify the parts of the blockchain that they own by possessing the private keys/passcodes needed to execute the modification. It ensures that everyone’s copy of the distributed blockchain is kept in sync. Those explained as above are the reasons why blockchain has top-grade security technology and is widely believed to resist fraud and hacking.


How are new coins created and new transactions recorded in the blockchain?

New cryptocurrency coins are created and new transactions are recorded in the blockchain via the mining process. Visit link below to learn more about mining in detail.
[ Read Cryptocurrency Mining Guide ]


What happens if a user with malicious intent modifies the contents of a block and update the hash of successive blocks?

Blockchain data is not kept in only 1 computer. Every user needs to download a copy of the entire blockchain before they can use it, so data is technically replicated to every computers in the blockchain network. If any individual or even a group decided to tamper a copy or more than 1 copy of blockchain data for their own benefits, the blockchain will automatically accept the copy of the data that the majority say is correct with their own records.


Refer to Scenario 1 picture below, a normal and honest user did a new transaction with his existing copy of blockchain. All other users in the blockchain network automatically tallies and confirms that his existing block records are correct and accept his new transaction along with other valid transactions from other users in chronological order.


Honest Transaction Scenario

Under Scenario 2 below, a hacker tampered the content of a block. The blockchain population automatically rejects the incorrect data since it does not tally with their blockchain records and easily wins the majority battle against the hacker. Unless there are more hackers than the millions of blockchain users, and all of the hackers are in sync holding the tampered copy of blockchain with the exact same amount of changes, can the tampered data be accepted and recorded into the blockchain ledger which is impossible to happen.


Hacking Scenario
High Availability

The blockchain is operated 24 hours by all running computers using the blockchain and is the reason why there is no single point of failure. If 1 computer crashes, there are millions of other users’ computers that can host the blockchain.


Centralised internet applications on the other hand have much lesser redundancies. If their data centers or hosting servers encountered for example power failures, or network connection lost, their systems will be dead. Usually centralized organizations are capable of putting in 2-3 more redundancies for backups but they cannot reach the high availability or system uptime reliability of a decentralized blockchain, not even close.



Data Security

Centralized database is susceptible to data corruption and centralized organizations have the tendency to synchronize or replicate data to multiple hardware storage, data centers or sites (typically for disaster recovery or performance enhancement reasons) which will cause data corruption impacts (if it happens) to be more destructive, and data recovery to be much more difficult since corrupted data would be replicated to other destinations as well.


On the other hand, for attackers to be able to corrupt the data of a decentralized global blockchain, they will need to compromise simultaneously majority of nodes and data located everywhere in the world, since partial corruption will only result in rejection and auto-correction by the majority consensus mechanism. This is seemingly impossible in view of the fact that the vast costs required to execute the above are likely too enormous for malicious individuals, cartels or even governments to afford.


Centralized Database control is based primarily on access rights, anyone with sufficient access (gained legally or illegally) can steal, destroy and modify the data. That is the reason why Centralized Organizations and Banks are spending billions of dollars to improve their system security. Hence, centralized system users are highly dependent on those central organizations and their security administrators to be able to do their job of protecting their information and data from being hacked, altered or destroyed. If they failed or decided to rebel, the users will suffer.


How do cryptocurrencies work with blockchain?

Cryptocurrencies are assets that can be traded, but in order for participants to trade these assets, they need blockchain which is a public ledger to make every transaction transparent and permanent to prevent frauds eg. double spending. This means transactions can be done without going through and paying a middle man or a centralized institution securely.


Smart Contracts on the Blockchain

Decentralized ledger or Blockchain can therefore be used for Smart Contracts. A smart contract is a computer protocol designed to digitally verify, facilitate, enforce negotiation or performance of a contract. Contracts can be converted to computer codes, replicated and supervised on the network of computers that run the blockchain. Industry examples and use cases are healthcare, insurance or transport services etc.


Smart Contract transactions on a developed Blockchain are secure, trackable, fast, irreversible and allow the performance of credible transactions without third parties. Smart contract security is superior to traditional contract law and is capable of reducing transaction costs associated with contracting. Ethereum is a well know open-source, blockchain based distributed computing platform designed primarily for smart contracts.


NEXT: 3. Read Cryptocurrency Security Guide