This article is intended for the novices in the world of cryptocurrency. Here, we will introduce you to all the fundamentals of a Blockchain.
What is Blockchain?
The blockchain is a technology that allows you to store and transmit information ‘transparently’, securely and without a third party control. It is a large database that contains the history of all the operations made between its users since its creation. The information (transactions, title deeds, contracts, etc.) is secured through cryptography that prevents users from modifying them afterward.
A new block is created when several operations are grouped together and placed at the end of the previous chain of blocks. Thus, a blockchain is created.
The blockchain is not hosted by a single server but by many due to its decentralized architecture. There is no central authority and every user can check the validity of the blockchain.
A public blockchain can be seen as an accounting book, anonymous and unfalsifiable.
How does blockchain work?
A blockchain can be either public or private. A public blockchain works with a cryptocurrency or a token. Bitcoin is an example of a cryptocurrency.
For example, User 1 wants to send 5 bitcoins to User 2. User 1 submits their transaction request to all Bitcoin network participants.
Sending a request for a transaction does not require any verification. Technically, User 1 could ask to send 5 Bitcoins to User 2 when he only has 2 Bitcoins. But transactions are not automatically validated.
Transactions between network users are grouped into blocks. Each block is validated by the nodes (node=one or several computers connected to the network) of the network called the “miners”. Different blockchains have their own way of functioning, they have set “network mining protocols”.
Mining is a fundamental operation of any blockchain, which distinguishes it from a classical centralized system. In the bitcoin blockchain, these network protocols are called “Proof-of-Work” and consist in solving algorithmic problems. Once the block is validated, it is time-stamped and added to the blockchain. A block is therefore defined as a group of several valid operations. The transaction is then visible to the receiver as well as the entire network.
This process takes some time depending on the blockchain (about ten minutes for Bitcoin, 15 seconds for Ethereum).
Difference between public blockchain and private blockchain
There are public blockchains, open to all, and private blockchains, whose access and use are limited to a certain number of actors. The public blockchain can be viewed and used by everyone. Anyone can participate as a node (explain) or a miner. All the transactions will be registered in the blockchain (if they follow the rules of a blockchain). This is the case of Bitcoin and Ethereum blockchains.
In a private blockchain, an organization can modify the protocol whenever it wants. Nobody can participate without being authorized but everyone can consult it. Private blockchains are widely used by companies to experiment internally.
There are also “permissioned” blockchains in which an entity has the controlling authority on the network. Ripple blockchain is the prime example of a permission blockchain, on Ripple, only the network owner can validate transactions on the network. Ripple came up with this structure to offer banks and other financial institutions security, stability and speed, characteristics which Bitcoin and other public blockchains do not offer.
Two Major Blockchain Protocols
Bitcoin is the first blockchain created in 2008 by an anonymous creator whose pseudonym is Satoshi Nakamoto. He published a manifesto entitled «Bitcoin: A peer-to-peer electronic cash system »
The term “Bitcoin” with a capital letter designates a blockchain protocol while the term “bitcoin” without the capital letter is a cryptocurrency with the symbol BTC.
Some of the Bitcoin Blockchain characteristics:
- The Bitcoin blockchain is a peer-to-peer network that is not regulated by a central authority, users exchange bitcoins without the intervention of a trusted third party
- Bitcoins traded have a fixed value in traditional currencies that vary based on supply and demand
- The exchanges are validated by “Proof of Work” as described above
- Each transaction is recorded by a timestamp (of type SHA-256) which is tamper-proof, visible by all and unmodifiable
- The number of bitcoins is limited to 21 million, due to this cap bitcoin will always have value and will be a currency in constant deflation
Ethereum is considered the most promising blockchain outside of Bitcoin. Ethereum was invented in 2013 by Vitalik Buterin, a 19-year-old Russian-born Canadian. He speaks of it as the “first true global computer”, which makes it possible to build decentralized applications on its platform.
Photograph by Julie Glassberg for Fortune In 2016 Vitalik Buterin joined Fortune's 40 under 40 list.
Ethereum computer code is profoundly different from Bitcoin. It was not built to compete with Bitcoin: they are two complementary blockchain technologies. Note the existence of ideological differences between the two communities that surround them: Bitcoin is more of a libertarian inspiration, centered on the monetary domain, while Ethereum aims more to create a new web, decentralized, rather than a new currency.
In practice, participants in the Ethereum network do not just validate monetary transactions: they execute code from decentralized applications, called “Dapps”. In particular, this code allows the implementation of smart contracts, which constitute the heart of Ethereum’s potential.
Ethereum works with a cryptocurrency, ether, which has a specific function: pay the execution of smart contracts, whose operation can consume significant resources.
Although blockchain and bitcoin cryptocurrency appeared together, today many actors (companies, governments, etc.) are considering the use of blockchain technology for other cases than digital currency.
The decentralized architecture of the blockchain, coupled with its security and transparency, promises much broader applications than the monetary domain.
Blockchains could replace most centralized “trusted third parties” (banking trades, notaries, land registry, etc.) and be applied to numerous fields, such as bank operations, real estate transactions, agri-food traceability, identity control, the protection of intellectual property or the certification of diplomas.