Blockchain technology is a relatively new innovation that is well-positioned to become a fundamental operating system for a wide variety of uses. While blockchains seem complicated at first glance, they are really just a method of digitally storing information that enables a shared record of transactions across an online network.
Blockchains were originally envisioned as systems that could be used to securely store digital documents and prevent them from being backdated or tampered with, and they were first conceived in 1991 by researchers Stuart Haber and W. Scott Stornetta of Surety, Inc. This idea evolved along with several other innovations over the following two decades, most notably alongside technologies like Nick Szabo’s Bit Gold and Dr. Adam Black’s Hashcash. Building off the discoveries made by those two systems, blockchain technology came to the fore on the global stage with the invention of Bitcoin in 2009. Championed by the pseudonymous Satoshi Nakamoto, it birthed the world’s first legitimate digital currency (cryptocurrency).
What Are Blockchains and What Applications Do They Have?
In simple terms, large sets of digital data are grouped together on a list; this list of data is then added to a communal digital ledger (i.e., a list of transactions) where all users on the blockchain network can access it. Imagine a group of writers all collaboratively contributing to author a book. Each participant is able to add to the narrative and move the story forward.
The blockchain ledger is not privately kept in the hands of any one centralized authority (i.e., a financial institution). Instead, it is distributed across the network with a complete copy stored on each user’s computer, which are known in the industry as nodes. Each node on the network has the ability to contribute to the ledger, with each addition being broadcast to the entire network. When additions are received by other nodes, their own copies of the ledger are updated. Going back to our previous analogy, if Author A was to insert a new paragraph into the collaborative story via Google Docs, each of the contributors could see an updated manuscript with Author A’s new addition, meaning data is continually added to the ledger until it has reached its storage capacity, which signals the completion of a block. The full ledger is then locked away in the block, so it can be kept for historical records and used as a reference for future data retrieval. At this point, our authors have all signed off on a completed chapter in their book.
Given That Anyone Can Contribute to the Ledger and There is a Central Authority Presiding Over These Additions, How do Blockchains Remain Honest?
Blocks in blockchains have several features that mitigate corruption, including encrypted digital signatures that are generated through cryptography. This process involves the use of private and public keys. A unique private key is given to each user and kept secret, giving them exclusive access to their digital wallet and funds. A public key on the other hand is accessible by the entire network as a way of verifying transactions they intend to make, without forcing adoptees to divulge their private information. The two keys are mathematically paired so that only the public key can decrypt the private key and vice versa. They work together in unison when contributing to a ledger to avoid being taken advantage of by malicious activity. The public key is like your bank account details as you often need to send these to clients and employers, so they know where to direct funds. Without the password (private key), they are able to know your account number, but other people can never access it to see its contents.
The first step in the encryption process is to filter the information being contributed to the ledger through software, manufacturing a hash function (read more about hash functions here) to produce a message digest. The user’s private key will then encrypt the message digest to output a unique digital signature. Once the digital signature is generated, it is then used to sign the encrypted information within the ledger, which is submitted to the network along with the public key, so it can be added to a block. This can be likened to a bank checking a physical handwritten signature on a contract, and then verifying the signatory’s identity. In a callous attempt to oversimplify this process, complicated cryptography assignments are deployed to protect user identity while facilitating complex transactional activity at scale.
Meanwhile, other users on the network can check that the message digest is correct by decrypting the digital signature using the public key. If the message digest of the block can be decrypted successfully using the public key, then the block is validated. However, if the decrypted information produces a different output, then that the information is deemed invalid, and it is omitted it from the block. Valid information is then stored within a block that, once completed, is chronologically added to the chain. Each block is timestamped and stored with all the preceding blocks that came before it.
At this point, the aforementioned activity is representative of all blockchains. There is a recap below:
Blockchain Basics Summarized
- Data is listed together in a ledger;
- Anyone on the network of a blockchain can contribute to the ledger;
- Everyone on the network maintains their own copy of the ledger;
- Any additions to the ledger are broadcast to the network to keep their ledger up to date;
- Once the ledger has reached its storage capacity, it is sealed in a block;
- Blocks are made secure using private and public keys;
- An individual user generates a digital signature by encrypting the information from the ledger;
- Once encrypted information is put into a block with their private key, the network can check the validity of the block by decrypting the information with a public key;
- Once approved by the network, the block is chained to the preceding blocks, which formally adds it to the blockchain.
What Are the Benefits of Using Blockchains?
Essentially, blockchain technology facilitates the ability to store data at varying scales and from multiple contributors, without needing to put trust in a central authority. An effective blockchain will be able to operate in a completely decentralized manner, meaning there is no single point of control; instead, control is distributed across the network through a consensus protocol. Furthermore, different blockchains use divergent processes for achieving consensus, with the most notable protocols being proof of work or proof of stake (or in Algorand’s case the pure proof-of-stake protocol).
As blockchains can offer a truly decentralized and secure information storage solution, they are the ideal platforms for digital/cryptocurrencies to be built upon. Digital currencies are not tied to sovereign nations or bordered states, making their ability to span the globe revolutionary. Imagine sending 100 USD to a family member who lives on the other side of the world via your traditional banking branch. Once fees have been deducted, they would be lucky to receive three-quarters of that amount, and it would likely take days to reach them. If the same transfer of funds was done via an Algorand wallet, it would cost 0.001 ALGO (or 0.0008 USD) and would reach their wallet within five seconds.
One of the key differences between Algorand and other blockchains is the method it uses to validate new blocks that are proposed for its blockchain. The company utilizes a proprietary system known as pure proof of stake, while most other blockchains either use an energy hungry proof-of-work system or a more traditional proof-of-stake example. To find out more about blockchain technology visit Algopulse.io.