As indicated in our guide “What is Blockchain technology?“, There are three main technologies that combine to create a blockchain. None of them is new. Rather, it is its orchestration and application that is new.
These technologies are: 1) private key cryptography, 2) a distributed network with a shared ledger and 3) an incentive to handle transactions, record keeping and network security.
The following is an explanation of how these technologies work together to ensure digital relationships.
Two people want to make transactions online.
Each of them has a private key and a public key.
The main objective of this blockchain technology component is to create a secure digital identity reference. The identity is based on the possession of a combination of public and private cryptographic keys.
The combination of these keys can be seen as a skillful form of consent, creating an extremely useful digital signature.
In turn, this digital signature provides strong ownership control.
But strong ownership controls are not enough to secure digital relations. While authentication is resolved, it must be combined with a means to approve transactions and permissions (authorization).
For blockchains, this starts with a distributed network.
A Distributed Network
The benefit and the need for a distributed network can be understood through the mental experiment “if a tree falls in the forest”.
If a tree falls in a forest, with cameras to record its fall, we can be quite sure that the tree fell. We have visual evidence, even if the details (why or how) may not be clear.
Much of the value of the bitcoin blockchain is that it is a large network where validators, such as cameras in the analogy, reach a consensus that they witnessed the same thing at the same time. Instead of cameras, they use mathematical verification.
In summary, the size of the network is important to secure the network.
That is one of the most attractive qualities of the bitcoin blockchain: it is so large and has accumulated so much computing power. At the time of writing, bitcoin is insured for 3,500,000 TH / s, more than 10,000 of the world’s largest banks combined. Ethereum, which is even more immature, is insured for approximately 12.5 TH / s, more than Google and is only two years old and is still basically in test mode.
System of record
When cryptographic keys are connected with this network, a super useful form of digital interactions emerges. The process begins with A taking his private key, making an announcement of some kind, in the case of bitcoin, that he is sending a sum of the cryptocurrency, and attaching it to the public key of B.
A block, which contains a digital signature, timestamp and relevant information, is transmitted to all nodes of the network.
Network servicing protocol
A realist could challenge the tree that falls in the forest through the mental experiment with the following question: Why would there be a million computers with cameras waiting to record if a tree fell? In other words, how do you attract computing power to service the network to make it safe?
For public and open blockchains, this implies mining. Mining is based on a unique approach to an old economic issue: the tragedy of common goods.
With blockchains, by offering the processing power of your computer to service the network, there is a reward available for one of the computers. A person’s self interest is being used to help meet the needs of the public.
With bitcoin, the objective of the protocol is to eliminate the possibility of using the same bitcoin in separate transactions at the same time, so that this is difficult to detect.
This is how Bitcoin acts as gold, as property. Bitcoins and their base units (satoshis) must be unique to be possessed and have value. To achieve this, the nodes that serve the network create and maintain a transaction history for each bitcoin working to solve mathematical proof of work problems.
Basically, they vote with the power of their CPU, expressing their agreement on new blocks or rejecting invalid blocks. When most miners arrive at the same solution, they add a new block to the chain. This block has a timestamp and can also contain data or messages.
Here is a blockchain:
The type, quantity and verification may be different for each blockchain. It is a matter of blockchain protocol, or rules for what is and is not a valid transaction, or a valid creation of a new block. The verification process can be adapted for each blockchain. The necessary rules and incentives can be created when enough nodes reach a consensus on how transactions should be verified.
It is a situation of choice of tasters, and people are just beginning to experiment.
We are currently in a period of blockchain development where many of these experiments are running. The only conclusions drawn so far are that we have not yet fully understood the skill of blockchain protocols.
More about this in our guide “What are Applications and Use Cases for Blockchain Technology?” and “What is the Difference Between Open and Permissioned Blockchains?”
images by Maria Kuznetsov
Article Source: http://www.coindesk.com