What is a Blockchain?

June 17, 2020

|In For the web, Featured, Blockchain and Criptovalute

What is Blockchain?

You hear a lot about it, often inappropriately when not in a smoky way. Yet the concepts are not complicated. The technology that supports the blockchain can be a bit tricky and complex (not complicated), but in essence, the matter is quite simple. I would like to help you clarify. Mine is a NON-TECHNICAL explanation, as a non-expert on the subject or rather as someone who understands the process but doesn't go into the technical detail because there are people more prepared than me for that. The purpose here is to clarify the general concepts and make you understand how powerful, versatile and universal this tool is and how it can be exploited to our advantage. If you are interested in going into detail on the matter, after also reading my post related to Tokens I advise you to contact Michael Gandolfi which prepares and holds webinars and specialized courses on these topics. The online magazine is also very interesting The Cryptonomist which contains a lot of information about it including cryptocurrencies, what they are and how to manage them: in this regard, I take this opportunity to send a greeting to Amelia Tomasicchio, CEO of Cryptonomist.

1. What is blockchain?

Let's say that: Blockchain technology allows the distribution of public "registers" that contain immutable data in a secure and encrypted way and guarantees that information exchanges can never be altered.

I go into detail.

If this technology is so complex, why actually call it “blockchain”? At its most basic level, blockchain is actually just a chain of blocks, but not in the traditional sense of those words. When we express the concepts of "block" and "chain" in this context, we are actually talking about digital information (the “block”) stored in a public (the “chain”).

Try to imagine the business register of a chamber of commerce. The information contained in the register corresponds to the "block" while the register itself is the "chain". The information contained in the chain is the Blockchain.

Thus, the “blocks” on the blockchain are made up of digital information. In particular, they have three parts:

The blocksi that store information about transactions such as the date, time and currency amount of your last purchase on for example on Amazon. (NOTE: This Amazon example is for illustrative shopping; Amazon's retail does not operate on the blockchain principle as illustrated here)
Blocks that store information about who participates in transactions. A hold on buying a package on Amazon would register your name with Amazon.com, Inc. (AMZN). Instead of using your real name, your purchase is recorded without any identifying information using a unique "digital signature," a sort of username.
Blocks that store information that distinguishes them from other blocks. Just like you and I have names to distinguish each other, each block stores a unique code called hash which allows us to distinguish it from any other block.

Hashes are cryptographic codes created by special algorithms. Let's say you made your shopping spree on Amazon, but while it's in transit, you decide you can't resist and need a second purchase. Even though the details of your new transaction would be nearly identical to your previous purchase, we can still distinguish the blocks due to their unique codes.
While the block in the previous example is used to store a single Amazon purchase, the reality is a bit different. For example, a single block on the Bitcoin blockchain can actually store up to 1MB of data. This means that depending on the size of the transactions, a single block can host a few thousand transactions "under one roof".

Okay so far? do you follow me? Now I explain in simpler words how a Blockchain works.

2. How Blockchain works

When a block stores new data it is added to the block chain. Blockchain, as the name suggests, is made up of multiple blocks linked together. In order for a block to be added to the blockchain, however, four things must happen:

2.1 A transaction must take place.

Let's continue with the example of your impulse buy on Amazon. After hurriedly clicking through the tongue-out multiple checkout prompt, you still have to proceed to checkout and reluctantly make the purchase. As we saw earlier, in many cases a block will potentially bundle thousands of transactions, so your Amazon purchase will be packaged in the block along with other users' transaction information.

2.2 Verification of the transaction

After the purchase, the transaction must of course be verified. With other public registries of information, such as the Securities Exchange Commission, the banks themselves, the financial institutions that issue credit cards, the carriers for online payments, someone is busy verifying the new data entries. With blockchain, however, that job is left to a network of computers. When you purchase from Amazon, that computer network undertakes to verify that the transaction took place in the manner indicated by you. That is, they confirm the details of the purchase, including the time of the transaction, the currency amount and the contracting parties.

2.3 Storing the transaction

Once the transaction is verified as accurate, it gets the green light. The currency amount of the transaction, your digital signature, and Amazon's digital signature are all stored in one block. In that block your transaction will stack with hundreds or thousands of other transactions like yours.

2.4 Attribution of a "hash" to the block.

Not unlike an angel earning its wings, once all transactions in a block have been verified, it will be provided with a unique identification code, called a "hash". The block is also given the hash of the most recent block added to the blockchain. Once the block is defined as hashed, it can be added to the blockchain "reaching eternity" I dare add to be a little funny.

When that new block is added to the blockchain, it becomes publicly available to anyone, even you. If you take a look at the Bitcoin blockchain for example, you will see that you have access to transaction data, along with information about when, where, and by whom the block was added to the blockchain.

3. Is Blockchain Private?

Here's a question I hear asked. Often this question arises from the diffidence in entrusting one's data to "bodies" or "institutions" whose names and places are not known. But the reality is different and nobody has to worry about anything. If you understand well the mechanism by which a blockchain is generated, the question becomes superfluous because anyone can view the content of the blockchain, but users can also choose to connect their computers to the blockchain network as nodes. By doing so, their computer receives a copy of the blockchain that is automatically updated every time a new block is added, kind of like a Facebook News Feed that provides a real-time update every time a new status is posted. It is the power of the internet and it is the reason why cryptocurrencies are considered so "dangerous", because they cannot be subjected to the control of superior bodies at their sole discretion.

In fact, every computer in the blockchain network has its own copy of the blockchain, meaning that there are thousands, or even, millions of copies of the same blockchain. While each copy of the blockchain is identical, spreading that information across a computer network makes the information more difficult to manipulate. With blockchain, there is no single definitive account of events that can be manipulated. Instead, a hacker would have to manipulate every copy of the network's blockchain. This is what is meant when it is stated that blockchain is a “distributed” and truly “democratic” ledger.

So looking at the Bitcoin blockchain for example, however, you'll notice that you don't have access to identifying information about users making transactions. While transactions on the blockchain are not completely anonymous, users' personal information is limited to their digital signature or username.

This raises an important question: if you can't tell who is adding blocks to the blockchain, how can you trust the blockchain or the computer network that supports it?

4. Is Blockchain Safe?

Blockchain technology deals with security and trust in several ways. First, new blocks are always stored linearly and chronologically. That is, they always add to the “end” of the blockchain. If you take a look at the Bitcoin block chain, you will see that each block has a position on the chain, called a "height". In this regard, it can be seen that in January 2020, the height of the block had exceeded 615.400 meters!!!

So, after a block has been added to the end of the block chain, it is nearly impossible to go back to change the block content. This is because each block contains its own hash, along with the hash of the block that precedes it. There is indeed a chain or a principle of concatenation! Hash codes are created by a mathematical function that transforms digital information into a string of numbers and letters. If this information changes in any way, the hash code also changes.

That's why it's important for security. Let's say a hacker tries to change your Amazon transaction so that you actually have to pay for your purchase twice. As soon as the hacker changes the currency amount of your transaction, the hash of the block will change. The next block in the chain will still contain the old hash, and the hacker would have to update that block to cover his tracks. However, doing so would change the hash of that block. And the next, and so on. He should have 100 hands on 100 keyboards and that wouldn't be enough.

To change a single block, therefore, a hacker would have to change every single block after it on the block chain. Recalculating all of these hashes would require an enormous and impossible amount of computing power possibly available to an alien civilization to such an extent that not even the imaginations of the Star Trek writers could predict. In other words, once a block is added to the blockchain it becomes very difficult to modify and impossible to erase.

To solve the trust problem, blockchain networks have implemented tests for computers that want to join and add blocks to the chain. The tests, called "consent models," require users to "prove" themselves before they can join a blockchain network. One of the most common examples used by Bitcoin is called “proof of work”.

In the proof-of-work system, computers have to "prove" that they have done "work" by solving a complex computational math problem. If a computer solves any of these problems, it becomes eligible to add a block to the blockchain. But the process of adding blocks to the blockchain, what the cryptocurrency world calls "mining," or mining, isn't easy. In fact, the odds of solving one of these problems on the Bitcoin network were approximately one in 15,5 trillion in January 2020.1 To solve complex mathematical problems at these probabilities, computers must run programs that cost them significant amounts of energy.

So to conclude, proof-of-work doesn't make hacker attacks impossible, but it does make them somewhat useless. If a hacker wanted to coordinate an attack on the blockchain, he would have to control more than 50% of all computing power on the blockchain so that he could overwhelm all other network participants. Given the huge size of the Bitcoin blockchain, a so-called 51% attack is almost certainly not worth it and probably impossible and would require such an arrangement of resources that it has no attractive cost/benefit value.

5. Practical applications of the Blockchain

The blocks on the blockchain store data about monetary transactions, and we have talked about this so far for convenience and simplicity. But we know very well, having developed practical applications that blockchain is actually a very reliable way to store data on other types of transactions as well. In fact, blockchain technology can be used to store data relating to property swaps, stops in a supply chain, and even the handling of a political election.

Professional services network Deloitte recently surveyed 1.000 companies in seven countries about integrating blockchain into their business operations. Their survey found that 34% already had a blockchain system in production today, while another 41% planned to implement a blockchain application within the next 12 months. Additionally, nearly 40% of companies surveyed said they will invest $5 million or more in blockchain next year. Here are some of the most popular blockchain applications being explored today.

5.1 Banks and financial institutions

Perhaps no industry can benefit from integrating blockchain into its business operations more than banks. Financial institutions only operate during business hours, five days a week. This means that if you try to deposit a check on a Friday at 18pm, you will probably have to wait until Monday morning for the money to arrive in your account. Even if you deposit during business hours, the transaction can still take one to three days to clear due to the volume of transactions banks have to settle. Blockchain, on the other hand, never sleeps.

By integrating blockchain into banking processes, consumers can see their transactions processed in just 10 minutes – basically the time it takes to add a block to the blockchain, regardless of the time of day or day of the week. With blockchain, banks also have the ability to exchange funds between institutions faster and more securely. In stock trading, for example, the settlement and clearing process can take up to three days (or longer, if banks operate internationally), meaning your money and shares are frozen for that period.

Given the scale of the sums involved, even the few days in which the money is in transit can involve significant costs and risks for banks. Santander, a European bank, put the savings potential at $20 billion a year. Capgemini, a French consultancy, estimates that consumers could save up to $16 billion in banking and insurance fees each year through blockchain-based applications. This is to give an idea of what we are actually talking about.

5.2 Cryptocurrencies

The block chain forms the basis for cryptocurrencies like Bitcoin. As I have extensively explained above, currencies are regulated and verified by a central authority, usually a bank or government. In the central authority system, a user's data and currency are technically at the discretion of their bank or government. If a user's bank collapses or they live in a country with an unstable government, the value of their currency can be at risk. These are the reasons why Bitcoin for example was born.

By spreading its operations over a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces your risk but also eliminates many of the processing and transaction fees. It also offers those in countries with unstable currencies a more stable currency with more applications and a wider network of individuals and institutions with whom they can do business, both domestically and internationally.

5.3 Healthcare Professionals

Healthcare professionals can leverage the blockchain to securely store their patients' medical records. When a medical record is generated and signed, it can be written to the block chain, which provides patients with proof and assurance that the record cannot be changed. These personal medical records could be encrypted and stored on the clipboard with a private key, so that they are accessible only to certain individuals, thus ensuring privacy

5.4 Public Records

If you've ever wasted time with a public registry of any kind, you know that the record-keeping process is both cumbersome and inefficient. Today, a physical deed must be delivered to a civil servant at the local public registry office, where it is manually entered into the central database and eventually into the public index.

This process is not only expensive and time consuming but it is also full of human errors, where every inaccuracy makes the tracking of data less efficient, often messy, not very granular, not coinciding with other data and based on different archiving techniques and not compatible with each other. Blockchain eliminates the need to "process" documents and track physical files in a public registry. If the data is memorized (imagine for example the cadastre) and verified on the block chain, the citizen can blindly trust the data that is made available to him.

5.5 Smart Contracts

A smart contract is computer code that can be integrated into the blockchain to facilitate, verify, or negotiate a contractual agreement. Smart contracts operate based on a set of conditions that users agree to. When these conditions are met, the terms of the contract are automatically executed.

Let's say, for example, I'm going to rent my apartment to you on a smart contract. I agree to give you the apartment door code as soon as you pay me your security deposit. We would both send our side of the deal to the smart contract that comes into being and it would automatically exchange my door code for your security deposit on the rental date. If I don't provide the door code by the rental date, the smart contract will refund your security deposit. This eliminates the fees that usually accompany the use of a notary or third-party broker.

5.6 Supply chains

Suppliers can use blockchain to record the origins of the materials they have purchased. This would allow companies to verify the authenticity of their products, along with health and ethical labels such as 'Organic', 'Local' and 'Fair Trade'.

As reported by Forbes, the food industry is moving towards the use of blockchains to increasingly trace the path and safety of foods throughout their journey from farm to user.

5.7 Voting Systems

Chain voting has the peculiarity of being able to eliminate electoral fraud and increase voter turnout. Each vote would be stored as a block on the blockchain, making it nearly impossible to tamper with. The lockdown protocol would also maintain transparency in the electoral process, reducing the staff needed to conduct an election and providing officials with immediate results.

Here, I would say that I have given you a rather precise and simple overview of what is meant by Blockchain. We will return to this subject in other circumstances. If you have any doubts, questions or requests in this regard, we are here at your disposal.