How does Blockchain really work - All Levels Guide

The blockchain technology is promising and is expected to transform most of the financial assets and technological models due to its transparent, immutable and distributed structure. The blockchain technology has brought along with it so many benefits and tokenization are one of them.

Blockchain technology has been theorized in the 90’s but it’s only today that has been widely used; it’s architecture is based on three main technological pillars:

- Distributed Ledger (DLT): Digital version of ledger to track and monitor data

- Peer-to-Peer Transactions (P2PT): Trading takes place directly between two parties, with no need for an intermediate like broker or a banking institution

- Cryptography: Process in which information embedded in block is validated by network nodes using cryptographic nodes.

 What makes unique a Blockchain are the components of its DLT:

 a.    A network of nodes which is represented by each end-point user (human member or computer) of the network

b.    Tokens, which represent the unit of exchange/account in DL transactions

c.    How transaction data are stored in the ledger (blockchain is the most preeminent)

d.   The consensus mechanism, which prevents double spending and determines the correct version of the ledger

e.    Rules which set out a protocol for interactions between participants

More simply, here is how it works:

The data that is stored inside the block depends on the type of blockchain. In the case of bitcoin, its blockchain stores the details of the transactions (sender, receiver and amount). A block also has a Hash, which is the single block fingerprint. This is represented by an alphanumerical encryption which uniquely identifies the block across the whole chain and it’s always unique, just like a fingerprint.

Once the data is stored inside the block, the is automatically calculated. Changing the date causes the hash to change immediately and that’s extremely useful when it comes to detect changes that occurred on the individual blocks of the chain. The last element of the single block is the Hash of the previous block, which is what really makes the chain so secure. In a nutshell, here is how the chain works:

Now let’s assume you try to tamper with the second block of the previous picture.

Changing the stored date in the block will cause the hash to change and for instance also all the following blocks will change their “previous hash”, somehow invalidating the whole chain. But using hashes is not enough to prevent tampering. Computers these days have a strong calculation power and they are able to compute millions of hushes per second and so you could potentially tamper with a block and fast recalculating all the following hashes to make the blockchain valid again.

To prevent this risk, blockchain has something called “Proof-of-work” . PoW is a mechanism that slows down the process of recalculating the hashes, in order to mitigate the risk of fast recalculation. In the case of Bitcoin, to add a new block to the chain takes 10 minutes and this gives an idea about how much it would take for thousands of thousands of blocks. This leads to the fact that the larger is the chain, the more secure it is.

But what really makes a blockchain secure is the P2P logic: when a new block is created, there is no centralized stakeholder or entity who has the responsibility whether to validate or not the added block. Is the majority (51%) of the P2P network who has that responsibility. In other words, users validate the new stored information, as shown in the pictures below:

When someone creates a new block, that block is sent to everyone in the network. Each node then verifies the block to make sure that it hasn’t been tampered with and if everything checks out, each nodes adds it to their own blockchain. The mechanism where the majority of users agree about what is valid and what not is called Consensus.

So if an hacker would like to successfully tamper with a blockchain, (s)he will need to: 1.  Tamper with all the blocks of the chain, 2.  Redo the Proof-of-Work for each block   and 3.  Take control of more than the 50% of the P2P network. That’s almost impossible to do!

We can immediately notice which are the main advantages of this new way to digitalize the world of assets:

 1.   Transparency: each user knows about al the other network transactions

2.    Security: once some data has been recorded inside the blockchain becomes extremely difficult to change it

3.    Decentralization: no need for an intermediary like a broker of a banking institution

4.    Time and Cost Effective: smart processes drive to time saving

In general terms a Blockchain system can be:

 -     Public if allows anyone who is a part of the consensus process to view or send transactions

-     Private if restricts the ability to write to a distributed ledger to one organization.

As mentioned, the blockchain’s unit of account is the Token which represents the digital way to attribute and exchange value. This is not neither e-money, which is based on fiat currencies or cryptocurrencies. It’s something more elementary, upon which the whole system of Blockchain is based.

The direct or indirect way to regulate across the P2P network the token transactions is the issuance and mutual acceptance of Smart Contracts. Currently Smart Contracts are being used to store medical records, E-notary acts, and to collect taxes.

The majority of people tend to associate Blockchain technology to the mainstream concept of Cryptocurrency, like Ethereum, Bitcoin, Dogecoin etc. Just as note to the reader: the cryptocurrencies represent less than the 1% of the global Blockchain potential and adoption.

Applications:

-      Crowdfunding (Equity and non equity): Real Estate, Technology, Finance, Art etc

-      Other business applications (still to be discovered)