Key Concepts of Blockchain

This chapter will explore how blockchain technology can be applied in various fields. While we will primarily use examples related to financial transaction processing, it's essential to understand that blockchain's potential is not limited to this area. This technology offers a flexible framework for implementing decentralised solutions to securely store, share, and protect data across multiple domains.

The term 'blockchain' has come to mean different things to different people. For developers, it's a set of tools and encryption techniques that make it possible to store data securely across a network of computers. In business and finance, it's seen as the technology behind digital currencies and a way to keep track of transactions without needing a central authority. For tech enthusiasts, blockchain is driving the future of the Internet. Others view it as a powerful tool that could reshape society and the economy, moving us toward a world with less centralised control.

At its core, blockchain is a new type of data structure that merges cryptography with distributed computing. Satoshi Nakamoto developed this technology by combining these elements to create a system where a network of computers works together to maintain a shared, secure database. In essence, blockchain technology can be described as a secure, distributed database.

Blockchain technology demonstrates that people anywhere in the world can trust each other and conduct business directly within large networks without needing a central authority to manage everything. This trust isn't based on big institutions but on technology—protocols, cryptography, and computer code. This shift makes it much easier for people and organisations to work together, opening up new possibilities for global collaboration without relying on traditional central institutions.

What is blockchain in simple terms?

A blockchain is a method of storing data. Data is stored in blocks that are linked to the previous block.

Each block contains:

• a list of transactions,
• a unique ID for all the data in the block called a hash,
• a hash of the previous block's data.

Data in the block usually consists of transactions, each block can contain hundreds of transactions (for example person A sends 100 EUR to person B, this transaction describes 3 variables: sender identification, receiver identification and amount).

A hash generated from a transaction record is a unique combination of letters and numbers. It's always unique to every block on the blockchain. When the data in the block changes, the hash will also change. When a hash is applied to transaction data, it turns off the option to make changes in a record, as the resulting hash of the new record will not equal the previous value. (For example, if we generate a hash for records “PersonA, PersonB,100,” the hash result of this record will be a unique value and will be changed if at least one symbol from the original record is changed.) Each block also contains the previous block's hash, forming a chain structure.

As a result, if a transaction in any block changes, the block's hash will change. When the hash of the block changes, the next block will show a mismatch with the previous hash that was recorded by it. This gives blockchain the property of being tamper-resistant as it becomes very easy to identify when data in a block has changed. Blockchain has one more property that makes it secure. A blockchain is not stored on one computer or server, which is usually the case with a database. Instead, it is stored in a large network of computers called a peer-to-peer network.

Peer-to-peer is a network in which all computers play server and node roles. Such networks usually do not have a centralised server; this role is shared across network nodes. This structure allows the network to remain operational with any number and combination of available nodes.

Every time a new block of transactions is added to the network, all network members or nodes must verify whether all transactions in the block are valid. If all nodes in the network agree that the transactions in the block are correct, the new block will be added to every node's blockchain.

This process is called consensus. Hence, any attacker who tries to tamper with the data on the blockchain must tamper with the data in most of the computers in the peer-to-peer network.