Key Concepts of Blockchain

In this chapter, we will explore how blockchain technology, originally developed and can be applied in various fields. While we will primarily use examples related to financial transaction processing, it’s important to understand that blockchain's potential is not limited to this area. This technology offers a flexible framework for implementing decentralized 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 centralized control.

At its core, blockchain is a new type of data structure that merges cryptography with distributed computing. The basics of technology comes from Satoshi Nakamoto, who combined these elements to create a system where a network of computers work together to maintain a shared, secure database. In essence, blockchain technology can be described as a secure, distributed database.

Blockchain technology demonstrates that when it is used, people anywhere in the world can trust each other and conduct business directly within large networks without the need for 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 organizations 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 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 Hash is applied to transaction data it disable option to make changes in record as result has of new record wont be equal to previous value. (for example if we generate hash for records “PersonA, PersonB,100” the hash result of this record will be unique value and will be changed if at least one symbol from original record will be changed.)

Each block also contains the hash of the previous block hence forming a chain structure.

As result if a transaction in any block changes, the hash of the block 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 database. Instead, it is stored in a large network of computers called a peer to peer network.

Per to peek is a network where all computer plays both server and node role. In most cases such networks does not have centralized server, this role is shared across network nodes. This structure allows the network to remain operational with any number and any combination of available nodes.

Every time a new block of transactions has to be added to network, all members or nodes of the network must check and verify if all transactions in the block are valid. If all nodes in the network are in agreement that the transactions in the block are correct, then the new block will get 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.

Transactions

Block chain technology uses two main types of cryptographic keys to provide the security of transactions and data: public keys and private key. These keys work together to protect the integrity of the blockchain, enabling secure exchanges of digital records and protect user identities. Consider the example of a mailbox. The public key is your email ID which everyone knows about and can send you messages. The private key, on the other hand, is like the password to that mailbox. Only you own it and only you can read the messages inside.

A public key is a cryptographic code that is openly shared and used by others to interact with your blockchain account. It's generated from your private key using a specific mathematical process. Public keys are used to verify digital signatures and to encrypt data that only the private key can decrypt. This ensures that messages or transactions are intended for the correct recipient.

A private key is a secret cryptographic code that grants access to your blockchain records. It must be kept confidential because anyone with access to the private key can control the records associated with the corresponding public key. This key is used for authorizing transactions on the blockchain. When it is necessary to transfer information (make transaction), you use your private key to create a digital signature that proves you are the owner of those transactions.

Public and private keys work together to secure blockchain operations:

• Encryption and Decryption: When data is encrypted using a public key, only the corresponding private key can decrypt it. This mechanism ensures that even if the data is intercepted, it cannot be read without the private key.
• Digital Signatures: When a transaction is signed with a private key, the signature can be verified by others using the public key. This verification process confirms that the transaction is authentic and has not been tampered with.
• Secure Transactions: Blockchain transactions rely on the interplay between public and private keys. The public key directs the transaction to the correct recipient, while the private key authorizes the movement of transactions.

Categories of blockchain.

There are three categories of blockchain:

Public blockchains, anyone can access the database, store a copy and make changes subject to consensus in the public blockchain. Bitcoin, is a classic public blockchain. The key characteristics of a public blockchain are, they are completely decentralized. The network is open to any new participants. All participants, having equal rights, can be involved in validating the blocks and access the data contained in the blocks.

Public blockchains process transactions more slowly because they are decentralized, as result each node should agree on each transaction. This requires time-consuming consensus methods like Proof of Work, which prioritize security over speed.

Private blockchains (in some literature is mentioned as managed blockchains) are closed network that are accessible to authorized or select verified users only. They are often owned by companies or organizations, who use them to manage sensitive data and internal information.

Private blockchain is very similar to existing databases in terms of access restrictions, but is implemented with blockchain technology as result such networks are not aligned with the principle of decentralization.

Since it is accessible only by certain people, there is no requirement for mining of blocks (validating), as result such networks are faster than other types because they does not have necessary in mining, consensus, etc.

Hybrid or consortium blockchains are permissioned based blockchains but in comparison to private blockchains control is provided by group of organizations rather than one coordinator. Such blockchains have more restrictions than public ones, but are less restrictive than private ones. For this reason, they are also known as hybrid blockchains. New nodes are accepted based on a consensus with the consortium. Blocks are validated according to predefined rules defined by the consortium. Access rights can be public or limited to certain nodes. User rights might differ from user to user. Hybrid blockchains are partly decentralized.