People often get bogged down in technological complexity when trying to understand blockchain, but the basic concept is a simple and universal one. We have facts and information we don’t want accessed, copied, or tampered with, but on the internet, there’s always a chance it could be hacked or modified. Blockchain gives us a constant—a bedrock we know won’t change once we put something on it and where a transaction will be verified only if it follows the rules.
How it really works?
The Nakamoto white paper explains the basics of “mining” data into a block, then using a hash (a time-stamped link) to chain those blocks together across a decentralized network of “nodes” that verify each and every transaction. The other key innovation in the white paper is using what’s known as the proof-of-work (PoW) model to create distributed “trustless” consensus and solve the double-spend problem (ensuring cryptocurrency isn’t spent more than once).
A “trustless system” doesn’t mean it’s a system you can’t trust. Quite the opposite. Because the blockchain verifies each transaction through PoW, this means no trust is required between participants in a transaction. Where does the proof-of-work come from? The miners. A P2P network of Bitcoin “miners” generates PoW as they hash blocks together, verifying transactions that then go into the ledger.
In the 2016 book Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World, authors Don and Alex Tapscott explain Nakamoto’s Bitcoin model about as succinctly as one can:
“Bitcoin or other digital currency isn’t saved in a file somewhere; it’s represented by transactions recorded in a blockchain—kind of like a global spreadsheet or ledger, which leverages the resources of a large P2P network to verify and approve each Bitcoin transaction. Each blockchain, like the [Bitcoin blockchain] is distributed: it runs on computers provided by volunteers around the world. There is no central database to hack. The blockchain is public: anyone can view it at any time because it resides on the network… and the blockchain is encrypted… it uses public and private keys (rather like a two-key system to access a safety deposit box) to maintain virtual security.”
Note that nothing is completely unhackable, particularly when you don’t use it as intended. Blockchain’s security works not only because it’s encrypted but also because it’s also decentralized. Victims of the biggest blockchain breaches and cryptocurrency heists (Mt. Gox in 2014 and Bitfinex in 2016) were targeted and pilfered clean because they tried to centralize a decentralized system. Ethereum has seen a number of hacks and security incidents as well. Last year’s DAO hack was traced to exploited loopholes in smart contracts written atop an established blockchain. More recently South Korea’s largest Ethereum exchange was hacked, and an Israeli startup’s initial coin offering (ICO) was hijacked when their website was hacked.
These issues all stemmed from vulnerabilities in systems connected to the blockchain, not within the blockchain itself. Blockchain’s underlying security and encryption model is a sound one. How that security is executed is a story for another feature.
So we’ve explained how the network functions and how security works, but how do the blocks actually connect to one another? Why does a blockchain get stronger the longer it gets? Where does the immutability come in? The Tapscotts’ explanation continues:
“Every ten minutes, like the heartbeat of the Bitcoin network, all the transactions conducted are verified, cleared, and stored in a block which is linked to the preceding block, thereby creating a chain. Each block must refer to the preceding block to be valid. The structure permanently time-stamps and stores exchanges of value, preventing anyone from altering the ledger… so the blockchain is a distributed ledger representing a network consensus of every transaction that has ever occurred. Like the World Wide Web of information, it’s the World Wide Ledger of value… This new digital ledger can be programmed to record virtually everything of value and importance to humankind: birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims, votes, provenance of food, or anything else that can be expressed in code.”
The concept of immutability is maybe the most crucial to understand when trying to wrap your head around blockchain and why it’s important. An object that once created can never be changed has infinite value in our editable, ephemeral digital world.
Harking back to the “strength in numbers” principle, the more nodes a blockchain is distributed over, the stronger and more trusted it becomes. It’s verification on top of verification to infinity. Bloq’s Garzik talked about how the network effect of blockchain is key to its immutability, and why it’s the reason the public Bitcoin blockchain is still the most popular and trusted blockchain out there:
“The immutability factor is very much dependent on the network effect,” said Garzik. “You see that with Bitcoin very specifically. The cost of creating a new digital asset is essentially zero. Therefore you have to demonstrate an overwhelming amount of value in overcoming that network effect if you want to convince someone to switch away from the Bitcoin blockchain, which not only has a good track record but high security value from a technical perspective. Security and immutability are a direct function of the economics—how much investment there is in the ecosystem, and how many people are using it.”