How Blockchain works

How Blockchain works

It is not an exaggeration when it is said that the Internet changed our lives. Who could have imagined that after MIT researcher Lawrence G. Roberts achieved in 1965 connecting two computers via a switched telephone line, the world would change radically? Today, many technologies have revolutionized the way we communicate and work; one of them is Blockchain.

Surely you have heard a lot about this technology, but it is likely that you still do not know well what it is about or why it is revolutionizing the global economy.

Blockchain Code

Blockchain is the technology that underpins Bitcoin, the largest and most famous cryptocurrency so far. It became known in late 2008 when Satoshi Nakamoto published the study Bitcoin P2P e-cash. This was an electronic money system that was independent of intermediaries.

Today, Bitcoin is not the only cryptocurrency out there. After it, many others were created called ‘Altcoin,’ including Litecoin and Dogecoin. Currently, one of the cryptocurrencies that have a strong position, just behind Bitcoin, is Ether. These digital currencies have something in common: they are supported by the Blockchain.

What is Blockchain?

Blockchain in Spanish means a chain of blocks. It is a system with which you can make secure transactions between people worldwide without the need for intermediaries.

Marc Andreessen, the creator of Netscape and partner at Andreessen Horowitz, one of the largest Private Equity funds in Silicon Valley, has defined Blockchain technology as a registry, that is,

    a ledger of digital events that is shared between different parties.

Blockchains can only be updated by the consensus of the majority of the system participants, which are called nodes and are essentially computer-ready for these transactions. This information can never be erased or modified, so the Blockchain is presented as an immutable and permanent record.

Blockchain was born out of the need to eliminate intermediaries such as banks in the case of financial operations. These institutions are necessary to make transactions of value because they certify that we are who we say we are. In exchange for providing us with this service, banks or electronic platforms such as PayPal keep user data and trade with them. This restricts privacy and, with it, freedom.

Blockchains came to change this. And it is that with this technology, it is not a single participant who has the information but millions. It is a large database in which many nodes keep a copy of the information. Blockchain bases the certification of consensus information; if we all have the same information, it means that that information is true.

Each transaction that is made is added as a block to a chain. Therefore, the records are linked and encrypted to protect both the security and privacy of transactions. This also means that such transactions are anonymous. That is, the system only knows that you want to transfer a certain amount to another, but the data of the people is not known.

How Blockchain works

Now that you know what the technology is, you should know how it works. The process is not complicated, but it involves more people. It is no longer the bank where you must certify the transactions but a group of users.

Everything starts when A wants to make a transaction for B. In the network, this transaction is represented as a block. This is transmitted to all parts of the network, that is, to the connected nodes, so that they approve its validity. Once this is done, the block can now be added to the chain, becoming a transparent and memorable record. Finally, the money moves from A to B.

In this process, the nodes confirm that whoever wants to make the transfer has sufficient funds to do so. If so, everyone ‘notes’ the transaction and certifies that it can become part of the block of transactions. This block is going to get bigger to the point where it no longer supports any more transactions.

Basic concepts

    The Blockchain is a database distributed among the participating nodes in the Blockchain network.

    Said distributed database contains transactions signed with public-key cryptography, thus allowing access to the information contained therein to be identified.

    To save information in the database, a consensus algorithm will be applied to execute the mining nodes. When the mathematical problem is solved, the block obtained will be issued to the rest of the nodes, “chaining” itself to the chain existence. Each of the blocks contains the signed transactions.

    The mining nodes that manage to upload a block receive a reward in the form of cryptocurrencies (both for the block and for the transactions contained in it).

    The most popular implementation of Blockchain is Bitcoin, a protocol that allows the sending of transactions between addresses (hash of the public part of the key) using the homonymous cryptocurrency.

    The media impact of this technology is based on the following detected advantages:

        Third parties are eliminated (decentralization)

        Increased transparency


Elements that define a Blockchain

The elements that define a Blockchain are the following:

    Public key cryptography: Also known as asymmetric cryptography, it uses the elliptic curve implementation to improve performance over traditional implementations such as RSA. In this way, the authenticity of the issuer of the transaction is validated by all the network nodes. For the most popular implementations (Bitcoin and Ethereum), this validation is carried out by comparing the sender’s public key with the signed element with his private key (the element to be signed is a “hashed” version of the transaction).

    Distributed database: Each node fully replicates the database by joining the corresponding Blockchain network (currently working on an “approach” related to historical management). This replication process synchronizes all the blocks in the chain. Once synchronized, the node will start operating normally on the network (cryptocurrency balance, sending, and receiving transactions). It is important to note that the database is made up of blocks. Until a transaction is confirmed by including it in an accepted block, the transaction itself is not considered valid on the Blockchain.

    Consensus algorithm: the feature that makes the difference between other distributed systems and Blockchain is the consensus algorithm. This algorithm encourages participation by sending rewards to the miners in charge of creating the blocks.

The most prominent ones at the moment are the following:

    Proof-of-Work is the most widespread algorithm used by Bitcoin and the stable version of Ethereum and is oriented to public networks.

        It is based on the generation of a hash taking into account the Merkle Root (the hash root of the tree that takes in pairs the hashes of the transactions to include in a block), the hash of the previous block, the time, the difficulty and the nonce (“Unique value”).

        The miners combine the values to generate a hash with N 0s (in the preparation of this presentation, the value of N for Bitcoin is 18).

        The protocol modified the value N to fit with the average block upload times (10 ‘for Bitcoin, 15″ for Ethereum).

        Once the correct block hash is generated, it is sent to the rest of the network. The acceptance of said block is achieved when the miners in the network begin to use the said hash as the value of the previous block.

        In exchange for the uploaded block, you get a reward per block and transactions. Suppose a hash solution is reached but fails to become the new block in the chain (because someone else has achieved it before). No reward will be obtained in Bitcoin but Ethereum (orphaned blocks and uncles).

    Proof-of-Authority: the algorithm used by Ethereum for managing private networks.

        The cost of PoW does not make sense in private networks where all parties are known.

        Authorities are defined to speed up the uploading of blocks and their transactions, one for each party involved.

        Each authority has a private key on the network that allows transactions to be signed. The public part of it is distributed to the rest of the authorities.

        When a transaction is issued, the sender’s signature is validated and included in a block that goes up “immediately.”

        In this way, times are exponentially reduced, based on predefined confidence.


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