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Take a monthly guided tour through the maze of virtual currencies and digital technologies with Crypto Mike: Part 1:What is Blockchain?

  • April 22, 2022
  • 3 min read
Take a monthly guided tour through the maze of virtual currencies and digital technologies with Crypto Mike: Part 1:What is Blockchain?

Blockchain is an ever-growing, secure, shared recordkeeping system in which each user of the data holds a copy of the records, which can only be updated if all parties involved in a transaction agree to update.

Blockchain is the technology at the heart of Bitcoin (BTC) and other digital assets. It is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.

There are five fundamental principles underpinning this technology. Distributed database: Each party on the blockchain has access to the entire database and its complete history. No single party controls the data or the information. Every party can verify the records of its transactions directly, without an intermediary.

Peer-to-peer (P2P) transmission: communication occurs directly between peers instead of through a central node. Each node stores and forwards information to all other nodes. Transparency with pseudonymity: every transaction and its associated value are visible to anyone with access to the system.

Each node, or user, on a blockchain has a unique 30-plus-character alphanumeric address that identifies it. Users can choose to remain anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses. Irreversibility of records: once a transaction is entered into the database and the accounts are updated, the records cannot be altered, because they’re linked to every transaction record that came before them (i.e. hence the term ‘chain’). Various computational algorithms and approaches are deployed to ensure that the recording on the database is permanent, chronologically ordered, and available to all others on the network.

Computational logic: the digital nature of the ledger means that the blockchain transactions can be tied to computational logic and, in essence, programmed. So users can set up algorithms and rules that automatically trigger transactions between nodes.

Blockchain acts as a layer of a distributed P2P network running on top of the internet (see Figure 1 below). It is analogous to Simple Mail Transfer Protocol (SMTP), Hypertext Transfer Protocol (HTTP), or File Transfer Protocol (FTP) running on top of the Transmission Control Protocol (TCP)/Internet Protocol (IP).

A generic blockchains consists of three main elements: Address: addresses are unique identifiers used in a blockchain transaction to denote senders and recipients. An address is usually a public key or derived from a public key. Transaction: a transaction is a fundamental unit of a blockchain. A transaction represents a transfer of value from one address to another.

Block: a block is composed of multiple transactions and other elements, such as the previous block hash (hash pointer), timestamp, and nonce. A block contains five elements:

A reference to a previous block is also included in the block unless it is a genesis block. This reference is the hash of the header of the previous block.

A nonce is a number that is generated and used only once. A nonce is used extensively in many cryptographic operations to provide replay protection, authentication, and encryption. A timestamp is the creation time of the block.

Merkle root is a hash of all of the nodes of a Merkle tree. In a blockchain block, it is the combined hash of the transactions in the block. A transaction is a record of an event, for example, the event of transferring cash from a sender’s account to a beneficiary’s account.

Michael Borrelli

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