Blockchain 101: The Basics

By Carla Vercellone

As the first post in our new series on Blockchain technology, we will comment on the basics of blockchain, who participates in a blockchain network and how it works, and finally we’ll touch on the major cryptocurrency in the network, Bitcoin. Since its introduction in 2008 as the creation of a person, or group of people, known by the pseudonymous Satoshi Nakamoto, blockchain has grown and evolved into becoming the future of today’s internet and transactions.

What is blockchain?

The blockchain is a decentralized, shared, and immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, a car, etc.) or intangible (intellectual property, patents, copyrights, etc.).

  • Anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. Transactions made in bitcoin or other cryptocurrencies are recorded chronologically and publicly between two parties, being efficient and in a verifiable and permanent way.

A peer-to-peer (P2P) network like Blockchain is, according to the Oxford English Dictionary, a network in which each computer can act as a server for the others, allowing shared access to files and peripherals without the need for a central server.

How is it decentralized you may ask? Every participant is an “administrator” of the blockchain, joins the network voluntarily and thus, anything that happens on it is a function of the network as a whole. As opposed to traditional transaction (as seen below in a server-based network on Fig. 1) methods involving third parties, such as banks, in which every piece of information is stored and recorded by one entity, the central bank. A main characteristic of this decentralization is that information is continually managed and hosted by millions of computers simultaneously worldwide on a distributed database, making the data accessible to anyone on the internet.

p2p 2
Figure 1. Kologynski, Maria. “P2P”. Proyectoidis.org

Who participates?

To understand how Blockchain works, we need to first learn who participates in a blockchain network. The main participants of a blockchain network are (See Fig. 2 above):

  • User: A participant with permissions to join the blockchain network and conduct transactions with other network participants.
  • Node: A computer connected to the network.
  • Regulator: Individuals who oversee the transactions happening within the network, don’t have the authority to issue or control assets
    • Regulators simply receive blocks and view blockchain data.
    • Perform the duty of an observer, auditor, and/or analyst.
  • Developer: Creator of applications and smart contracts that interact with the blockchain and are used by the users.
  • Operator: Individuals who have define, create, manage, and monitor the blockchain network.
    • Businesses on a blockchain network have a blockchain network operator.
    • Determines who can participate in the blockchain, gather valid transactions from participants, etc.
  • Certificate authority: Manages the different types of certificates required to run a permissioned Blockchain.
  • Traditional Processing Platform: An existing computer system, such as Windows, Android, Apple OS X or iOS, Linux, etc., that may be used to augment processing or to initiate requests into the Blockchain.
    • There’s a mobile blockchain-enabled virtual operating system being developed now called “Nynja” that would allow the mobile device to combine communication and commerce in a single unified platform.
  • Traditional Data Sources: An existing data system which may provide data to influence the content and structure of smart contracts, as well as define how communications or data transfer will occur into the blockchain.

How does Blockchain work?

Figure 2 - Hash (blockchain)
Figure 3 – Gupta, Manav. Blockchain stores transaction records in a series of connected blocks. 2018. Graph. Blockchain for Dummies. Hoboken, NJ: John Wiley & Sons, Inc., 2018. 14. Print

In order for exchanges in today’s traditional transaction methods to take place, one of three things needs to happen: the individuals exchanging the item or data need to trust each other, engage in a legal contract, or involve third parties. Most of the time these exchanges are subject to several challenges, such as the time a customer waits between transaction and settlement, fraud and cyberattacks due to simple mistakes, the possibility of exposing the participants in the network to risk if the central system (i.e., a bank) is hacked or compromised, etc. On the other hand, Blockchain promises to facilitate the process of business transactions through tracking and trading of valuable assets in a shared, immutable network.

Blockchain owes its name to the way it stores transaction data —in blocks that are linked together to form a chain. As the number of transactions grows, so does the blockchain. Each block contains a hash (a digital fingerprint or unique identifier), timestamped batches of recent valid transactions, and the hash of the previous block. The previous block hash links the blocks together and prevents any block from being altered or a block being inserted between two existing blocks (Fig. 3 above). When a user requests a transaction (cryptocurrency, contracts, records, etc) in a network, said request must be validated by all the participants of the network to reach a consensus (Fig. 3 below). Once it has been verified, a block created with the new hash, the previous hash, and the transaction identifier (Fig 3 above), is added to the existing blockchain making it permanent, visible and unalterable. If the transaction were in error, a new transaction is made to reverse the previous one, and both transactions are visible to the participants, showing transparency in the network. All the nodes in the network check for errors in this transactions with the previous transactions correlated to the asset the user wants to transfer. When all transactions are finished, validated, and added to the blockchain, the transaction is complete.

how does it worl
Figure 4 – What is Blockchain Technology? A Step-by-Step Guide For Beginners. Digital Image. Blockgeeks. Blockgeeks, 13 September 2018. Web.

Key characteristics

What makes Blockchain different from other transaction systems are four key characteristics:

  • Consensus: As explained before, all participants of a network must agree for a transaction to be considered valid.
  • Provenance: Participants know where the asset came from and how its ownership has changed over time due to the trajectory of the asset in the ledger shown to the participant (Fig. 3).
  • Immutability: No participant can tamper with a transaction after its been recorded to the ledger.
    • If a transaction is in error, a new transaction must be used to reverse the error, and both transactions are then visible.
    • Transactions are combined into single blocks and are verified every ten minutes through mining[1]. The nature of this structure permanently timestamps and stores exchanges of value, preventing anyone from altering the ledger. If someone wanted to steal a Bitcoin, for example, they’d have to rewrite the coin’s entire history on the blockchain in broad daylight and “fake” all the participant’s consent.
  • Finality: A shared ledger provides one place to go to determine the ownership of an asset or completion of transaction; facilitating information to users in an open network rather than using intermediaries like banks, ports, etc. The accessibility of the blockchain during and after its creation is determined by the blockchain operator and/or the smart contracts associated with the network.

Bitcoin vs Blockchain: Difference

Although most people have heard of the Blockchain’s biggest cryptocurrency, Bitcoin, some still confuse both terms as interchangeable. Blockchain is a database that is simultaneously stored on a set of computers connected to each other on the Internet where each transaction is written down and safely stored; along the lines of an operating system like Microsoft Windows. On the other hand, Bitcoin is a digital currency, created and operated only on the Blockchain network; a similar example can be an application running on an operating system, such as Skype on Microsoft Windows.

 

Next in this blog series on blockchain, we will explore the application of blockchain in Intellectual Property, explaining its role in the field of IP, determining the classes and subclasses of blockchain technology-based patents, and many other topics.


Sources:

 

[1] Mining: Confirmation process. “Cryptocurrency Glossary”. Blockchain Support Center.

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