A Technical Dive into Blockchain

Because digital ubiquity raises more and more concern for decision-makers to be able to thrive and adapt their businesses to emerging trends and shifts in consumption habits, new technologies have to be well apprehended. Blockchain, as a matter of fact, is a new enabler that must be understood properly when considering an innovation strategy for your company.

First of all, there are different types of blockchain but the general idea behind them is the same. Mainly, they aim to solve trust issues between strangers willing to exchange value in the digital world. Secondly, even though we can distinguish several kinds of blockchain such as public or semi-private infrastructures (more on that in Chapter 9, Infrastructures and Cloud-Based Solutions), they all integrate similar components.

Throughout this chapter, we will discover how the network...

No network, no blockchain

A blockchain's most important component is the network—which is the community empowering it. The role of the community is to ensure that the truth is correctly recorded in the shared database.

The following diagram is an overview of a blockchain layer:

To understand this in a better way, let's look at a metaphorical example.

Truth in the network

Imagine a US Open final is happening next weekend between Roger Federer and Rafael Nadal. Being a big fan of Roger Federer and being sure he will win the game, Alice bets $10 on the betting website Betwin. On the other hand, Bob, who is an experienced gambler, thinks that Rafael Nadal will win. Bob decides to place a $10 bet on the Betwin platform...

Cryptography

We talked about cryptography and hash functions in the first chapter where we defined what it was:

It is a mathematical function where, knowing the output, it is almost impossible to find the correct input. But knowing the input of the function, it is very easy to find the correct output. This is made possible because a hash function always returns the same output for the same input.

A hash is a result of a mathematical function that is a transformation applied to an input that generates an output. Y = f(x) is a mathematical function where x is the input and Y is the output.

In mathematical terms, we have the following:

"Knowing Y, it is almost impossible to find x. But knowing x, it is very easy to find Y."

The hash function is essential to make information and transactions secured along the blockchain.

There are basic properties around a hash function...

Understanding the data structure

A blockchain can also be defined as a sequence of blocks containing data that are chained together. There are two types of data:

• Transactions
• Block information (also called metadata)

The transaction section is built by gathering all of the transactions that happened in a certain period of time and gathered in the block. If I send you one Bitcoin, this transaction will be part of the transaction section. Three fields are consistently active:

• The recipient
• The sender
• The amount

When I send you one Bitcoin using the Bitcoin blockchain, the transaction is composed as follows:

• The recipient is your account (your Bitcoin address).
• The sender is my account (my Bitcoin address).
• The amount is 1 Bitcoin.

An example of a Bitcoin address is 3QSuhbsJUZJRgYX965CwMHgsdaU8KuTg4H.

Once all of the transactions are filled in the block, the block is hashed...

Creating identities

Most of the time, to use a service online, you must create an account with the organization that provides the service. If you want to use a social media application or create a bank account, you need to provide information on yourself for the organization to grant you access. This is the centralized model: identities are stored and managed on one central organization's servers. This is totally incompatible with the concept of blockchain that promotes decentralization to achieve mass-coordination without a central entity.

So, how do we create identities that are not controlled by any third party in that kind of ecosystem?

Securing identities using blockchain

In a blockchain, the person who sends the digital...

The Byzantine Generals Problem

In the following chapters, we will start addressing more business-oriented topics. Until then, I should provide you with some context on the whys and wherefores of blockchain and go back to where it all started, with the Byzantine Generals Problem.

The Byzantine Generals Problem is a real-life analogy for computer science that was expressed and partly answered in 1982 by Leslie Lamport, a famous American scientist and Turing Award winner, who raised the following question: how can you achieve a consensus in the presence of traitors or faults? Translated to the computer science world, this means: how can you achieve consensus in a distributed system where some computers may be malfunctioning or give conflicting information? This is how the issue came to be illustrated and known as the Byzantine Generals Problem.

The following diagram...

Understanding the consensus protocol mechanism

As stated before, for the miners to validate a block and, hence, the transactions, they have to solve a mathematical problem. To solve it, there is a need for a specific resource. In Bitcoin, the resource is computing power. The more computing power a miner has, the faster he/she can solve the mathematical problem, therefore the faster he/she completes a block and the more likely he/she will receive Bitcoins as a reward. This mining process is called proof-of-work and is inherent to Bitcoin. It is a protocol that all of the miners of the Bitcoin blockchain should follow to demonstrate that they have done an appropriate work for validating the transactions. This ensures a selection process in which every miner uses computational power to find the correct nonce that will return a hash starting with a predefined number of zeros....

Summary

All in all, a blockchain is the combination of several instruments that come together to provide an infrastructure to exchange digital value and assert the truth without the need of a central entity.

As discussed throughout this chapter, a blockchain is composed of a network of users, nodes, and miners that respectively send/receive, store, and validate transactions. Cryptography (and more specifically hash functions) is used in this configuration to create an output (a hash) that refers to any kind of digital information, for example, to refer to a batch of transactions. Blocks cluster these transactions and include metadata associated with the block itself such as the previous hash, the timestamp, and the nonce. Public and private keys provide a way to efficiently manage identities in the digital world and more specifically in the network. In a blockchain...