An Introduction to Blockchain

An Introduction to Blockchain

author: xiekch

What is blockchain

Blockchain a distributed database which has the characteristics of decentralization, persistency, anonymity and auditability.

Bitcoin

Blockchain is first proposed in Bitcoin. In traditional digital currency, there exists double-spending problem with the payee that he can’t verify the owners did not double-spend the coin. A trusted third party is required to prevent double-spending.

But in the other hand, if we know all the transactions of the coin owner, we then can verify if he double-spent the coin. I think the highlight of Bitcoin is to make all transactions public and keep the transactions consistent. Consensus mechanisms are the key parts in blockchain.

Blockchain architecture

First, let us have a look at the architecture of blockchain.

A blockchain is a sequence of blocks, which record the information like transaction. Each block points to the immediately previous block by storing a hash value of the previous block. So if you want to change a transaction in a previous block, you have to change all the blocks after it.

The transaction is somehow like a chain with cryptographic proof. An electronic coin is a chain of digital signatures. To transfer the coin to others, the owner must sign a hash of previous transaction of the coin and the public key of the next owner with his own private key. To check whether the coin is double-spent, we can go through the transaction chain and verify it. Therefore, the double-spending problem is avoided if we find the transaction is not valid as long as our records are trusted.

Consensus mechanisms

However, what if the records of transactions are not so trusted. Let us suppose Alice finds a transaction is invalid in her records but Bob says that it is valid according to his records, which records to believe? We don’t often have the problem in reality for we always have some trusted third parties like banks. But it is under a decentralized environment now. Well, we can say, let us vote, if more than half of the people think it true then it is, and vice versa.

But it is flawed. If Bob calls a large number of people nobbled by him to vote for him, what will happen? Obviously, if the dishonest people participating the vote are more the honest people, a record will be accepted even if it is false. It is known as Sybil attack. It is the same in Bitcoin. Although in Bitcoin, you can only revise your own past transaction to steal back the money you have spent, it is still unacceptable in a financial system. It is vital for Bitcoin to ensure the chain is so hard to change or almost impossible.

Consensus mechanisms work for it. A good consensus mechanism can outpace attackers and make the system strong and healthy.

Bitcoin proposed proof of work (PoW) strategy. Instead of one-account-one-vote, it uses one-CPU-one-vote. By incrementing a nonce in the block, we can require the hash value of the block to satisfy some requirement, such as beginning with a number of zero bits, which required work growing exponentially with the number of zero bits. As a majority of CPU power is controlled by honest people, the honest chain will grow the fastest. The principle of Bitcoin is to believe the longest chain is the correct one. With incentive, computing nodes keep working on extending the longest chain and are encouraged to stay honest.

To modify a block , you need to change all blocks after it, which is almost impossible while the longest honest chain keeps growing. It provides the property of immutability of blockchain.

As PoW is very electricity-consuming, some energy-saving alternative consensus mechanisms were proposed. In proof of stake (PoS), the selections are based on account balance since it believes people with more currencies are less likely to attack to network.

Practical Byzantine Fault Tolerance (PBFT) uses replication to ensure its consensus and are permissioned. Each node can be selected to determine the new block in a round if it has received votes from over 2/3 of all nodes.
But in delegated proof of stake (DPOS), nodes elect their delegates to generate and validate a block where a block is confirmed quickly with fewer nodes to participate.

Applications

Blockchain can be divided into three main types: public blockchain, private blockchain and consortium blockchain. Public blockchain is open to all. Consortium blockchain is permitted for a selected set of nodes while private blockchain is totally controlled by one organization.

Different types of blockchain have different applications. For public blockchain, it can be applied to P2P digital currency system like Bitcoin, smart contracts like Ethereum. For consortium blockchain, it can be applied to product traceability and asset-backed securities. As it is much quicker and cheaper in private blockchain, it can be used for audit and identity authentication in financial organizations.

Blockchain is very attractive and has shown much potential recently, but it is still hard to land in reality. Many people believe its potential for transforming the traditional industry with its key characteristics in the future.

References

[1] Nakamoto, S. (2008). Bitcoin: A peer-to-peer electronic cash system.
[2] Zheng, Z., Xie, S., Dai, H. N., Chen, X., & Wang, H. (2018). Blockchain challenges and opportunities: A survey. International Journal of Web and Grid Services, 14(4), 352-375.