What is blockchain?

 

Since 2017, blockchain has often been put forward as the miracle solution to all the world’s ills. At that timeThe hype was at its height, and blockchain projects were springing up by the thousands, driven by the ICO phenomenon. However, many people talk about blockchain without really understanding what it’s all about. In this article, we attempt to explain blockchain as simply as possible, its basic principles and how it works, to arrive at the most commonly accepted definition: an “immutable database”.

As an example of innovation in blockchain, the Solana platform stands out for its speed and efficiency, offering a robust infrastructure for dApps and large-scale transactions.

What is blockchain?

 

It’s impossible to talk about crypto, miners or mining without mentioning the famous blockchain. It plays a key role in the world of virtual currencies. But blockchain’s applications are much broader than just cryptocurrencies, since it can be used to trace all kinds of assets and products. It can therefore be used by organizations and companies in many sectors: energy, finance, healthcare, entertainment, commerce… It is then used for certifications, hedge funds, food product traceability…

 

Before discussing how how blockchain workshere’s a reminder of its definition and all the basic information you need to know about this system.

 

Blockchain: definition

 

What is blockchain? To sum up blockchain simply and concisely, it’s a virtual network for storing and exchanging value (bitcoin, for example), without intermediaries, in complete security. All transactions are recorded in an unalterable way.

 

Of course, the in-depth definition of this technology inseparable from cryptocurrencies is actually more complex.

 

Why blockchain?

 

A blockchain is a digital ledger that uses cryptographic methods to structure data into blocks. Each operation within a blockchain is called a transaction and is triggered by users, whether it’s a simple, conditional transaction, or the call of a function in a smart-contract.

 

A unique digital fingerprint of each block is generated via a hash that represents all the information it contains. This hash is copied to the block that follows. Each block is thus cryptographically linked to the next, hence the name “block chain”.

 

So, if any data is modified, the digital fingerprint of that block changes, impacting all the digital fingerprints of subsequent blocks. This means that you’re instantly aware that a piece of information has been modified. This brings security to cryptocurrencies, an essential element since there is no intermediate trusted third party, such as a bank, to control transactions. A blockchain network can track transactions (orders, payments), but also accounts, crypto creation… transparently. All information recorded on the blockchain can be seen by all users.

 

Blockchains are therefore tamper-evident registers. This means that if a piece of information is modified, everyone knows about it. However, this does not guarantee that the information cannot be modified.

 

To reach the tamper-proof level, i.e. an immutable register where information cannot be modified, more complex mechanisms must be introduced in terms of consensus mechanism.

 

 

 

How does blockchain work?

 

The blockchain is much more than a database or a succession of lines of code. Within the blockchain, each transaction is recorded in the form of a block. This is done by miners. It’s a chained system. Each block contains information about the transaction in question, such as its timestamp. Each new block reinforces the security of the previous one. They thus form a secure data chain. It is not possible to insert new blocks between two others already created.

 

By definition, a blockchain is a member of the distributed ledger family, and exists in several copies. The ledger is distributed among different actors, who can eventually take part in validating transactions by adding blocks to the blockchain they are participating in. As the book is shared, this ensures that transactions can only be recorded once. This prevents duplication of tasks.

 

In a private or consortium blockchain, all validators are known and chosen. This is known as Proof-of-Authority. This is a simple mechanism in which the various players place a high degree of trust in the other players on the network.

 

While this may make sense depending on the use case, the direct consequence of this architecture is that a coalition of validators gives them significant power to modify the state of the blockchain and the data it contains, without anyone being able to stop them. This may be the result of top-down pressure from a government or regulator, for example. The changes will, however, be visible to all players who have a copy of the blockchain. Once data has been recorded in the shared ledger, no actor on the blockchain can alter it without it being visible. If an error occurs on a transaction, it cannot simply be modified. A new transaction must be created to correct it. Both transactions, the one with the error and the one used to correct it, remain visible on the blockchain.

 

In order to make a blockchain tamper-proof, it is essential to introduce a mechanism that ensures that the identity of all validators is not known, and that the cost of modifying the data in a block is as high as possible. This is the role of the Proof-of-Work or Proof-of-Stake consensus mechanisms found in public blockchains.

 

We won’t go into the details of Proof-of-Stake in this article. For more details, please consult the article on Tezos also written by Coinhouse.

 

Blockchain is based on a number of technologies. Although it first saw the light of day in its current form in 2008 with the birth of bitcoin, created by Satoshi Nakamoto, the idea was not new. This technology was in fact already mentioned in the work of Stuart Haber and W. Scott Stornetta in 1991. Bitcoin, which popularized blockchain, is an improved version of the b-money concept, conceived in 1999 by Wei Dai, and of bitgold, developed by Nick Szabo in 2005.

 

Why does sufficient proof of work bring immutability to a blockchain?

 

Proof-of-Work allows you to define an amount of work to be carried out by allocating energy resources in the form of electricity. This amount of work is relative to each block and is defined by the mining difficulty. A validator – called a miner – who has provided proof of work for a given block can broadcast the block to the rest of the network, which will quickly check the block’s validity. He will be rewarded for his work through the monetary creation of the block and the sum of the transaction fees. If the block is invalid, then his work is lost, and he will have wasted money by using energy resources for nothing.

 

Let’s analyze the possibilities open to an attacker to take advantage of Proof-of-Work. We’re talking about 51% attacks.

 

Modifying past transactions

 

To modify a transaction recorded in a past block, it is necessary to recalculate the fingerprint of the block containing it, as well as all the fingerprints of blocks generated since then. The difficulty, computing resources and, ultimately, power consumption required to modify the blockchain therefore increase in proportion to the age of the transaction to be modified.

 

So, if an attacker wishes to modify a transaction that has been included 60 blocks in the past, i.e. around 10 hours, he will have to recalculate the fingerprints of 60 blocks, bearing in mind that the proof of work required by the entire mining network to create a fingerprint is 10 minutes, on average.

 

Meanwhile, the rest of the network continues to create new blocks. The attacker will need to catch up with and then overtake the existing mining network in terms of computing power, so he will need at least 51% of the total computing power, hence the name “51% attack”. This level of computing power must be maintained until the attack is successfully completed.

 

It is estimated that the attack described above to go back ten short hours in time would cost between six and ten million dollars on the Bitcoin network if the necessary IT infrastructure were already in place. This has never been achieved in the ten years of Bitcoin’s existence, as the benefits are too small in relation to the cost of the attack.

 

Proof-of-Work guarantees the immutability of the Bitcoin blockchain.

 

Modification of current transactions

 

It is easier to start from the last block created. The attacker will then only have to modify future transactions, not past ones, but these attacks remain extremely costly on the Bitcoin Blockchain and require colossal computing resources to obtain over 51% of the computing power.

 

While this type of attack has been observed on minor blockchains such as Ethereum Classic, an actor holding more than 51% of the computing power on Bitcoin would have no interest in launching this type of attack, as the reward he could gain by duping marketplaces would be less than the cost of executing the attack, and harmful to the value of Bitcoin, the asset that remunerates his activity.

 

Types of blockchain

 

Are all PoW public blockchains equal in terms of immutability? Of course not.

 

The level of security of a public Proof-of-Work blockchain depends directly on the difficulty of finding the necessary proof-of-work. The two most secure and immutable blockchains are Bitcoin and Ethereum, which account for the majority of mining power.

 

Why a block structure?

 

Apart from the usefulness of a blockchain as a tamper-evident register, the block structure makes sense for a distributed system. All copies of the blockchain, known as nodes, must be synchronized in order to work on the same version.

 

The interval between blocks must be long enough to ensure that newly mined blocks are distributed. It is estimated that it takes 12 seconds for blocks to be propagated to 95% of the nodes on the Bitcoin network. When you hear about block times of just a few seconds on so-called public blockchains, ask yourself the right questions.

 

Sidechains, the private blockchain without the drawbacks?

 

More and more projects are turning to the use of Sidechains. Liquid Bitcoin and POA Network for example. This type of architecture is interesting because it creates bridges between private Proof-of-Authority blockchains (with a very low blocktime, shared between a small, controlled number of players) and public blockchains.

 

In particular, this makes it possible to sequester funds on the public blockchain in order to create a representation of them on the sidechain. In this way, you can share secure, market-renowned securities such as BTC on less secure but potentially faster networks, with the assurance of recovering your funds on the public blockchain in the event of an attack on the sidechain.

 

By adding digital fingerprints of sidechain blocks to the public blockchain, it is possible to facilitate verification of fingerprint accuracy forever.

 

Differences between Bitcoin blockchain, Ethereum blockchain and others

 

Bitcoin and Ethereum are the best-known cryptos in the virtual currency world. There are fundamental differences between their blockchains and the way they operate.

 

Bitcoin blockchain:

• Based on Proof of Work;
• Has a limited number of tokens it can issue (21 million coins);
• Does not yet support smart contracts, although projects are being developed in this direction;
• Belongs to a fully decentralized network;
• Can generate a new block every 10 minutes.

 

Ethereum blockchain:

• Previously based on Proof of Work, Proof of Stake is increasingly used;
• Does not have a limited number of issuable tokens;
• Can integrate turing complete smart contracts into its code;
• Belongs to a decentralized network, but its developers, as well as the Ethereum Foundation, have a strong power of influence;
• Can generate a new block every 12 seconds.

 

Other blockchains operate differently. For example Litecoin:

• Based on the Proof of Work, but in a different version than Bitcoin (it uses the Scrypt hash function);
• Has a limited number of tokens it can issue (84 million coins);
• Has a mining difficulty that changes every 2.5 days, compared to two weeks for Bitcoin);
• Does not yet support smart contracts;
• Belongs to a decentralized network ;
• Can generate a new block every 2.5 minutes.

 

Public or private blockchain: what are the differences?

 

Every cryptocurrency has its own blockchain, but as we’ve seen, this technology isn’t exclusive to the world of crypto-based financial transactions. To fully understand blockchains, we need to differentiate between the different possibilities: private, public, permission-based or consortium blockchains.

• The public blockchain network: anyone can join. It requires powerful equipment to solve the calculations. It also implies total transparency, which limits the confidentiality of transactions. It is therefore not recommended for companies or private players with high confidentiality requirements;
• The private blockchain network: this is a decentralized, peer-to-peer network. Not everyone can join. Participants and their actions are controlled by the person who created the blockchain;
• The permission-based blockchain network: a company can set up a private blockchain. To join, an invitation is required. It decides who is authorized to participate and applies specific restrictions on the possible actions of different participants;
• The consortium blockchain network: management is shared between several organizations. They determine which participants can join, and which data they can access.

 

How is blockchain regulated in France?

 

The Order of April 2017, by amending Article L 223-12 of the Monetary and Financial Code, provides a legal definition of blockchain in France. It defines it as a “shared electronic recording device enabling the authentication of specific securities transactions, intended to be exchanged on participatory finance platforms: minibons”. In December of the same year, another ordinance was passed to enable the transfer of ownership of various financial securities using blockchain. At European level, the situation also seems to be moving towards greater acceptance of blockchains and cryptocurrencies. In 2022, the European Commission is due to submit the MiCA directive, concerning cryptoasset markets. This directive aims to authorize certain cryptocurrencies within the European Union.

 

In short, a blockchain is nothing more than a way of ordering data on a distributed network. Blockchain in itself does not provide all the answers needed to create a system as robust as Bitcoin. It needs to be linked to other mechanisms, such as Proof-of-Work and certain cryptographic methods, in order to make the most of its possibilities, defining a new level of security for digital data. This type of architecture opens up extremely promising possibilities for data management and value sharing on the Internet.