‘Commerce on the Internet has come to rely almost exclusively on financial institutions…While the system works…it still suffers from the inherent weaknesses of the trust based model’. The year was 2008, Satoshi Nakamoto, the creator of Bitcoin announced to the world that they have solved this weakness in their paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. Unbeknownst to them, the following pages would set off a chain reaction that would revolutionise the world of finance and economics.
History
The first resemblance of modern blockchain technology was proposed in 1991 by Stuart Haber and W Scott Stornetta as a method to securely timestamp digital documents. They discovered that it is possible to use hash functions (a key idea adopted later in Bitcoin) to string together time stamped documents such that it is computationally infeasible to forge the date. Later in 1997, Adam Back, the author of Hashcash, invented the proof-of-work system that would become a fundamental component of Bitcoin and modern blockchains. Interestingly, Hashcash was not a blockchain or cryptocurrency, it was an idea proposed to discourage email spam. The idea was to attach a mathematical puzzle that needed to be solved in order to send an email. This reasoning is that for a spam emailer, the cost associated with sending millions of emails would increase exponentially. Building on these two ideas, it wasn’t until 2009 when Nakamoto introduced and implemented the first widely recognised and adopted blockchain, Bitcoin. Bitcoin’s ambitious goal was to create an electronic payment system that removes the need for a trusted third party. A feat that prior to Bitcoin has never been successfully achieved.
Since then, blockchain technology has progressed rapidly. There now exists thousands of cryptocurrencies ranging from Ethereum ‘the world’s most programmable blockchain’ to the infamous Dogecoin. Innovation in blockchain technology has also enabled the invention of NFTs which has revolutionised the way digital art and media is shared and owned. As well as the creation of new industries, most notably decentralised finance (DeFi), which aims to upheaval the financial services industry by simply removing them from the process entirely.
Moreover, governments all around the world have come to accept and embrace its existence.
Venezuela has their own government issued cryptocurrency called the Petro and in 2021, Bitcoin became legal tender in El Salvador. In addition, Ukraine and Russia have the highest number of cryptocurrency owners as a percentage of its population. A fact that is unsurprising given the fragility of their currency and raging war that is happening as we speak.
Given the increasing popularity and adoption of blockchain, naturally, one might ask: what is a blockchain?
Hashes, Blocks, and the Subsequent Chain that Connects Them
To develop an intuitive understanding of what blockchain technologies are, we should start with the smallest unit of a blockchain—blocks. A block is a piece of secured data, it contains pieces of information that range from words, sentences, books, numbers, financial transactions (in the case of Bitcoin), or even entire computer functions and programs. For simplicity, let us assume that these pieces of information are A, B, and C.
To secure the contents of the block, we use cryptographic hash functions to take these pieces of information as inputs and return a unique string of characters of fixed length as the output. Regardless of whether your input is a single letter like in our case, or the entire Oxford dictionary, the output, which we call the hash, will remain of fixed length. Additionally, any changes made to the input will generate an entirely new unique hash. For example, inputs A, B, D will have a completely unique hash with no correlation to that of A, B, C. This property is known as the Avalanche Effect, which describes how a small change in the input will result in a large change in the hash output.
Hash functions are unique because it is computationally infeasible to deduce the data input from a given hash. In addition, identical data inputs will produce an identical hash, analogous to fingerprints of digital data.
This explains the core idea of a block: data that is secured using hash functions. Security in this context refers to the way in which hash functions allow us to verify the integrity of a block’s data, that is, if any changes were made the hash would change. To form a blockchain, all blocks must contain a special data input called PrevBlockHash. The PrevBlockHash as the name suggests, contains the hash of the previous block and together with the data in the current block, generates a new hash. It is this specific feature that links blocks together forming a basic blockchain. Furthermore, this adds integrity and immutability to the blockchain as any alterations made to a block will not only change the hash of the altered block but also all subsequent blocks.
What’s Next?
So far, we have looked at a basic blockchain and its elements in isolation, meaning we have yet to examine the most well-known feature of blockchain technology, decentralisation. In part 2 of this series, we look to cover the core concepts that transports this basic blockchain to a distributed network and the challenges that arise from doing so. Before then, I would like you to imagine yourself as a one of four generals that has an enemy fortress surrounded. To successfully take down the fortress, you and all other generals must agree to attack simultaneously. However, in the absence of secure channels of communication, how can you ensure that you all attack in unison?
References:
Back, Adam. (2002). Hashcash – A Denial of Service Counter-Measure.
Brownworth, A. (n.d.). SHA256 Hash
Ethereum.org. (n.d.). Decentralized finance (DeFi).
Ethereum.org. (n.d.). Non-fungible tokens (NFT).
Ethereum.org. (n.d.). What is Ethereum.
Haber, S., & Stornetta, W. (1991). How to time-stamp a digital
document. Journal Of Cryptology, 3(2), 99-111. doi:
10.1007/bf00196791
Krygier, R. (2018, February 20). Venezuela launches the ‘petro,’ its
cryptocurrency. The Washington Post.
Nakamoto, S. (2008) Bitcoin: A Peer-to-Peer Electronic Cash System
PricewaterhouseCoopers. (2021). El Salvador’s law: a meaningful test for
Bitcoin.
tripleA. (n.d.). Cryptocurrency across the world.