Blockchain, the underlying technology of bitcoin, has been a buzz word and irreversible trend and has the potential to reshape human society.

What is blockchain?

Technically speaking, blockchain is an ever-growing append-only chain of blocks, where blocks are chained together by cryptographic guaranteed hashes. In every block are the transaction items and other extra information.

Blockchain is a concept from bitcoin paper by bitcoin founder Satoshi Nakamoto. In bitcoin paper, it uses "chain of blocks" or block chain instead "blockchain". The idea of blockchain first appeared in a research paper "How to Time-Stamp a Digital Document" by Stuart Haber and W. Scott Stornetta. In the paper, it introduced the notion of "chain of time-stamps" similar to our current definition of blockchain. Blockchain is a combination of three technologies - cryptography, distributed ledger technology (DLT), and Consensus.

Some key features are out of the combination, marking the uniqueness of blockchain, the core being immutability, which could have a profound influence on social structure, monetary and financial system, government governing philosophy, value definition, and more. Blockchain technology is the backbone to transforming our trust from trusted third parties to trust machines. Blockchain technology is the backbone for the value network that solves the problem of double-spending without the need for trusted central authority.

Key features of blockchain 

Immutability. With blockchain, it is the first time in history that humanity has the ability to keep records permanently. this feature gives us the feeling of "eternality". On the blockchain, the record is undeniable and tamper-proof. Immutability is blockchain’s most important feature. With immutability, blockchain makes trustless applications a reality.

Decentralization. Blockchain's node can be everywhere. As nodes are distributed globally, it avoids a single point of failure.

Consensus. It is the economic incentive to make miners do the right thing. It is, in essence, a reward mechanism to reward those who contribute to the security of blockchain, thus making the blockchain network more robust with time. For the bitcoin network, it uses proof-of-work (PoW) consensus to solve probabilistically long-last Byzantine Generals' Problem in distributed systems. As Satoshi said, “The proof-of-work chain is a solution to the Byzantine Generals' Problem...The proof-of-work chain is how all the synchronisation, distributed database and global view problems you've asked about are solved.”

Permissionless. The blockchain network is open to everybody. Everybody can join or leave the blockchain network as a node without any permission. This is really a powerful feature as it decoupled from node numbers and the nodes communication complexity doesn’t necessarily rely on node number.

Block and transaction

Block is a collection of transactions. Typically, a block has some metadata like transactions, a hash that represents the block, Height, Block reward, timestamp, Nonce, etc. Now in the extended version, it has Miner name, Fee Reward, confirmation, Transaction Volume, etc.

The transaction has a hash, received time, inputs (address and other info), output (address and other inf), etc.

All the block and transaction info are publicly available, but typically you don't know who is behind the address. There are some blockchain explorers you can use to inspect block and transaction details like blockchain.com, btc.com and blockchair.com

How does blockchain work?

The blockchain working process is simply adding a new block to the existing blockchain recursively.

(1) When people make transactions, the transactions are broadcast to all miners (full nodes). Then miners collect new transactions into a block.

(2) At the same time, miners will do a proof-of-work puzzle game (proof-of-work) for the right of adding the block. When a miner solved the puzzle game, it broadcasts the block to all nodes

(3) If miners confirmed all transactions in the block are valid and unspent, miners will accept the block. Then miners will use the accepted block's hash as the previous hash and work on the creating next block.

(4) repeats the above process endlessly.

Types of blockchain

The blockchain can be public or private. A blockchain can be permissioned and permissionless.

Typical public permissionless blockchains are bitcoin blockchain and Ethereum blockchain.

Typical public permissioned blockchain is R3.

Importance of blockchain

Blockchain’s immutability make direct p2p transaction without trust third parties involved. To understand the importance of blockchain, we need to first under “trust”.

Credit, Trust and Reliance

Trust and credit are everywhere in our society. Common institutions like banks are built around trust. They are trusted third parties. When you buy a house, many third parties are involved like governments, banks, real estate agencies. When it comes to the monetary and financial industry, almost everything is based on trust. If you save money in banks, your wealth is simply a digital number in bank IT systems and you have to trust them. Almost all financial services are based on trust. Even your money is issued with trust in the central bank. All fiat money is issued based on national credit.

Reducing trust and reliance

Where there is a reliance there is the risk of being enslaved. Government and other institutions tend to abuse and extend its scope in nature. When we delegate more to authorities, there are more risks of abuse. Although we have laws and regulations, these checks and balances are far from perfect when the rules are getting ever more complex. The best way is to reduce the roles of trusted third parties. Nobel prize winner Milton once talked about reducing government roles. He said in 1999: "I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A". The missing e-cash is much like blockchain-based bitcoin and other cryptos.

Actually, the core of the bitcoin network is to make possible p2p transactions without trusted third parties involved, thus removing the need for trusted third parties. In bitcoin whitepaper, it mentions “trust” for 14 times. " [Bitcoin is] a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution…Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments". Satoshi also expressed his frustration on the trust of central banks. He said, "the root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible."

When blockchain removes the trust in monetary and financial systems, it will no doubt introduce a new money issuance consensus. Bitcoin creation relies on computing power. When the ways of creating and earning money changes, the value system built around it will change accordingly.

The blockchain’s ability to reduce “trust” is beyond the monetary and financial industry, and government. There are many more blockchain applications like supply chain, voting system, personal identity, IoT and etc.

Blockchain applications