Demystifying Blockchains: A Comprehensive Guide for Wealth Managers to Master Blockchain Investing
Welcome to the blockchain basics series, your go-to resource focused on the fundamentals of blockchain technology. Albert Einstein once said, “If you can't explain it simply, you don't understand it well enough,” and we're here to do just that for the complex world of blockchains.
Understanding Blockchain Technology
A blockchain is both a secure and transparent digital ledger that records and verifies transactions across a network of computers. These computers are often referred to as miners or validators. As records continuously pile onto the chain, modifying it becomes a colossal task. In the age of decentralization, this ledger isn't centralized; copies are stored globally, with the network verifying that new transactions are accurate. While blockchain technology is the engine behind cryptocurrencies like Bitcoin and Ethereum, its potential use cases stretch far beyond the realm of cryptocurrency.
A Deep Dive into the Blockchain Database Structure
Transactions/records are bundled into blocks and sequentially appended to the chain. The fundamental components are:
Transactions/Records: These can include financial transactions, patient health records, loan documents, simple messages, or other types of data worth storing.
For our examination, the blue cube will represent a record/transaction on the blockchain
The Block: A grouping of transactions/records
The panel of cubes represents a block. Once the last transaction/record is connected or grouped with the other records/transactions, this will become a complete block.
The Chain: All the blocks linked together that create a public ledger
Each complete block (red cubes) will attach in order to form a larger chain of blocks (grey cubes).
The Transaction Journey & Block Formation in Blockchain Systems
For this example we will use two parties that want to make a transaction such as a monetary exchange for goods. Dan is willing to sell Dave two concert tickets for $100.00.
There is now a new record or transaction which is again represented by the blue cube.
The record will need to be validated by the network. The network which consists of many computers are referred to as nodes, often disbursed across the world. The job of the nodes is to verify that the details of the transaction/record have consensus or are correct.
The network consisting of nodes
All the nodes will receive the record for confirmation
If the record is accepted by the nodes it will be added to the block. The process of the network of nodes verifying new transactions is referred to as consensus.
Records are added in blocks sequentially to the chain after consensus.
Unraveling Hash Codes: The Unique Identifiers of Blocks
Each block is identified by a unique code called a hash, or a string of letters and numbers. Each block will also contain the previous block’s hash as well. Ex of a hash code:
“27686e2ed9c23036a47ad2c0291c376097a1acaf65522746754B0a9c1e74cf89”
In order for each block to bind to the previous block, hash codes must be identical. Each block contains two
Hash codes, the hash of the previous block and it’s own unique hash code. Once the new or blue block confirms the chain or grey blocks with a matching hash code it will be appended to the chain and so on.
The Secret Behind Blockchain's Security
Hash codes are birthed by an algorithm that transforms input information into a unique digital ID - a string of letters and numbers. There are a variety of algorithms that are used across many blockchains, however, there are four crucial properties make these hash codes central to blockchain's security:
I. On a specific blockchain, hash codes maintain a fixed length, irrespective of the diversity of each transaction or record. If we input the details of a court transcript as one record and then input lyrics from Hotel California , the length of the hash will remain the same, however, their values will be unique. This also requires that the hash will remain deterministic as the lyrics from Hotel California will always yield the same hash. For fun you can check out a hash creator here.
II. Any tiny alteration to the original input spawns a new hash. If one single lyric in Hotel California is changed, we would notice as the hash would change. This simple altercation would break the chain or connection of blocks since the hash would change and not match the previous block. This, in turn, creates a domino effect breaking all the chains. Or, in a hacker’s case, recalculating all these hashes would demand a monstrous amount of computing power, making blockchain technology a hard nut to crack for hackers.
III. Hash functions are one way. It is infeasible to reverse the process that generates the given hash unless every record possible is tested.
IV. The computations of the hash do not allow two records to yield the same result of hash.
This article covered the basics of a blockchain, which is the foundational layer of blockchain technology powering crypto projects and cryptocurrencies. Blockchains are also known as the Layer 1 of crypto.
Stay tuned as we continue to unravel blockchain complexities in future articles, possibly tackling hot topics like layer 2’s, cryptocurrency mining, blockchain networks, and consensus mechanisms.
