Lecture 6 – Blockchain
What is a blockchain?
Blockchain is a system of recording information in a way that
makes it difficult or impossible to change, hack, or cheat the
system. A blockchain is essentially a digital ledger of
transactions that is duplicated and distributed across the entire
network of computer systems on the blockchain.
‘Blockchain’ was invented by ‘Satoshi Nakamoto’ in around
2008/2009. To this day, we do not know who this person(s)
is/are. The search for a trustworthy anonymous currency online
has been an ongoing quest since the internet became
mainstream in the early 90s. Blockchain enables anonymity
and creates trust without a trusted third party, as you would
normally have in internet transaction. Thus, using blockchain,
you can execute transactions and deal with commercial
relations online that you do not necessarily trust.
The development of blockchain has resulted in Bitcoin, which
was the first blockchain application.
How does blockchain work?
It is a clever combination of three underlying technologies:
1. Peer-to-peer communication
This is a well-known concept that is used in file sharing.
There is no central node, nobody is in charge and all peers
are equal. It differs to a centralised server as it allows all
users to communicate directly without a central base
necessary. Peer-to-peer protocol is needed.
2. Cryptography
This is mostly used in digital signatures. It hides the
contents of messages by encrypting messages in a way
that only allows the receiver to read it. This technology
does not use symmetric encryption, which is where the
sender and receiver need the same key to read the
message. Instead, it is asymmetric, which allows different
keys for encryption and decryption. An advantage of this
is that no prior exchange of key is needed.
, As two keys are used, it is known as a ‘key-pair’. There is
one private key and one public key. A message encrypted
by one key can only be decrypted by the other
corresponding key. So, a message encrypted by the
private key can only be decrypted by the public key and
vice versa. Note, from a public key, the private key
cannot be inferred. Thus, a public key printed on a
business card or website etc, cannot then lead to the
corresponding private key.
In a blockchain context, private keys should be kept
private and public keys are open to the public. A private
key is used to encrypt a message, much like a signature.
This message can only be decrypted by using the
associated public key. A public key is much like an
address. If a message can be decrypted using a public
key, it must have been signed by the associated private
key.
3. Hashing
This is similar to encryption, but it is a one-way only
operation. You can only move in one direction. Hashing
refers to sealing data off with a code (like a fingerprint). It
is important to know that the tiniest change in the data
results in a completely different hash. The input data can
be any length, but the output data is a fixed length. In
Bitcoin, the output data yields a 32-byte hash.
With hashing, there is no way back. The original data can
never be retrieved from the resulting hash value. You
cannot go from the output back to the input. Further, re-
running the hash function over the same set of data will
always yield the exact same hash-value, proving that the
data is unchanged.
How does this create a blockchain?
A blockchain is built by combining the three technologies
above. A blockchain is a way of storing data. The data stored is
data concerning transactions. Transactional data is typically
stored in ledgers. The ledger is stored in a distributive way,
over a peer-to-peer network. Asymmetric cryptography is used
to sign transactions (public key is like the address and private
What is a blockchain?
Blockchain is a system of recording information in a way that
makes it difficult or impossible to change, hack, or cheat the
system. A blockchain is essentially a digital ledger of
transactions that is duplicated and distributed across the entire
network of computer systems on the blockchain.
‘Blockchain’ was invented by ‘Satoshi Nakamoto’ in around
2008/2009. To this day, we do not know who this person(s)
is/are. The search for a trustworthy anonymous currency online
has been an ongoing quest since the internet became
mainstream in the early 90s. Blockchain enables anonymity
and creates trust without a trusted third party, as you would
normally have in internet transaction. Thus, using blockchain,
you can execute transactions and deal with commercial
relations online that you do not necessarily trust.
The development of blockchain has resulted in Bitcoin, which
was the first blockchain application.
How does blockchain work?
It is a clever combination of three underlying technologies:
1. Peer-to-peer communication
This is a well-known concept that is used in file sharing.
There is no central node, nobody is in charge and all peers
are equal. It differs to a centralised server as it allows all
users to communicate directly without a central base
necessary. Peer-to-peer protocol is needed.
2. Cryptography
This is mostly used in digital signatures. It hides the
contents of messages by encrypting messages in a way
that only allows the receiver to read it. This technology
does not use symmetric encryption, which is where the
sender and receiver need the same key to read the
message. Instead, it is asymmetric, which allows different
keys for encryption and decryption. An advantage of this
is that no prior exchange of key is needed.
, As two keys are used, it is known as a ‘key-pair’. There is
one private key and one public key. A message encrypted
by one key can only be decrypted by the other
corresponding key. So, a message encrypted by the
private key can only be decrypted by the public key and
vice versa. Note, from a public key, the private key
cannot be inferred. Thus, a public key printed on a
business card or website etc, cannot then lead to the
corresponding private key.
In a blockchain context, private keys should be kept
private and public keys are open to the public. A private
key is used to encrypt a message, much like a signature.
This message can only be decrypted by using the
associated public key. A public key is much like an
address. If a message can be decrypted using a public
key, it must have been signed by the associated private
key.
3. Hashing
This is similar to encryption, but it is a one-way only
operation. You can only move in one direction. Hashing
refers to sealing data off with a code (like a fingerprint). It
is important to know that the tiniest change in the data
results in a completely different hash. The input data can
be any length, but the output data is a fixed length. In
Bitcoin, the output data yields a 32-byte hash.
With hashing, there is no way back. The original data can
never be retrieved from the resulting hash value. You
cannot go from the output back to the input. Further, re-
running the hash function over the same set of data will
always yield the exact same hash-value, proving that the
data is unchanged.
How does this create a blockchain?
A blockchain is built by combining the three technologies
above. A blockchain is a way of storing data. The data stored is
data concerning transactions. Transactional data is typically
stored in ledgers. The ledger is stored in a distributive way,
over a peer-to-peer network. Asymmetric cryptography is used
to sign transactions (public key is like the address and private
