Blockchain basics: An introduction to blockchain technology

Blockchain technology and where it came from

Many people equate blockchain with Bitcoin. But there’s quite a bit more than Bitcoin to the technology. Here we shed some light on the basic facts.

  • Blockchain is a technology to verify and record information
  • It requires no central authority
  • It is extremely difficult to tamper with

Blockchain is strongly associated with the first cryptocurrency, Bitcoin, created in 2009 by an unidentified individual or group operating under the pseudonym Satoshi Nakomoto. In fact, the technology dates back to 1991, when the two pioneering cryptographers W. Scott Stornetta and Stuart Haber published the paper “How to Time-Stamp a Digital Document.”

Removing the need for trust

In the course of their research aimed at creating a tamper-proof digital ledger for legal documents, Stornetta and Haber hit on a promising solution, but soon called it “naïve.” It was a “digital safety-deposit box” able to record the date and time a document was created and also store a copy of it. But the solution relied on a central authority, which meant that trust in that authority was a prerequisite. “Nothing in this scheme prevents the time-stamping service from colluding with a client,” Stornetta and Haber wrote.

Only a system that required no trusted central institution could be truly tamper-proof, they determined. This ultimately led them to the concept of a distributed, self-reliant ledger that would generate an immutable transaction trace and multiply it across systems – making authentication a question of consensus, not trust.

The idea detailed in the white paper gained little traction until the financial meltdown of 2008. It was then that the mysterious individual or group Satoshi Nakomoto issued the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System,” proposing a digital currency based on the distributed ledger concept. This digital money would require no central bank and no intermediaries.

The technology

The term “blockchain,” which was coined in 2011, refers to a string of linked blocks of digital information. Satoshi Nakomoto’s paper used the words “block” and “chain” separately. Each block is made up of three parts: 

  • A unique code that distinguishes it from other blocks. This code, termed a “hash,” could be compared to the serial number on a banknote or a person’s fingerprint.
  • Transaction information like date, time and the amount transacted.
  • Encrypted information on the parties involved in the transaction.

Each time a transaction takes place, the block is linked to the next block by means of a cryptographic signature. A chain of blocks – a blockchain – forms, which serves as a distributed ledger, a consensus of replicated, shared and synchronized digital data spread across multiple sites, countries and/or institutions. This ledger can be shared and accessed by anyone with the appropriate authorization. Each computer operating within the blockchain network makes its own copy of the entire chain. This results in thousands – in the case of Bitcoin, millions – of replications of a given blockchain. The fact that the identical blockchain is spread across a huge network of computers makes the information very difficult to manipulate. A hacker would need to somehow access and tamper with every single copy of the blockchain on the network.

Blockchain in action

When a person makes a transaction using a blockchain-based cryptocurrency, computers in the blockchain network in question race to verify that transaction. Running special software, users seek to solve a complex mathematical problem and create the hash referred to above. The chances of guessing the correct solution to the mathematical problem are approximately one in six trillion.

In essence, blockchain is a record-keeping technology, true to the original concept published in 1991. Cryptocurrency is only one of many applications – and the list keeps growing.