“The “blockchain” — the engine on which Bitcoin is built — is a new kind of distributed consensus system that allows transactions, or other data, to be securely stored and verified without any centralized authority at all.”
– Jon Evans
“With blockchain technology, you could create a truly tamper-proof record system… records can go into the Blockchain in a way that I know if anybody tries to change it.”
– Peter Kirby
“You should be taking this technology as seriously as you should have been taking the development of the Internet in the early 1990’s.”
– Blythe Masters
“Both the financial services and Bitcoin communities perked up last week when Citi, Nasdaq, Visa and other large financial institutions invested in Chain.com, a Bitcoin blockchain services provider.”
– Laura Shin
“Bitcoin is giving banks a run for their money. Now the same technology threatens to eradicate social networks, stock markets, even national governments.”
– Matthew Sparkes
Traditional databases are maintained by a single organization, and that organization has complete control of the database, including the ability to tamper with the stored data, to censor otherwise valid changes to the data, or to add data fraudulently. For most use cases, this is not a problem since the organization which maintains the database does so for its own benefit, and therefore has no motive to falsify the database’s contents; however, there are other use cases, such as a financial network, where the data being stored is too sensitive and the motive to manipulate it is too enticing to allow any single organization to have total control over the database. Even if it could be guaranteed that the responsible organization would never enact a fraudulent change to the database (an assumption which, for many people, is already too much to ask), there is still the possibility that a hacker could break in and manipulate the database to their own ends.
The most obvious way to ensure that no single entity can manipulate the database is to make the database public, and allow anyone to store a redundant copy of the database. In this way, everyone can be assured that their copy of the database is intact, simply by comparing it with everyone else’s. This is sufficient as long as the database is static; however, if changes must be made to the database after it has been distributed, a problem of consensus arises: which of the entities keeping a copy of the database decides which changes are allowed and what order those changes occurred in? If any of the entities can make changes at any time, the redundant copies of the database will quickly get out of sync, and there will be no consensus as to which copy is correct. If all of the entities agree on a certain one who makes changes first, and the others all copy from it, then that one has the power to censor changes it doesn’t like. Furthermore, if that one entity disappears, the database is stuck until all of the others can organize to choose a replacement. All of the entities may agree to take turns making changes and all the others copy changes from the one whose turn it is, but this opens the question of who decides who gets a turn when.
How Blockchain Technology Works
Blockchain technology solves these problems by creating a network of computers (called nodes) which each store a copy of the database, and a set of rules (called the consensus protocol) which define the order in which nodes may take turns adding new changes to the database. In this way, all of the nodes agree as to the state of the database at any time, and no one node has the power to falsify the data or to censor changes. The blockchain further requires that an audit trail of all changes to the database is preserved, which allows anyone to audit that the database is correct at any time. This audit trail is composed to the individual changes to the database, which are called transactions. A group of transactions which were all added by a single node on its turn is called a block. Each block contains a reference to the block which preceded it, which establishes an ordering of the blocks. This is the origin of the term “blockchain”: it is a chain of blocks, each one containing a link to the previous block and a list of new transactions since that previous block. When a new node joins the network, it starts with an empty database, and downloads all of the blocks, applying the transactions within them to the database, to fast-forward this database to the same state as all the other nodes have. In essence, a blockchain establishes the order in which transactions were applied to the database so that anyone can verify that the database is accurate by rebuilding it from scratch and verifying that at no point was any improper change made.
The most obvious example of blockchain technology in use today is Bitcoin. Bitcoin is a digital currency system which uses a blockchain to keep track of ownership of the currency. Whenever someone wishes to spend their bitcoins, they create a transaction which states that they are sending a certain number of their bitcoins to someone else. Then they digitally sign this transaction to authorize it, and broadcast it to all of the nodes in the Bitcoin network. When the next node creates a block, it will check that the new transaction is valid, and include it in the new block, which is then propagated to all other nodes in the network, which adjust their databases to deduct the transferred bitcoins from the sender and credit them to the recipient.
Blockchain Consensus Protocols
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