Blockchain technology

Transparency and efficiency in financial transactions.

Photograph: iStock

Text: Mariano Anthony Davies

Although the mechanics of blockchain are incredibly complex, the basic idea is simple: to decentralize the storage of data so that such data cannot be owned, controlled or manipulated by a central actor.

Blockchain is literally just a chain of blocks, but not in the traditional sense of those words. When the words “block” and “chain” are used in this context, they actually refer to digital information (the “block”) stored in a public database (the “chain”).

These “Blocks” on the blockchain are made up of digital pieces of information that have three essential elements:

1. They digitally store information about transactions like date, time and the currency amount of the transaction.

2. They also digitally store information about the Parties in the transaction.

3. They assure that digitally stored transactions have unique identification codes.

How Blockchain works Whenever a transaction block stores new data, this data is added to the blockchain. In other words, a blockchain, as its name suggests, consists of multiple blocks of stored data transactions strung together. For data to be added to the blockchain, four things must happen:

1. A specific transaction between two or more Parties must take place.

2. This transaction must also be verified.

3. The transaction must be stored in an identifiable block.

4. This identifiable block must be unique. It is given a “hash” tag.

These data principles create data visibility that is constant and transparent for all those given access to the data. It cannot be altered or manipulated. This is why it is also called a “distributed” ledger.

"Blockchain, as its name suggests, consists of multiple blocks of stored data transactions strung together."

Is Blockchain secure?

Blockchain technology tackles the issues of security and trust in several ways.

1. New blocks are always stored linearly and chronologically. Each block has a specific position on the chain.

2. After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash, along with the hash of the block before it. Hash codes are created by a mathematical function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.

3. As soon as someone tries to edit a transaction payment amount, the block’s hash will change automatically. The next block in the chain will still contain the old hash, and the hacker would need to update that block to cover the hacking tracks. However, doing so would also change that block’s hash. And the next, and so on.

4. Therefore, to change a single block, a hacker would need to change every single block after it in the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block is added to the blockchain, it becomes challenging to edit and impossible to delete.

5. To address the issue of trust, blockchain networks have also implemented tests for computers that want to join and add blocks to the chain. These tests, called “consensus models”, require Users to “prove” themselves before they can participate in a blockchain network. One of the most common examples employed is called “proof of work.”

In a “proof of work” system, computers must “prove” that they have done appropriate “work” by solving a complex computational mathematical problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain. However, the process of adding blocks to the blockchain (called “mining” in the cryptocurrency world) is not easy. In fact, the odds of solving one of these problems on the Bitcoin network were calculated to be one in 17.56 trillion in August 2020.

To solve complex mathematical problems at those odds, computers must run programs that cost them significant amounts of power and energy.

“Proof of work” does not make attacks by hackers impossible, but it does make them somewhat useless. Why? If a hacker wanted to coordinate an attack on a blockchain, control must be gained to more than 50% of all computing power on the blockchain to be able to overwhelm all other participants in the network - probably impossible.