When Satoshi Nakamoto invented blockchain as a peer to peer electronic cash system, he made use of existing methods like cryptographic hash function and public-key cryptography along with concepts like Haber and Stornetta’s ‘Digital Time-Stamping’ and Proof of Work similar to Adam Back’s “Hashcash,” in order to protect and secure the decentralization of the system.
On top, he built the solution to the double-spending problem of digital cash, without the need for a trusted authority or central server. It’s all revealed in Bitcoin’s white paper.
It soon became clear that the same concept could be applied to fields outside of finance and reach any place where a trust-less network to verify any transaction was needed.
Therefore we see blockchain applied to the legal world for the authenticity of verifiable documents, to commerce for cost and time reduction in traceability. Governments and administrations use it for more transparency and fraud solution.
The applications are countless but when is the blockchain really necessary?
The real value of the blockchain is visible when it offers all of its main features together to create a network that is at the same time * decentralized, distributed, open, neutral, borderless, censorship-resistant. This is what makes an open, public blockchain.
Then there are private (also called permissioned) blockchains, widely used by businesses, that provide more security and quicker transactions but are purely a better version of a database.
Certainly, they have a clear advantage in the annulled time of transaction execution. Think of the long and cumbersome verification time required by certain processes.
The purchase of a house, for instance, can expect a reduced timeframe and resources for verifying and registering the change of property ownership to virtually zero.
Indeed, on the blockchain, the process of transaction verification and recording is immediate and permanent. This will revolutionize contracts and reduce friction in the exchange of assets.
Yet, the real (r)evolution is due to the decentralization and distribution of the network which clearly incorporates all of the other *characteristics of the blockchain. The freedom of secure distributed peer to peer transactions is the real deal. Opening up new ways to organize and govern ourselves.
Let’s see how this plays out in the blockchain
The Peer to Peer network exists to allow and execute the blockchain, the ledger, and it’s made up of nodes (computers attached to a network) that have the main function to verify transactions in blocks (storage of data or transactions).
What are these nodes?
For example, your phone is a node, your laptop is a node, your router is a node.
If you want to be a node of the Bitcoin blockchain you can simply read on how to run a bitcoin node in 2019 and be a participant of the network.
There are currently 10,000 nodes that keep the Bitcoin network alive.
The ledger (the recorded history of all transactions) is distributed across several nodes. When a transaction is recorded in the blockchain, its details are recorded, verified, and sent within seconds across all nodes.
As the digital ledger is distributed and recorded on anyone’s computer, anywhere in the world, it is decentralized.
The nodes have to agree to follow the same protocol rules so that consensus happens and the aim is to guarantee a single chain is used and followed.
Despite all nodes being equal, they can take on different roles within the blockchain ecosystem, such as that of a miner that operates the blockchain.
Miners bear the costs of maintaining these ledgers/databases and the rewards are distributed in the form of cryptocurrency they obtain by proof of work, solving cryptographic puzzles. The miner who solves the puzzle first gets the reward. By solving these puzzles, miners keep the blockchain secure and operational. Since the blockchain database isn’t stored in any single location, no centralized version of records exists for hackers to corrupt.
Therefore, to recap, in order for the network to function the following steps highlighted by Nakamoto are necessary:
1) New transactions are broadcast to all nodes.
2) Each node collects new transactions into a block.
3) Each node works on finding a difficult proof-of-work for its block.
4) When a node finds a proof-of-work, it broadcasts the block to all nodes.
5) Nodes accept the block only if all transactions in it are valid and not already spent.
6) Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.
- You may think of a transaction as the equivalent of a single line in a notebook page
- You may think of a block as the equivalent of a page on that notebook
- You may think of blockchain as the equivalent of the whole notebook
- All the users are able to read, write and get updated on that notebook
From MOOC 11: Introduction to Digital Currencies University of Nicosia
How does Satoshi Nakamoto resolve the problem of double-spending?
By creating this genial architecture of a trust-less decentralized system. The whole peer-to-peer network resolves the double-spending problem using “proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power. The network is robust in its unstructured simplicity.” *Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System.”
In conclusion, we can now rely on a robust peer-to-peer decentralized system that allows having complete autonomy and sovereignty not only on our finances but also on our data and credentials with no control or censorship from any authority.
In the words of ShapeShift CEO and Founder Erik Voorhees, “Bitcoin is the only money that doesn’t require the permission of an overseer, therefore it’s the only money appropriate for free people.”