Blockchain Technology: What Is A Decentralized Distributed Ledger?

The concept of a digital currency that is completely independent of the governments that manage fiat currency (dollars, euros, yen, etc.), or any centralised financial institution, has been experimented with for some years. If we can exchange email via the internet, and other information, then why can't we just as easily exchange some form of electronic currency?

The problem is that for denominations of electronic coins to have any meaningful value within an unregulated decentralised system, it must, like any form of currency, be resistant to counterfeiting.

How Does Blockchain Technology Work?

The first really effective solution to this specific problem was developed by the innovators of Bitcoin by means of the blockchain: an ever lengthening, openly accessible, chronological ledger of every unique transaction ever made, and whose historical records cannot knowingly be altered.

Proof-of-Work

For the decentralised monetary system to maintain its integrity, every transaction between two clients within the peer-to-peer network of nodes must be approved before earning a legitimate place within the blockchain.

For this to happen, the details of ongoing transactions are grouped into blocks and broadcast to the network in a format that must then undergo a degree of computational effort (proof-of-work) as part of the confirmation process. There is no getting around this procedure: a so-called hashing function has to be performed based on the transaction details and resolved, which demands considerable processing power.

But it isn’t a calculation of an equation as such; it is really a method of iteration—an algorithmic procedure that is applied over and over until a satisfactory result is found. It operates by process of trial and error, and there is no short cut. An analogy might be something like completing a jumbled Rubik’s cube by systematically trying out a series of combinations.

Once the hashing function is resolved it can be checked with minimum effort by all nodes (just as it is easy enough to check the sides of a Rubik’s cube). A consensus forms across the network as to the validity of a transaction and the ledger is updated.

As an aside, CAPTCHA (Completely Automated Public Turing test to tell Computers and Humans Apart) is a very common proof-of-work principle, but in this case it is human work rather than computational work that is demanded.

Usually, prior to engaging any further in some functional aspect of a webpage, a group of photos is presented to the user who is then expected to identify and correctly pick out a selection according to set criteria: photos of a scene that include cars or shops in, for example. This is a difficult task for a computer to determine but relatively straightforward for a human being.

The proof-of-work protocol used by Bitcoin wasn't a new concept; it was already in use by other applications to deter would-be spammers. An e-mail plugin called Hashcash (which predates Bitcoin) demands a second or two of the sender’s processing power (a micro payment) in order for the recipient to accept e-mail: an electronic stamp, in other words.

This hopefully puts enough strain on the sender’s computational resources for them to weigh up the cost effectiveness of sending indiscriminate quantities of mail. It also has an application as a protective measure against denial-of-service (DNS) attacks for much the same reason.

Mining

Some nodes within the Bitcoin network have powerful hardware specifically configured for the proof-of-work protocol; they are the miners who carry out the hashing verification process discussed earlier, and in return are rewarded with newly created coins as an incentive for sustaining the system.

The blockchain, ideally, evolves into a trusted dynamic database that is resistant to fraudulent transactions, especially duplicate transactions. The integral proof-of-work validation process renders the system extremely resilient to malicious parties who would exploit it; they would require access to unfeasibly enormous computational resources in order to alter the blockchain exclusively in their favour.

Duplicate Spending

Each block in the chain has a hash of the previous block, stretching right back to the very first transaction, which links them all together (hence, blockchain) and strengthens the database from tampering. The more blocks added to the chain after a transaction the less likely it is to be reversed (which can happen if there is an attempt to make duplicate payments).

This is particularly a problem, for example, if a merchant/vendor in receipt of a payment does not wait long enough for its confirmation prior to transferring the purchased goods. The blockchain only confirms one instance of a spend, and will ultimately discount all other duplicate attempts, i.e., trying to spend the same coin twice. As the blockchain lengthens after a transaction the less likely this is to happen.

Blockchain Technology Summary

This is a very basic summary of blockchain technology whereby something of value can be securely exchanged and recorded between clients within a distributed network without being compromised.

All participating nodes continuously download the blockchain: everybody involved has the same version of the ledger. It is what enables a trustless decentralised system to operate autonomously: no individual entity is depended upon or entrusted exclusively to amend the ledger or uphold the rules governing transactions.

Blockchain technology is flexible and can be used for different applications: any system of exchange, actually, that benefits from forming part of a trustless, transparent public record. This goes beyond merely financial records; eventually blockchain technology might be used beyond the experimental stage for executing smart contracts, registering votes, or to record ownership of property, for example, be it physical or intellectual.