Understanding Blockchain, Bitcoin and Cryptocurrency
In 2008, as you remember, it was the economic crisis, the banking system was faltering, people no longer had confidence in their bank… Satoshi Nakamoto publishes a white paper in which he details how digital currency works without a bank.
A peer-to-peer digital currency. He calls this digital currency Bitcoin.
Bitcoin today, if you add up the value of all the Bitcoin chips in circulation, it’s worth over $11 billion. Bitcoin has a price, which is determined by supply and demand: one Bitcoin is worth more than 7,000 Euros.
It is a currency that does not belong to any country, any government, any bank. It belongs to all its users. To make this digital currency work, Satoshi Nakamoto invented a computer protocol that will allow all users to agree on the history of transactions that have been made in Bitcoin.
This underlying protocol is called the Blockchain.
Indeed, this invention is revolutionary for several reasons. First of all, because it rebalances access to resources, it allows two billion unbanked adults to have access to financial services and to exchange money.
This is why 90% of the volume of transactions made in Bitcoin take place in developing countries because it is very easy to have a smartphone but much more difficult to have a bank account. More broadly, the Blockchain changes the way money is transferred.
The Blockchain, which is just being touted as the biggest revolution since the Internet, that’s all. Why is that? Because just like the Internet, the Blockchain will create many new opportunities by breaking down the barriers to entry in many sectors of activity that are now monopolized by big players.
In fact, the Blockchain is to the transaction what the Internet has been to information. In the case of the Blockchain, it is the players who play the role of trusted intermediaries in transactions that will see their position challenged. We can mention for example banks, notaries but also digital platforms such as Uber or Airbnb.
How is all this possible with the Blockchain
Today, a financial transaction between two people requires the intervention of a trusted third party Here, Jennifer wants to make a transfer to David, to pay him for his goods She sends the money transfer order to her bank, the bank will check that Jennifer already has the amount in her account and it will also check that it is Jennifer who is requesting the transfer and if so, the bank will transfer the requested amount from Jennifer’s account to David’s account.
Then the bank’s role is also to keep track of everything its customers have and keep a record of all the transactions made. For our explanation, we will say that the bank stores all this information in a ledger.
How with the Blockchain It is possible to get rid of this trusted intermediary.
First of all, with the Blockchain, this account book becomes public, that is to say, that it is only held by one actor, but it is distributed to all. Each person then has a copy of this account book and can consult all the present and past exchanges.
Each person who owns this account book constitutes the Blockchain network, let’s take the same example but applying the principles of a transaction with the Blockchain.
Jennifer launches the transfer order, the different people in the network will then check in their account book that Jennifer has the amount necessary for the transaction. If this is the case then the transaction is validated.
Each person will then write this transaction on a new page of their account book, which updates all the account books of the Blockchain. You have understood it with the Blockchain, it is no longer a single central actor who validates or not a transaction but it is all the members of the network.
Now let’s imagine that you are trying to cheat For example by pretending to own more or by trying to falsify your account book, well this will be noticed, because all the others will see that this is not what is written in their copy of the register, so they will dispute the information. And if you think about it, in this system, you don’t even need physical currency as soon as you make a financial transaction. All you have to do is announce it and all the books of account will update the information.
The books of account are proof of what everyone has and you can check what you have and what other people have on the transaction history and that’s the principle behind virtual currencies like Bitcoin, but we’ll come back to that a little bit later.
In real life, of course, it’s not books that store and process information but machines with computing power like computers or servers. Technically the blockchain can, therefore, be seen as a database distributed on different storage nodes.
These storage nodes are the users who will bring with their machines computing power and storage space to run the blockchain. Just as the account book is made up of transaction pages, the blockchain is a chain made up of blocks of transactions.
Each exchange made between its users is recorded in the form of blocks that end to end form a chain, hence the notion of blockchain or chain of blocks in French.
Each block in the chain contains a set of transactions, then a block is characterized by a hash, the hash is a unique sequence of characters, serving to identify the block, basically, it is the block’s footprint.
Finally, the block also contains the hash of the previous block, which is, therefore, the unique identifier of the block that precedes it. This guarantees the order of the block in the Blockchain.
Hash involves cryptographic concepts. Basically, a hash algorithm is a mathematical function that will transform a set of initial data into a string of characters.
This sequence of characters is, therefore, the hash and is specific and unique to the data that was originally taken, meaning that any change in the message, no matter how small, implies a significant change in the hash.
For example, the addition of a simple exclamation mark creates a hash that is totally different from the hash of the same sentence without an exclamation mark.
Secondly, the hash functions have a specificity, it only works in one direction, so it is not possible to retrieve the original message from the hash.
It is therefore not possible to retrieve the initial message from the hash. It is therefore not possible to do anything with the hash’s sequence of characters alone, the hash only provides a guarantee that the initial data has not been modified by someone.
Now back to the hash of a block: A new block is identified by its hash, and this hash is computed from the hash of the previous block and the validated transactions of the block.
Now let’s move on to the last important point of the blockchain-related to cryptography: It’s the electronic signature.
The principle is that each transaction request in the Blockchain must be signed by the sender to be validated. So if you try to say: “Jennifer gives 1000 bitcoins to Tom”, the others won’t believe you until they have proof that it is indeed Jennifer who sent the message and this proof is Jennifer’s signature.
Let’s take an example with Jennifer who wants to sign her message, for that she’s going to need to generate an encryption key pair: A private key that must not be communicated to anyone.
Jennifer has to be the only one to have this private key and a public key that can be communicated to everyone. These different public keys are stored on every computer on the network and her two public and private keys are mathematically linked, Jennifer wants to initiate a transfer order.
For example, “I give Tony 10 bitcoin” she’s going to encrypt that message using her private key Encrypting a message means making it incomprehensible and in order to read that message again, it has to be decrypted, and the only way to decrypt that message is to use the associated public key created by Jennifer.
In fact, only this public key is able to decrypt messages that have been encrypted with Jennifer’s private key.
So to decrypt this message that is supposed to come from Jennifer, other people in the network will use the public key given by Jennifer and if they can decrypt her message using Jennifer’s public key then they know that the message is indeed from Jennifer.
That’s how in the Blockchain the different people in the network make sure the identity of the person who gave the order is correct, then in the Blockchain, there is no real name, and fortunately, there is no real name! Because you certainly don’t want everyone to know what you own and what you do as transactions.
In practice, we transfer assets from one address to another and the address is simply a hash of the public key when a user generates a key pair, so he also generates an address from his public key and it is to this address that the bitcoins will be sent. Thanks to this system, the anonymity of the users is preserved.
The two best-known blockchains today are Bitcoin and Ethereum. These block blocks work with their own cryptography.
The Bitcoin Blockchain has crypto money with the same name: Bitcoin, while the Ethereum Blockchain has an Ether crypto money with the same name: Bitcoin.
Before we see how bitcoin exchanges work it should be noted that storage nodes are also called “miners” and when we talk about “mining bitcoins” it means using the computing power of machines for solving mathematical problems to generate a new block.
Miners who have created a new block will be paid for this work with new Bitcoins.
Transaction in Bitcoins
Jennifer wants to transfer a Bitcoin to Christophe, she sends this request to the whole network, the miners will check the whole block to make sure that Jennifer has this Bitcoin, but they will also check that the order comes from Jennifer.
If everything is OK then each miner will work to forge a new block to account for that transaction. And the first miner who succeeds in creating the block passes that block on to the other members for verification, so for a new block to be validated, there has to be a consensus among the members of the network.
This consensus principle is very important because the blockchain is a decentralized system without a control body, which means that the only way to have a global validation is to get a majority vote of the network members.
Just to reassure you about reliability, be aware that the miners have no interest in letting fraudulent transactions go through because that would make them lose confidence in the system and would, therefore, make their Bitcoins lose all value, and that would not be very smart.
Once the block has been validated by the network members, everyone adds that last block to their copy of the Blockchain and finally Tony has a new Bitcoin.
Each new transaction added to the Blockchain cannot be erased, this ensures the validity and authenticity of a transaction. So far we have only talked about cryptocurrency but we can very well extend the use of the Blockchain to other assets, this is, for example, the case with property titles.
In Ghana, a majority of rural territories are not registered in an official Bitland land register, so an organization in Ghana offers institutions and individuals the opportunity to register their property titles on the Blockchain, which provides a permanent and verifiable record and thus helps the Ghanaian government to resolve conflicts.
Another example of assets stored on the Blockchain is diplomas! The Massachusetts Institute of Technology (or MIT) is starting to use the Blockchain to certify their students’ degrees. MIT associates the degree with the student’s unique ID, and graduates can then send their degrees to recruiters who can, in turn, verify the authenticity of the information on an MIT site.
Other use cases: the unalterable and transparent character of the Blockchain allows to guarantee the traceability of an asset and this is why Carrefour created the first food Blockchain in Europe The aim is to guarantee to the consumers the complete traceability of the marketed products Thus all the chickens of Auvergne of Carrefour integrate a QR code With this QR code, Customers have access to the history of events in the life, breeding, death and transportation of the chicken.
And customers can, therefore, ensure that the chicken has been raised under the conditions required by Carrefour.
And finally, there is one last use of the Blockchain that is rarely mentioned and yet can be the source of many innovations: smart contracts. A traditional legal contract defines the rules of an agreement between several people.
A smart contract will freeze these rules in a blockchain and then the smart contract will automatically trigger actions according to the conditions set out in the contract.
In concrete terms, this is a software code that runs on a blockchain and is triggered by external data.
Example: The insurance company Axa used the Etherium Blockchain to create its first smart contract Fizzy.
Fizzy is travel insurance for flight delays between Paris and the United States.
This smart contract automatically triggers the compensation of the insured in case of a delay of his plane and all this without the need for human intervention.
The Blockchain even has the potential to “use Uber”. With the Blockchain, users can carry out peer-to-peer transactions, i.e. transactions directly between themselves, whether with a rental company, a driver or between private individuals.
This means that by using the Blockchain, we can do without intermediate platforms such as Airbnb, Blablacar or Uber.
I hope this has helped you to understand the Blockchain better.