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How Blockchain Works – The “Big Three” Behind the Technology

Basics Blockchain

It was Isaac Newton who once said “If I have seen further it is by standing on the shoulders of Giants”. By that, he was alluding to the fact that breakthroughs in science (or technology) are actually a cumulative effort, with the contributions of those who came before you forming the basis of your success. Blockchain technology, demonstrates this perfectly.

While the problems solved by Satoshi Nakamoto’s brilliance were once unsolvable, it is crucial to acknowledge that his invention was the product of combining 3 existing technologies in an admittedly marvelous way.

Let’s take a dive into the “Big Three” to see how these technologies work together to ensure secure digital relationships.


1.    Private Key Cryptography

Every person transacting over the internet has two keys: one public key and one private key.

The possession of both these keys is the mechanism through which confidence is assured in the identity of their holders.

With these two keys, the holder is able to digitally “sign” things. This signature, like a wax stamp keeping an envelope sealed provides solid control of ownership.

With the identity authentication portion solved by the keys, the approval of transactions must also be done. On the blockchain, this verification process is done via a distributed consensus of the network.


2.    Distributed Network + Shared Ledger

The consensus method for blockchains works via a system in which a minimum of 51% of all the nodes (computers running the Bitcoin software) agree that they witnessed a transaction happen at the same time.

The genius of this method is that: a) the nodes are spread out all over the planet, and b) the majority of them have to confirm the transaction simultaneously. Trying to bamboozle that number of dispersed computers is about as close to impossible as it gets.

Furthermore, as the network of validators increases, so too does the level of network security. This is one of the key reasons why bitcoin’s blockchain is so valuable – the sheer size and scale of the computing power behind at this point it is mind blowing. It dwarfs the power of the tech giants and all the largest banks in the world combined.

The layering of the guaranteed identity provided by private key cryptography is where the rubber really starts to meet the road, as now we are:

  1. 100% sure of who is doing what
  2. 100% sure that the transactions are valid, and
  3. can record these transactions indelibly in a globally dispersed and totally accurate database

As stipulated by the code, every block contains three crucial bits of data: (i) a digital signature (private + public key), (ii) a timestamp & (iii) transaction details.

This block is then sent out to all the nodes in the network…


3.    Compensatory Network Authentication

Yeah, that subheading doesn’t exactly roll off the tongue – I know…

But, for the sake of the closest thing I can get to clarity on a fairly fiddly concept it’ll have to do. As we mentioned in the section just gone, the bigger the network of nodes, the better the security of the blockchain. Because nodes are needed to validate transactions, Satoshi understood that you needed to first attract people to do the task. This was done by offering those who performed this function a reward for their efforts: free bitcoin. Their self-interest is used to further the greater good.

You might know these people as miners.

Bitcoin’s protocol has the goal of eliminating the possibility of the problem of “double counting”, where the same bitcoin is used in two separate transactions at the same time. If a currency can be copied, it’s value is, well, nothing. Each node works to create and maintain a log of the transactions of every bitcoin by solving complex cryptographic mathematical problems (proof-of-work).

CPU power essentially casts the voting ballot, with the agreement about new blocks being accepted or rejected. When, as mentioned above, that 51% mark is hit, that block is added to the chain. Bitcoin is just one form of protocol, and as we speak various combinations of rules and variables are being tested and applied to all sorts of problems.

Watch this space, because we’re still in the early days of fully grasping the potential of blockchain protocols…