A brief overview of blockchain technology
We may not know who created Bitcoin besides the fact that he/she used the pseudonym Satoshi Nakamoto. We do know, however, who is credited with inventing blockchain technology. Stuart Haber and W. Scott Stornetta, two American scientists, identified a problem with record keeping. In their opinion, it was too easy to alter digital records, causing problems, such as fraud and intellectual property theft. They strived to find a solution to solve this problem. [2] In 1991 they published their findings in an academic article titled “How to time-stamp a digital document” [3] and presented, what turned out to be the foundation of blockchain technology at the 10th annual International Cryptology Conference in Santa Barbara. [4]
In more detail, the solution that Haber and Stornetta came up with was a method to timestamp digital documents. Their intention was to use a cryptography technique called hashing to create a digital fingerprint. Not just for the document, but the document including a time stamp. The genius of their idea was the fact that if someone tried to alter the document or the time stamp the fingerprint would change as well and everybody would know the document was tampered with. [5]
It gets even more clever because this technique allows for the inclusion of the first fingerprint in another document and hashing of the second document to create a second fingerprint. You now have “fingerprint inception” (a fingerprint within a fingerprint). In practice, this works as follows. When someone would temper with the first document, the fingerprint of the first document would change. And because the first fingerprint changes and this first fingerprint is part of the data in the second document, the fingerprint of the second document changes as well, creating a traceable chain of documents ie. data.
This invention laid the foundation of what we now know as blockchain technology; chains of data blocks, each with its own fingerprint and containing the fingerprint of the previous block, creating an immutable chain of data. [6]
Blockchain technology versus traditional databases
In layman’s terms, a blockchain is a digital ledger that is used to record data. So, you would be right when you call a blockchain a database. However, there are fundamental differences between blockchains and traditional, table-based databases.
You may have heard the term distributed ledger technology (DLT). A common misconception is that blockchain and DLT are the same. However, that is incorrect. Blockchain is a type of DLT, but not the only one.
Blocks vs Tables
Most traditional databases are structured as a table. Just think of an Excel sheet that consists of rows and columns structured to form a table. A single database can contain countless tables. [7] However, these tables aren’t fundamentally linked to each other. Again, you can think of one Excel sheet with multiple tabs. Tables in a database may reference each other and data changes in table 1 can lead to changes in table 2, but this is not necessarily part of the fundamental architecture.
A blockchain, however, is structured by stacking blocks on top of each other. Each new data block goes on top of the previous block and is linked via a cryptographic fingerprint. Hence, the name “block-chain”. Moreover, you cannot make changes to the chain without consequences. For example, on the Bitcoin blockchain, each block contains the cryptographic fingerprint of the previous block. If you only change one bit (the smallest unit of data a computer can process) the chain of fingerprints would fall apart and the whole blockchain would have to be reconfigured, rendering it impossible to make any changes without other participants noticing. [8]
Centralized vs Decentralized
Traditional databases are centralized. There is usually a central entity or person controlling the database and making sure it’s up to date. For example, countries keep a database of who owns which house. Every time a house is bought or sold, a notary has to draw up the deed and communicate it with the government. The government has to update the database to reflect the new ownership. In this example, the government is the central entity controlling the database.
Blockchains can be decentralized. Blockchain participants, also known as nodes, are computer systems that each store a version of the ledger. Each node will know how and when to update its version through complex consensus mechanisms, ensuring that each node continues to add blocks in the same way, extending the blockchain. This way of working allows blockchains to function without a central entity. Even more so, when it comes to public blockchains, network participants don’t even have to know and trust each other (trustless network). The consensus mechanism makes sure that all information on the blockchain is correct and synchronized throughout the network of nodes. [9]
Mutable v immutable.
Another critical difference before we dive into the use of blockchain in the crypto industry is the fact that traditional databases are mutable. In other words, data can be changed. It doesn’t matter if you’re changing the first data entry or the last. In principle, each data point is entered individually and can be changed individually. A change may cause other data to change if they are linked somehow, but this is not part of the fundamental architecture. [10] Of course, a traditional database can be equipped with a security system that detects changes and unauthorised excesses. However, this requires additional features to be built into the database. That said, the fact that traditional databases are mutable does make it easier to correct mistakes. On the other hand, it also exposes them to a higher likelihood of fraud. [11]
Blockchains are immutable. A blockchain is built from blocks and all blocks are chained to each other via their digital fingerprints. Only changing one bit (the smallest unit of data a computer can process) breaks this chain. This literary means changing a “1” to a “0” or vice versa. It is theoretically possible to change the blockchain’s top blocks in a so-called consensus attack. However, this is extremely difficult ie. expensive. And the further down the blockchain you go, the more impossible it becomes. [12] In practical terms, it’s safe to say that the data registered on a blockchain is immutable. [13]
Blockchain technology and cryptocurrencies
Blockchain and cryptocurrencies have become almost synonymous with each other and for good reason. Without the invention of blockchain, cryptocurrencies, as we know them today, wouldn’t have been possible.
To understand this, you first have to realize that a cryptocurrency is nothing more than numbers on a ledger. [14] It’s data. You often see images of a shiny gold coin with the Bitcoin logo, but this is just a visualization. If you own bitcoin it means that you control a bitcoin address and the blockchain reflects the bitcoin owned by that address. To be more exact, the bitcoin that you own is not even a single number. The bitcoin owned by an address is the sum of all unspent transaction outputs (UXTO) that were sent to that address. [15]
Going back to the difference between traditional, table-based databases and blockchain, the key here is that on a blockchain the data is practically immutable. In principle, the only way to change data on a blockchain is through the consensus mechanism built into the blockchain. So, even though your cryptocurrencies are just numbers, due to the fact that these numbers are registered on a blockchain, everybody can know that the numbers are correct (consensus was reached).
When you combine the principle of immutable data with a consensus mechanism, a mechanism that implements strict standards for changes to the blockchain, it becomes possible to automate transactions in an honest way. The immutable nature ensures that data can be trusted and the consensus mechanism ensures that transactions and data changes are handled honestly. This results in a network where participants don’t have to know and trust each other and can still be sure that transactions are correct and the data is true, eliminating the need for a central entity and making decentralized digital ownership possible.
SOURCES
- IBM: What is blockchain technology?
- Bitcoin Association: The little-known history of blockchain, as told by its inventors | Author: Greg Hall
- Haber, S., Stornetta, W.S. How to time-stamp a digital document. J. Cryptology 3, 99–111 (1991). https://doi.org/10.1007/BF00196791
- Bitcoin Association: The little-known history of blockchain, as told by its inventors | Author: Greg Hall
- Haber, S., Stornetta, W.S. How to time-stamp a digital document. J. Cryptology 3, 99–111 (1991). https://doi.org/10.1007/BF00196791
- Agbo CC, Mahmoud QH, Eklund JM. Blockchain Technology in Healthcare: A Systematic Review. Healthcare. 2019; 7(2):56. https://doi.org/10.3390/healthcare7020056
- Microsoft Support: Database design basics
- Mastering Bitcoin: Chapter 7. The Blockchain | Author: Andreas M. Antonopoulos
- Mastering Bitcoin: Chapter 8. Mining and Consensus | Author: Andreas M. Antonopoulos
- Software Carpentry Github: Database & SQL, Creating and Modifying Data
- Schnell: How to Secure Your Database: The [Complete] Guide to database security & best practices
- Mastering Bitcoin: Chapter 8. Mining and Consensus | Author: Andreas M. Antonopoulos
- IBM: What is blockchain technology?
- Mastering Bitcoin: Chapter 7. The Blockchain | Author: Andreas M. Antonopoulos
- Mastering Bitcoin: Chapter 5. Transactions | Author: Andreas M. Antonopoulos
