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Blockchain: what does it mean?

We often hear about blockchain, but what does it really mean?

“An open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”  Harvard Business Review.

This definition clearly and precisely defines the meaning of the term blockchain

More broadly we could say that the blockchain is an open and transparent archive for all participants and can only be modified with everyone’s approval. In addition, it guarantees the absolute immutability and incorruptibility of the data. 

Otherwise, if we wanted to illustrate the blockchain in computer terms, we could briefly define it as a distributed database; that is, a database shared between several computers, called nodes, connected to the network. 

Before going into more detail, in order to provide more clarity about the terms and definitions, we will briefly illustrate the main elements of the blockchain: 

  • NODE: participants in the blockchain, usually consisting of servers.  
  • TRANSACTION: made up of the data representing the values exchanged. The transaction must be verified, approved and finally recorded.
  • BLOCK: consists of a set of transactions that must be verified, approved and recorded by the participants. 
  • LEDGER: is the public ledger in which all transactions are recorded in an orderly and sequential manner. It consists of a set of blocks. 
  • HASH: non-reversible logarithmic function. It identifies the block in a unique and secure way. The hash records all information related to the block and a hash with information related to the previous block, thus creating the chain of blocks (blockchain). 
  • MINERS: are those who process (check and validate) the block, solving a complex mathematical problem. 

The blockchain is therefore a series of blocks that store a set of transactions validated and approved by the participants (nodes) of the blockchain; each block includes a hash to identify it. 

Having shed some light on the terminology, let’s examine how this technology works. 

The blockchain is based on a distributed ledger system and to fully understand how it works we have to take a step back… 

The old ledgers were used to manage the accounting and to archive the data of the accounting transactions. Each change is made by a central authority responsible for managing the ledger. The ledger is used to verify that changes in ownership and transactions are possible and legitimate. All this is obviously based on the trust that people have in the manager of the ledger

“The Blockchain is doing with transactions what the Internet has done with information”.

The blockchain offers the same functionality and performance as a ledger, but without a central authority. The ledger “becomes everyone’s”: decentralization of the ledger. All users have a copy of the ledger and everyone can check it, view it and modify it according to certain rules. 

Everyone can carry out a transaction or modify an existing one as long as everyone, or the majority, agrees. Obviously, the transaction request will be accepted after verifying its legitimacy, so after a careful check performed by the nodes. Each new transaction is linked to others so as to form a block, each new block is added to previous ones so as to form a chain of blocks. In order for the block to be added to the chain, it must be subjected to the mining activity carried out by the miners. 

This activity controls, validates and encrypts the block by solving a complex mathematical problem (once the block has been validated, all the transactions inserted in it are also validated). 

After approval, the block will be public and no one will be able to change it. If an error is found in the mining activity, the block will be rejected and everyone will see that the transaction has not been authorized. The entire chain of blocks will form the blockchain ledger.

Increased security 

The old ledger can be modified, destroyed or damaged, by violating the central authority. To do so with the blockchain, all copies of the ledger owned by the participants should be violated simultaneously. In addition, the blockchain is equipped with protection tools such as digital signature and time stamps, a specific sequence of characters that uniquely identify a date and time to ascertain the actual occurrence of a specific event. 

Greater confidence 

In the old ledger, trust and control of transactions pass from the central authority to all participants. In the blockchain transactions are not centralized, but decentralized, as well as transparent and open to all users. In particular, the blockchain can be: 

Permissioned blockchain, in which there is the need for permission from a group of operators (governance) who control, authorize and give the possibility to add transactions to the ledger while maintaining the values of transparency and loyalty of the blockchain. This model is ideal for the requirements of businesses, banks and institutions. Three elements apply in private blockchains:

    • INFRASTRUCTURE: being able to rely on closed and reliable private networks.
    • ECOSYSTEM: the actors that populate private blockchains must rigorously share the same values and rules.
    • APPLICATIONS: development companies create applications for private blockchain solutions and must work in partnership with infrastructure providers.

Permissionless blockchain, which operates without permission from anyone. There is no type of governance that controls or allows transactions. They are open and designed not to be controlled. This model is called public and is the one used by bitcoin. 

It prevents any censorship and no one can prevent or authorize a transaction without everyone’s consensus. 

Main features of the blockchain: 

  • Reliability: not being a centralized system, it is more secure and reliable from attacks by attackers (if one node is damaged, the others remain operational). 
  • Transparency: all transactions are visible to participants. 
  • Convenience: it is more convenient because there are no intermediaries. 
  • Robustness: solid information, cannot be changed in any way. 
  • Irrevocability: irrevocable and easily traceable transactions. 
  • Digitality: with the blockchain everything becomes digital and as a result, there are infinite areas of applicability. 

Michele Angeloni