Blockchain technology is a relatively new concept and can be a confusing concept to understand. Here in this article we will try to simplify things by first explaining what is a blockchain.
A Blockchain is a distributed database or ledger that multiple parties share and everyone can trust. A Blockchain network provides a mutually trusted, transparent way of sharing and transacting. Each party participating in a Blockchain network maintains their own copy of the database or ledger.
Before proceeding to read rest of this article please have a look at the following two minute video giving you a short introduction to what is a Blockchain.
What makes Blockchain secure?
Transactions on the database are processed one at a time. The next transaction will be a different write or a read, but only after the preceding transaction has completed or failed.
Each write to the database is considered a ‘block’ and each new block contains a cryptographic hash (a unique fingerprint) of the previous block, creating a chain that can always be validated by checking the hashes back to the original root block.
Before a block can be committed, all participants are required to validate the transaction and provide consensus that the block can be added to the chain. This effectively makes it impossible to add a record unless all parties participating in the blockchain agree the record is valid.
Because all records are chained together by their hash value, once committed to the chain, all records are immutable (they cannot be changed). It is impossible to alter a previous record without altering every party’s copy of the chain. If one node is compromised, then it can no longer participate in the chain until it regenerates the true chain from the other participants.
How does Blockchain prevent double spending?
A major challenge of digitising assets is the potential to spend/redeem/use an asset multiple times. Because digital assets are much easier to forge than many traditional assets (such as tickets, physical coupons, etc.), a secure system is required to ensure that an asset is only used once.
With Blockchain, every time an asset is used or consumed, the owner of the asset signs the transfer with a private cryptographic key. This key is unique to the owner and is extremely difficult to forge. In order to initiate the transaction, the transferrer requires both the asset and their private key.
The Blockchain will check both the validity of the key, and ownership of the asset. Therefore, even if the asset is cloned, it cannot be used without the private key. Once the transaction has been committed to the chain, the owner of the asset will have changed. This means, each node that receives a second transaction requesting transfer of ownership (or redemption, etc.) will see that there was a previous transaction that already transferred the asset and will reject that transaction. This prevents a second transfer block from being added to the chain.
How does Blockchain ensure privacy?
Personal data and identifiers are not required to be stored in the chain. Such data is stored as a hash value which provides both anonymity and security.
The user may provide data such as their name, telephone number, email address, Facebook account id, unique user name, password etc. (in reality a combination of these values is used) to determine their identity. This data is hashed to provide a unique token that can only be recreated by providing the original values, and only this hash is stored to identify the party in the chain.
Since it is impossible to obtain the input values by reverse engineering a hash value,
the user is practically anonymous to all parties within the chain. But, they can be validated whenever required by providing the original values used to create the hash.