The concept of Blockchain ("chain of blocks") was introduced in the Bitcoin "White Paper" in 2008, with the goal of creating P2P money without banks. The paper, published by Satoshi Nakamoto, proposes a system in which all computers in the network hold an identical copy of a transaction ledger, which acts as a point of reference for everyone on the network. This way, we can now interact over the internet without the need for trusted third parties, such as banks and internet platforms, or other types of payment institutions.
The Double-Spending Problem
This new way of managing distributed data solved the “double-spending problem”. The way the Internet is designed today, the same value issued as a digital file can be spent several times, because digital information can be copied, and copies of the same digital file can be sent from one computer to several other computers at the same time. The Bitcoin protocol introduced a mechanism that makes copying digital value absurdly expensive.
Chain of Blocks
In a Blockchain network, transactions are recorded in batches of data called “blocks”, which in turn are subjected to a cryptographic process called “hashing”. This cryptographic hash creates a fingerprint of the block. Each block includes the hash of the previous block, thus linking the blocks together in a chain of blocks. This process guarantees the integrity and historical immutability of all blocks back to the first block created, also referred to as the genesis block. If the data in a block is changed, the hash value of that block and of all subsequent blocks will change, and every node on the network will know that the data has been tampered with. This growing list of blocks chained together is also referred to as a ledger.
A Ledger is a file that keeps an incremental list of transaction records, in blocks that are cryptographically “chained” and protected from tampering and revision. If attempts at manipulation were made, the hash value of the manipulated ledger would not match the hash value recorded in the copies of the ledger on all other nodes. The hash value of a block therefore serves as a safeguard that can be used to verify the authenticity of a transaction in a ledger.
Distributed Ledger
A copy of the ledger is stored on multiple nodes of a cryptographically secured P2P network. In order to change the records in all copies of the ledger on the network, the network nodes need to reach mutual agreement on that change. A distributed ledger is a shared, trusted and public book of transactions that everyone can inspect/audit, but that no single user controls. Each independent node has the latest version of the ledger, which contains every transaction ever made, and can verify transactions. This process is referred to as "consensus", and it is particularly useful in inter-organizational settings where no institution wants to entrust another institution with managing its data.
Token
The term “token” is, in simple terms, a metaphor. Contrary to what the metaphor might suggest, a token does not represent a digital file that is sent from one device to another. Instead, it shows up as an entry in the ledger that belongs to a blockchain address. Only the person who has the private key for that address can access the respective tokens, using software called a “wallet”, which acts as a client on the blockchain network
Bitcoin Transactions
When using the Bitcoin network, instead of having a central unit (such as a bank) validating financial transactions, all computers on the network (nodes) check their copies of the ledger for the validity of the transaction and collectively confirm transactions by majority consensus. No user is more trusted than any other. Instead of a single trusted third party validating transactions through its servers (a single vote), a P2P network of computers running the blockchain protocol validates transactions by consensus (majority vote).
The protocol is a set of rules and processes that define how all (anonymous) nodes on the network can reach agreement on the true state of the network. The protocol defines how network participants interact with each other: (i) under what conditions sending tokens from A to B is valid; (ii) the economic rewards for validating transactions with a cryptographic token; (iii) how to reference identities and sign transactions; and (iv) who decides on network updates.
Cryptoeconomics
Cryptography brings security to the network and provides full transparency to all participants, while maintaining the privacy of each individual actor. It also guarantees that past transactions are indeed valid and true. Game theory is applied to ensure that future transactions will be conducted truthfully by majority consensus of all network actors, assuming that all network actors could potentially be corrupt. In practical terms, this means that the cost of manipulating past records for one's own benefit is immeasurably higher than the gain from not manipulating them. The consensus mechanism is thus designed to make manipulating the ledger difficult.
Consensus: “Proof-of-Work”
The consensus mechanism used by the Bitcoin network guides the collective action of an unknown set of anonymous actors. It is based on crypto-economic principles. Retroactive game theory is used to reward network actors with a native network token. In the case of the Bitcoin network, this would be the bitcoin token. This reward mechanism is designed to make cheating the network economically unfeasible, due to the prohibitively large amount of computing power that would be required to do so, even taking extreme attack scenarios into account. The consensus rules are designed to make the network resistant to attacks, despite the lack of central parties to govern the truthfulness of network activities.
Identities
A blockchain address, which is derived from the private key, represents a pseudonymous digital identity of the token owner. Tokens are seen as belonging to a given address on the public ledger. Only the owner of that address can request that those tokens be sent to another address. In order to prove their ownership to other network participants, token holders need to sign transactions with their private key. This form of identity management is purely based on mathematical functions, allowing other computers on the network to confirm the validity of a transaction without needing to know the real person or their secret private key.
Accountability & Governance
Blockchain networks can also be described as distributed accounting systems, or public and transparent governance systems. In the absence of a central entity, they provide a governance layer for the Internet. All network participants have equal access to the same data in (almost) real time. Transactions are managed collectively, are transparent to all actors and can be traced back to their origin.
Decentralized & Autonomous Organization (DAO)
All records are managed collectively by autonomous nodes of the network, which is why a new form of organizational infrastructure is also being heralded, often referred to as a Decentralized Autonomous Organization
Purpose-Driven Tokens) Block-Explorer
Due to the public nature of blockchain networks, anyone can run search operations on the network, such as tracking all token transactions, the network's total hash rate, current token balances, transaction growth, etc. However, even though all records on the Blockchain network are public, few people have the knowledge needed to run advanced data analysis on the blockchain.
Block explorers are third-party applications that allow anyone to publicly explore all transactions of a given network, such as Bitcoin or other public blockchain networks. Block explorers are like a dedicated search engine for blockchain-related data. However, this level of transparency also raises privacy-related questions. These privacy questions are being addressed with new blockchain protocols that use more privacy-preserving cryptographic methods.