Bitcoin and Ethereum two of the most known cryptocurrency and payment platforms were introduced to the world in 2008 and 2015. The fact that these two cryptocurrencies are so public and other cryptocurrencies are beginning to be introduced to the world is a proof that electronic payment system based on cryptographic proof is an acceptable trustworthy fact which allows any two parties to transact directly with each other without the presence of a trusted third party.
this technology have much broader applications and implications, using blockchain as a secure way of transferring money and money transactions is only one of the known abilities of blockchain and its platforms, this technology can be used in so many different fields for multiple purposes.one of the benefits of blockchain is that by removing the middleman which used to act as a trusted third party the cost of the transaction and the time to transferring the money are both reduced.
To have a better understanding concept of this technology and blockchain it is better to use the Bitcoin and Ethereum as an example, since both these cryptocurrencies are intrinsically linked to blockchain.
So first here is a brief definition of terminologies we are going to use to define blockchain and how it works:
1- Cryptocurrency is an electronic currency and asset. Such as bitcoin and Ethereum
It is kwon that Bitcoin system works based on cryptographic proof instead of a trusted third party such as banks, but the question is what is this cryptographic proof?
Bitcoin system protects its transactions by a digital signature. Every account and party in the system owns their own unique key known as “private key” and another key known as the “public key”.
When a sender is making a transaction, the transaction will be send to the “public key” of the receiver which is singed and marked by the “private key” of the sender. The “private key” is being used as a proof of the owner ship of the money which is owned by the party or seller before any transaction. So the reviser of the digital currency verifies the “private key” or the digital signature on the transaction using the “public key” of the sender.
Every transaction will be copied and distributed to every node in the network of the system. Then this act of transaction will be recorded in the blockchain ledger, every transaction needs to be verified before being copied in the public ledger of blockchain, before the verification on the transaction by all the nods in the system it is a pending transaction and will not be included in the ledger as a valid new transaction. This verification in the ledger of the blockchain is done by use of both “private key” and “public key” to confirm that the sender owns the cryptocurrency and the balance of the account is enough to make the transaction.
The ledger of the blockchain keeps the history of all transactions and recalculates the balance every account by keeping the track of already spent transactions in the system which are coded as Hash in blocks after every transaction.
Block
The blockchain as its name sounds is made from a chain of blocks, which every block contains same components such as:
- Block number or Bloch Height
- Previous Hash which is the “Current Hash” of the previous block
- Current Hash value of the block
- Timestamp that shows the date and time of block creation
- Root Hash
- Nonce which is a random number which is created during the mining node
By linking recorded sequences together which each record contains the previous hash record blockchain is made each of these records are one block. So by this method the history of changes in the system is recorded in blocks as hash.
For storing every transaction by their hash in the records, there is a need for a data structure known as Merkle tree. This data structure ‘’ Merkle tree’’ makes a single root by combining all hash values of data together. This method has high efficiency due to the ability to summarize all transactions in one block and the presence of a new transaction in the block. The efficiency and validity of this method is that by this data structure it is possible to validate the data sent in the network.
Chaining Blocks
As it is said previously these blocks are chained by Hash, each block coprevioushe hash of pervious block header and by this method the blocks create a chthe ain by the name of blockchain. By this method it is easily possible to detect any changes in the previously created blocks since the copy of the blockchain is owned by all users and they system validate the new blockchain by other users.
Transaction
For example in Bitcoin as the most known cryptocurrency , Each owner transfers the coin to the next one by digitally signing a hash of the previous transaction and the next owner's public key and appending it to the end of the coin. The recipient of the payment can verify the signatures to verify the chain of owners. The problem, of course, is that the payee cannot verify that one of the owners has not duplicated the coin.
In the mint-based model, the Mint knew all the transactions and could decide which ones arrived first. To do this without a trusted party, transactions must be made public, so there is a need for a system whereby subscribers agree on a single history of the order in which they arrived. The payee requires proof that at the time of each transaction, the majority of the nodes of the network agree that they have received them first.
Safety
The reason cryptocurrencies based on blockchain or any other application that is using blockchain as its proof of work is known to be safe and legitimate is because of its complete transparency. As it is described in this paper every one with a computer can connchecko the network and cheek the chain of the all activities such as transaction to confirm the legitimacy of the chain.
Market
Blockchain market is mostly known by cryptocurrency and financial market such as Bitcoin or Eterium, but blockchain market has more potential even to distribute goods and using blockchain to have a record of all information.
Due to various kinds of block chain such as Alternative Blockchains, Colored Coins, Sidechains, etc. it is possible to archive distributed data, use them as an open source protocol to create digital assets by developers or even using them to back the cryptocurrency.
Due t,o Blockchain technology it has usage in both Financial and Nonfinancial Areas.
