What is blockchain technology? How does it work, and
what can it be used for? First, it is essential to point out that blockchain
technology is not necessarily related to cryptocurrencies or Bitcoin. It is
more correct to place it alongside artificial intelligence, the infamous 5G
network, and similar future technologies.
Blockchain technology existed well before the first
Bitcoin was created in 2009. This technology was described by a group of
researchers (Haber, Stornetta, and others) in 1991 but did not garner much
interest in the general public.
The popularity of blockchain technology began to grow
in 2008 when an individual or group of individuals under the pseudonym Satoshi
Nakamoto (it is still unknown who that may be) presented blockchain’s practical
value in the so-called Bitcoin white paper. The original purpose and protocol
for the Bitcoin network are described in this document.
This is what a description of blockchain technology
would look like in one sentence: blockchain technology is adigitally
distributed, decentralised public ledger that exists on a computer network and
cannot be changed. Now let’s try to explain what blockchain technology is
most simply and understandably, how it works and what it is used for. Experts
believe that this is the technology of the future.
blockchain technology, and how does it work?
The term blockchain comprises two English words; block
and chain. The basic building blocks of this technology are blocks that exist
only in digital form or ‘in the computer’. The blocks are bound in a sequence
in a chain; hence the name chain-of blocks (blockchain). Each block contains
four things: a timestamp, several different pieces of data, a hash of a block
that can be thought of as a fingerprint, and a hash of the previous block.
The type of data stored in a block depends on the kind
of blockchain. For example, the Bitcoin blockchain network stores details of a
particular transaction: sender and recipient information and the number of
coins involved in the transaction. Of course, Bitcoin can also be divided into
smaller units, called Satoshi, to facilitate smaller transactions.
Each block also has a hash that identifies each block
and its contents (data) and is always unique, like a fingerprint. A hash is a
mathematical function that converts a numerical input value of any length into an
encrypted and cryptographically protected fixed-length output. Once the data
block is created, its unique hash is also calculated. So, if anyone wanted to
change the data in the block, its hash would also change, and the block would
no longer be the same.
The third element of each block could be called the
‘confirmatory’ hash of the previous block. It’s the connecting part that
creates the chain of blocks, which is why blockchain technology is so secure.
Namely, the hashes of individual blocks and the confirming hashes must match in
precisely the same order in which they were created. Let’s look at an illustration
where we will purposely omit block A, as it’s a little more unique. Namely, it
is the first block created in a chain that (logically) has no predecessor and
is called the Genesis block.
Illustration: an integral part of block B is,
therefore, the data, B’s hash, and the confirmation hash of the previous block,
A. Block C also contains its own data, the C’s hash, and the confirmation hash
of the previous block B, and so on. So,
if someone were to change the data in block B, B’s hash would also change, and
consequently, the chain would not be valid from this point on because block C could
not validate block (hash) B. However, this is not yet safe enough, as modern
computers are very powerful. In theory, someone with such a computer could
calculate all the hashes and validation hashes from the changed block onwards,
thus adjusting the entire chain of blocks.
Proof of work, P2P network
and consensus of all users
For example, the Bitcoin blockchain network also works
according to the Proof-of-Work (PoW) model. This means that everyone who
creates blocks (the so-called miners) must use their computers to compete in
solving complex computational equations to validate blocks and transactions
that take place on the network.
When creating blocks in the Bitcoin network, the time
to solve the equations is set to about 10 minutes. Thus, the potential
malefactor would also have to include all the minutes spent creating all the
blocks in the chain he wants to change in his time of the attack.
On top of all that, blockchains use a peer-to-peer
(P2P) network as a blockchain management system instead of a central network.
In this decentralised network, users are on equal footing, and anyone can join
and get a complete copy of the blockchain.
When someone creates a new block, it is sent to
everyone on the network. Each user (i.e., node) checks the block to ensure it
has not been changed. If all is cross-referenced between all nodes, each node
adds this block to its copy of the blockchain.
Therefore, all nodes in a given network create a consensus
and determine which blocks are valid and which are not. Other nodes in the
network will reject blocks that have been modified. So, for someone to
successfully intervene in a blockchain, they would have to change all the
blocks in the chain, re-perform the Proof of Work (PoW) for each block, and
take control of more than 50% of the P2P network. Only then could the changed
block be accepted by all other nodes, which is almost impossible to implement.
Public blockchain networks, such as Bitcoin or
Ethereum, require cryptocurrencies to operate, while private networks do not.
Private blockchain networks retain some of the main features of this technology
but lose one of the critical features – decentralisation. Therefore, it would
be correct to say that private blockchain networks are centralised and use only
the so-called ‘digitally distributed ledger technology.’ Hence, by strict definition,
they are not real blockchain networks, which otherwise exclude intermediaries
from the game.
What is blockchain technology used for?
In addition to enabling transactions with Bitcoin and
other cryptocurrencies, blockchain technology is also used to optimise supply
chains and cross-border payments, protect personal and health data, and to trace
products. It is helpful in any process where a particular transaction
needs to be carried out digitally and securely between participants, or confidential
data or something similar must be transferred. However, it can go much
further than cryptocurrencies.
The European Commission is also aware of this, stating on its website that “The EU wants to be a leader in blockchain technology, becoming an innovator in blockchain and a home to significant platforms, applications, and companies”.
“Blockchain technology allows people and organisations
who may not know or trust each other to collectively agree on and permanently
record information without a third-party authority. By creating trust in data
in ways that were not possible before, blockchain has the potential to
revolutionise how we share information and carry out transactions online”,
explains the European Commission.
The European Commission’s strategy is aimed at
achieving the above objectives and seeks to support the ‘gold standard’ for
blockchain technology in Europe that embraces European values and ideals in its
legal and regulatory framework. This gold standard of blockchain technology
includes environmental sustainability, data protection, digital identity, cybersecurity,
European Commission. (3. 1. 2022). Blockchain Strategy. Digital-strategy.ec.europa.eu.
Simply Explained. (3. 1. 2022). How does a blockchain work. Youtube.com
EU Blockchain Observatory and Forum. (3. 1. 2022). Ask Me Anything Session. Youtube.com
Author: Rok Žontar
Keywords: blockchain, technology, decentralisation, digital, European Commission
article is part of joint project of the Wilfried Martens Centre for European
Studies and the Anton Korošec Institute (INAK) Following the path of
digitalization in Slovenia and Europe. This project receives funding from the
and views set out in this article are those of the author and do not
necessarily reflect the official opinion of the European Union
institutions/Wilfried Martens Centre for European Studies/ Anton Korošec
Institute. Organizations mentioned above assume no responsibility for facts or
opinions expressed in this article or any subsequent use of the information