Following the path of digitalization in Slovenia and Europe: What is blockchain technology that everyone is talking about?

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 a digitally 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.

What is 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, and interoperability.

Sources:

1. European Commission. (3. 1. 2022). Blockchain Strategy. Digital-strategy.ec.europa.eu.
2. Simply Explained. (3. 1. 2022). How does a blockchain work. Youtube.com
3. EU Blockchain Observatory and Forum. (3. 1. 2022). Ask Me Anything Session. Youtube.com

Author: Rok Žontar

Keywords: blockchain, technology, decentralisation, digital, European Commission

Disclaimer:

This 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 European Parliament. 

The information 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 contained therein.

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