Understanding the Basics of Blockchain for Beginner

Have you ever found yourself wondering, "What exactly is blockchain?" whenever you read news about it, and then searched for information about blockchain? Today, we'll cover everything from the definition of blockchain to its features as well as the limitations of the technology in a way that even non-developers can understand. Let’s begins the beginner's guide to blockchain.

Definition of Blockchain

A blockchain, as listed words narrate, is a chain of blocks connected together. It is a decentralized ledger technology that records information across multiple computers and encrypts it to ensure that the registered information cannot be altered. To change any information at the block, someone would need to modify not only the information in that block but also the information in all the other blocks connected to it which makes tampering the data impossible. This technology was introduced in public by still unidentified, Satoshi Nakamoto in 2008 that offers data integrity and transparency through decentralization, allows anyone to access all the information stored in the blocks.

In the early 2000s, the global financial crisis led many people to recognize the moral hazards and issues within the financial system. This awareness spurred the design of a “Peer-to-Peer Electronic Cash System”, enabling users to transact directly without the aid of centralized institutions or systems that had been played for many years. Today, blockchain technology is being implemented and considered not only in finance but also in logistics, distribution, society and culture, public services, and various other fields, making it a key technology poised to drive the 4^th industrial revolution.

Blockchain Key Features

Decentralization

The biggest risk in current transaction system is the bank, ironically speaking.  As seen in numerous cases of financial network hacking in worldwide, if a central bank server is compromised, data manipulation becomes easy. Blockchain, however, offers a reliable transaction system without a central administrator or authority like a bank. Saved transaction records in blocks are visible to everyone, held by everyone, and monitored and verified by all participants. No one can monopolize anything; blockchain is autonomously maintained and operated by a free and equal majority of participants, requiring the consent of more than half. This decentralization is the most distinguished feature of blockchain.

Security

As explained earlier, hacking a blockchain is practically impossible. Transaction verification is completed by majority consensus and shared with everyone. And to manipulate a single ledger, for an example, 51 out of 100 participants would need to collaborate in data manipulation. While it might seem possible to gather 51 participants, but the blockchain network already records hundreds of billions of dollars in transactions daily, with the number of participants continually increasing. In other words, assembling an overwhelming number of participants is virtually impossible. Even if a 51% attack were successful, the network would lose its validity due to verification issues.

Transparency & Anonymity

All blockchain participants can see all the past and present data of all blocks. A transaction such as 'A’ sent $1,000 USD to ‘B' cannot be hidden on the blockchain. However, the identities of A and B will remain as unknown. Blockchain provides a transparent structure where anyone can check transaction records, but since P2P (Peer-to-Peer) transactions are based on non-identifying encrypted transaction addresses, the parties involved remain anonymous. While the sending and receiving addresses and amounts are visible, the owners of those addresses are not identifiable.

Transaction in Blockchain

Let’s assume that you (A) have a bank account with balance of $100 USD. This balance is a value recorded in the bank's data server. What happens when you transfer $50 USD to your friend (B)? Your balance will decrease from $100 USD to $50 USD, and the recipient's balance will increases by $50 USD. Although this seems like a simple balance change, the procedure involves several steps:

1. To make the transfer, you have to log-in through authentication process at the bank app

2. You enter the transfer amount and create a transaction record

3. You confirm the transaction record using methods like certificates, passwords, or biometric authentication (similar to signing a contract)

4. The bank verifies whether balance is sufficient to complete the transaction and save its confirmation at data server

5. Once stored, the transaction alters the user balances within the bank's system.

As you could see, your bank is responsible for altering the records in the data server and guarantees the results. But what if the bank mistakenly records your actual balance of $100 USD as $0 USD? We use banks with the trust that they will manage our accounts correctly.

Now.. how does cryptocurrency operate without using centralized institutions or systems based on blockchain technology?

Let's take Bitcoin as an example, the most famous cryptocurrency. Same situation with above, you have 100 BTC in your Bitcoin address (similar to a bank account number). When you (A) want to send 50 BTC to B, how should the data storage be updated? Your balance should be reduced by 50 BTC, and B's balance should be increased by 50 BTC. Comparing this flow with previously explained bank example:

1. You create a transaction record stating that "A sends 50 BTC to B."

2. After signing the transaction (verifying that A is the owner of the Bitcoin), the transaction is sent to blockchain network.

3. Then network verifies the validity of the transaction, then stores the transaction record on the blockchain.

4. Bitcoin balances are updated accordingly.

The basic procedure and principle are the same. The only difference is whether a centralized institution like a bank or decentralized system like Bitcoin network is responsible for storing and approving the transaction data. As a side note, Bitcoin communities celebrate "Pizza Day," which marks the first time Bitcoin was used as in real world on May 22, 2010. On this day, an American developer successfully purchased two pizzas for 10,000 BTC through an online forum. Based on Bitcoin's peak price, those two pizzas were worth over $700 million USD dollars. We do not know whether the pizza shop owner still holds those 10,000 BTC or not.

You use the bank's data storage with the trust that the bank will manage it properly and not tamper with it. In contrast, Bitcoin network operates not based on trust in a particular authority, but on the fact that the transaction records stored in the blockchain are difficult to alter. Without relying on trusted institutions like banks, the blockchain itself becomes a reliable storage system.

If we can verify and trust the information stored in the blocks, then the concepts proposed by Satoshi Nakamoto can be applied in everyday life:

Blockchain Reliability

Below image illustrates how blockchain is structured.

When multiple transactions occur, they are collected together into a unit called a block. In the case of Bitcoin, one block is generated every 10 minutes, while Ethereum generates one block in every 15 seconds.

Each block compresses the transaction records inside and includes information that makes any alterations immediately detectable. In the diagram, assume that in transaction (TX) 3, C sends 1 BTC to D. If someone tries to alter the sending amount in TX 3 to 2 BTC, the hash value of the block would change, making the tampering easily noticeable. Additionally, as new transactions occur, new blocks are created, and each block is linked (chained) to the previous ones to prevent any tampering with past transaction records.

Therefore, the structure ensures that any tampering with transaction records can be immediately detected, reinforcing the statement that "data stored in the blockchain cannot be tampered with."

Drawbacks of Blockchain

While blockchain technology has many advantages, it also has certain drawbacks:

Lack of Regulation

Due to lack of regulation related with blockchain technology, it is much harder to recover losses if data stored on the blockchain is stolen. For instance, if someone gains access to cryptocurrency wallet, there is no bank or central authority to help recover the stolen funds. Additionally, if an incorrect address is entered in transaction, there is no way to cancel or reverse the transaction (except for crossing the fingers for sending the fund back to original address which is very slim chance).

Excessive Transparency

Most data on the blockchain is accessible to majority of people which makes it unsuitable for storing sensitive information. Although hashing technology (represents the original data as an obscure string of characters) can conceal the data owner, the data itself remains public. This is why there are cautious or conservative opinions for using blockchain for government records or medical data.

Transaction Approval Time

Quick transaction approval times are also essential, but for Bitcoin, it technically takes around 11 minutes. Furthermore, if there are many blocks that waiting for approval in the network, it could take 30 to 60 minutes or even longer, which is a significant drawback.

Of course, various technologies have continually introduced and achieved remarkable results to overcome these issues. For example, in January 2024, the United States Securities and Exchange Commission (SEC) approved Bitcoin spot trading service, making it the first cryptocurrency to be officially recognized as a digital asset by the government. Consequently, Bitcoin based financial services have been launched by leading financial service companies. As of July 2023, Bitcoin's market capitalization is approximately $114.1 billion, placing it among the top 10 global investment assets by market capitalization. Although the volatility of its price raises doubts about its ability to function as a stable measure of value, which is one of the key attributes of currency, there is no disagreement that Bitcoin plays a significant role as a digital asset.

Regards with excessive transparency and access to information are being addressed by applying  a technology called Zero Knowledge Proof (This technology allows you to prove that you have certain information without revealing the content of that information). For easier understanding, think of the signs you may have seen at amusement park that requires you to be a certain height to get on a ride. Zero Knowledge Proof means you can prove that your height exceeds the required height for the ride without disclosing your exact height.

To improve transaction approval speeds, various blockchain networks have been launched and created an ecosystem. For example, Solana network known for its fast processing speed, supports up to 65,000 transactions per second (TPS). This is significantly higher than VISA's 1,700 TPS. However, while VISA's TPS reflects the number of transactions used in real world while Solana's TPS is more of technical capability that does not include SPAM transactions. It indicates that there are still rooms for improvement. Nevertheless, compared to Ethereum, which supports only 15 TPS but allows for the addition of various functionalities through smart contracts, the progress made by Solana is remarkable.

Conclusion

Blockchain has provided solutions to the problems that were found in traditional centralized structures, and created revolutionary changes in currency and data ownership and offering many potential use cases. As blockchain continues to evolve, it can indeed develop to meet the demands of businesses and governments, but mass adoption is expected to take time. For example, internet technology you are using today began as ARPANET in the 1950s and switched to the current TCP/IP packet transmission method in 1983. This illustrates that blockchain will require significant technological advancements before it becomes mainstream in everyday life.

In the decentralized blockchain world, individuals are fully responsible for managing their information. It is crucial for users to have clear understanding about blockchain concepts and its principles. Wallet providers like D’CENT, a key player in the blockchain ecosystem, must put remarkable effort in educating users. Additionally, it is necessary to establish relevant regulations to protect users from hacking incidents and losses associated with cryptocurrency misuse.

There is no doubt about digitalization of the existing ecosystem, and the digitization of assets within this digital ecosystem is an unstoppable trend. In this rapidly changing world, some may dismiss it as a passing fad, while others may recognize the transformation and prepare or invest accordingly. Novelist William Gibson said, "The future is already here—it's just not very evenly distributed." We hope you wisely prepare for the increasingly digital world and D’CENT aims to provide content that makes fundamental blockchain and cryptocurrency concepts easy for beginners to understand. We are looking forward to have your support and interest.

Next session, we will explain why blockchain technology is considered a world-changing innovation and the second internet revolution by discussing about a key philosophy, which is decentralization.