Blockchain – What’s under the Hood?

When you buy a piece of real-estate how do you know that the seller is the actual owner and the property is free from all encumbrances and when you buy a diamond how do you know that the records are not fudged and that you are not buying a blood diamond!

What if there was a process to record every transaction, every event in the movement of a product so everyone could see every step of its journey and it was nearly impossible to change any information without everyone knowing about it? The answer lies in this wonderful technology called the blockchain.

To understand the blockchain solution and why does it work so beautifully let’s take a quick look under the hood.

The critical elements of the blockchain are the SHA (Secure Hash Algorithm) or simply – ‘Hash,’ the ‘Block’ of transactions and the blocks that are strung together to form the, what else – Blockchain.

SHA-256: Think of SHA 256 as 256bit (32byte) digital signature that secures a block of transactions. The ‘transaction’ could be text or data file. The unique feature of the hash function is that no matter how big the data file (it could be a single ‘Hello’ to an entire encyclopedia), the SHA256 would return a single string of unique characters that are 256bits. For example, a – ‘Whats under the Hood’ would look like –

7b26656e615c5a42cd4e9f4fcb1c8727cae858f789466406ab0361a01c10ee95

and a ‘Hello’ would look like

778d9960911189a6f8343d49900ace957c08f7deb3274a6a7f7ed2799d80138f

An essential feature of the hash function is that it is a one-way function, i.e., it cannot be decrypted back. So if I were to send you the above hash, you would not be able to get back the original texts, however, if you had the text strings with you that I used to create the hash you could easily verify the hash!. This ‘verification’ plays an important role in creating a distributed network that builds ‘consensus’ through verification to ‘approve’ a block. This majority verification makes nearly impossible to change anything once the block is finalized.

A Block holds Individual transactions. Think of each colored box as individual transactions. The network of nodes or computers undertakes to process simultaneously to solve a math problem to validate the transactions. Once the solution is arrived at by a node the same is announced by this node to the network and ‘verified’ by other nodes in the network. Once there is majority consensus the block is created, added to the chain, replicated and the network moves on. Due to consensus building amongst nodes, any possibility of collusion (tampering) is eliminated. Each block is secured with a hash.

Blockchain: As blocks are created they are linked with each other forming a chain and thus the term – blockchain. Every block is connected to the previous block by the hash function that was created by the previous bock when it was verified via majority consensus. If one were to go and change a transaction in a given block, it would change the hash function for that block which in turn would change the hash of the next block (since they are linked) and in effect the entire blockchain from that point onward, making it evident that something was changed and also making it possible to know where it was changed.

‘Tampered!!’

This new ‘modified’ chain would be rejected as there would be no consensus with the other chains that are in the majority and sync with each other. This makes the data contained in the blockchain immutable.

The blockchain is the network, and the network is the blockchain. No one entity or authority owns or controls the blockchain. It is distributed, built by consensus and is visible to all making it virtually tamper proof. Within the financial domain, cryptocurrencies are a great application of the blockchain allowing for value to be transferred nearly instantly across borders at a fraction of a cost of the regular channels that essential fulfill the same functions.

Blockchain offers a great solution wherever provenance, authenticity, and immutability of transactions are essential which is almost everything from simple financial transactions to supply chain to facilitating transactions when self-driving taxis begin to pull into our driveways. Even now, blockchain replaces all that Uber does!!

This would be a good time to explore the applicability of blockchain within your organization and industry to save costs, improve efficiency manifold and stay relevant.