Blockchain technology: we’re explaining everything!

You're probably familiar with Bitcoin, and maybe even other cryptocurrencies. But in concrete terms, how do these virtual currencies work? How can they be 100% digital? 

This is thanks to the magic of blockchains, the behind-the-scenes of cryptocurrencies, without which they could not exist. 

If we hear more and more about these "blockchains", how they work remains obscure for most of us. And for a good reason! It may seem difficult to understand this technology, which is far from dreamy at first glance.

However, you don't need to know anything about computer development, or even mathematics, to understand the blockchain. You'll see that it will soon hold no secrets for you!

Why was blockchain invented?

The place of  theInternet in our societies

For the majority of us, using the Internet has become a daily and ordinary act. Internet access was even recognized as a human right in 2016 by the UN. 

Thanks to the democratization of the Internet, many media have started to be dematerialized. As a result, it is now possible to listen to online playlists, stream a movie, or even get information on current events through the Internet.

Also, more and more items are connected to the "network of networks", such as smartphones, watches, but also coffee makers or refrigerators. This network of connected items has been called the "Internet of Things". It allows information to flow more efficiently between humans, but also between humans and machines.  

The Internet has thus become part of many of our activities, interactions, the way we consume content, etc. The motto behind the "Internet of Things" sums it up quite well:

Anything that can be connected, will be connected.

It seems normal that such logic also applies to money, which has not escaped the rise of the Internet. Moreover, it is now possible to consult one's bank account from anywhere, thanks to the Internet.

The invention of the "Internet of Value" 

But why not go even further? Why not create fully virtual currencies, which could be traded directly via the Internet? This was the goal of the first cryptocurrency, bitcoin, which was created in 2008. 

More than a decade later, Bitcoin is referred to as "digital gold" and serves as a benchmark for the crypto-currencies created in its wake, of which there are currently more than 3,000. Crypto-currencies have always been in the news, and more and more companies and individuals are investing in these new kinds of currencies. Their existence is therefore widely known.

But if the idea of a digital currency seems obvious today, it is necessary to insist on the revolution that the creation of Bitcoin has brought about. This revolution is the "Internet of Value" and it is entirely linked to blockchain technology. 

The blockchain is the backstage of cryptocurrencies. It is the system that allows them to be generated, stored or traded, as we will see later.

Bitcoin and digital scarcity

To understand why this technology is so innovative, we must take a look at the nature of digital data.

Any information, any dematerialized file seems to us inevitably falsifiable, replicable: it is possible to copy a Word file in a single click for example. In the same way, the management of information on the Internet requires the copying of files. Thus, an email is not "sent" to its recipient, it is in fact copied to his mailbox: the sender thus keeps the original e-mail. Whereas if you send a letter by post, it no longer belongs to you from the moment it is dropped in the mailbox.

If it is possible to duplicate an email to send it to its recipient, we quickly understand why it is impossible with money: you can't copy a 10 dollar bill to give it to someone, and keep the same bill on your side.

That's where blockchain technology comes in, by enabling the creation of digital scarcity. This concept is the origin of the "Internet of Value''. In short, the blockchain beyond Bitcoin has made it possible to accelerate and improve the management of value, just as the Internet had done for the management of information.

By making digital data "unique" (and therefore rare) and unforgeable, blockchain technology opens the door to activities and services that were previously limited to the real world. This is obviously the case for money: cryptocurrencies can be exchanged without fear of copies or malicious attacks. 

But money is not the only asset based on scarcity. Many goods, documents and items must retain their uniqueness to retain their value. This is the case with trading cards, for example. The blockchain has made it possible to create Panini Cards 2.0: Sorare cards are entirely virtual, yet can be bought or traded like their real-world counterparts.

But we can also think of real estate titles, contracts, intellectual property, works of art etc. The blockchain can be used in many other ways, as we will see later.

The concept of decentralization

Now that you know about the "Internet of Value", you know that Bitcoin revolutionized the Internet by allowing data to be distributed without being copied. That's why cryptocurrencies can now be traded online, just like cash.

But crypto-currencies have not only created digital payment systems. With Bitcoin, Satoshi Nakamoto's goal was also and above all to free ourselves from banks and all other intermediaries in the financial world. The blockchain is therefore a dematerialized system, but also decentralized. 

This is one reason why the first block of the Bitcoin blockchain contains a sentence from the January 3, 2009 Times:

Chancellor on brink of second bailout for banks

This headline refers to the 2008 global financial crisis, during which the British Chancellor of the Exchequer had to inject billions into his country's economy to save the banks. The headline of this article helps date the beginning of blockchain, but it also served as an explanation for the creation of cryptocurrencies. According to this view, crypto-currencies were created to save banks.

The true origin of blockchain

However, far from wanting to save the world of finance, blockchain technology was designed to do without it. It is in fact the result of a movement born in the 1990s. The "cypherpunks" were then looking to safeguard privacy, which had been undermined by the development of the Internet. With this in mind, they wanted to invent an independent payment system, since no digital alternative to the credit card had been created since the beginning of the Internet. Although payment systems such as Paypal are apparently freer, they do not escape censorship: the account of the founder of Wikileaks was closed by the company in 2010 for example.

On the contrary, the blockchain is based on cryptography to propose a monetary system that relies on a network, not on a central entity. It generates consensus, organizes transactions, stores data from a computer code. It is therefore no longer necessary to trust intermediaries to manage one's money, for example: mathematics replaces these verification and control steps. We will see that the blockchain could eventually replace many procedures, documents, transactions that today require trusted third parties and are controlled by the Government.

In theory, the operation of the blockchain would therefore allow for more transparency in many areas. This was also the project of the Internet. In reality, transactions on the Bitcoin blockchain are still controlled by the state, although its next update should improve the privacy of its users. 

Like the web, the way blockchains work has become increasingly centralized. But the concept of decentralization is at the heart of its original project, and it is no less essential to the understanding of its technology. 

How does blockchain work? 

If we wanted to define blockchain simply, we could describe it as a type of database. Like an Excel spreadsheet, it allows for the storage and updating of data, which can be linked to a monetary system in the case of Bitcoin for example. 

But the blockchain is not only about storing data. Thanks to it, it is also possible to transfer information or money. There is no need for a trusted third party to do this.

What is a "trusted third party"?

What is a trusted third party? Here is an example. Today, to make a bank transfer from one account to another, the transaction must necessarily go through an intermediary: a bank, for example. Banks proceed in the form of transfers: they decrease the balance on one side, update the credited account, and then update the first balance again. 

In the current monetary system, data is not shared, but transferred. It's a bit like when you have to write a document with several people: you send a first version to someone, which prevents you from having access to it or modifying it as long as this second person is working on it. On the contrary, the blockchain can be compared to a shared document, on which all participants can write, while having access to an always synchronized and updated version of the text. 

Here is another way to describe blockchain according to mathematician Jean-Paul Delahaye (winner of the d'Alembert Prize): according to him, we must imagine :

a very large notebook, which everyone can read freely and for free, on which everyone can write, but which is impossible to erase and indestructible.

While the services of a notary, a lawyer or a banker are necessary to establish contracts or transfer money, the blockchain sets up an encrypted and decentralized service in which the "code is law". The concept of "mining" guarantees the security and integrity of legal acts or financial transactions, as we will see. Reducing the number of intermediaries has multiple advantages: transactions are private, uncontrolled, faster and more secure, costs are reduced, etc.

Where is the blockchain stored?  

The originality of blockchains is that they are not stored in a single place (on a single computer or server for example). 

They operate through an independent community of thousands of computers, called "nodes. These nodes are all connected to an open network.

It is open, in the sense that it is possible to connect to a blockchain freely and without authorization: all you need is an electronic device (computer, telephone, printer…) and access to the Internet. The software needed to operate them can be downloaded free of charge. Of course, some authorities recommend specific software and the GitHub development platform is often preferred. But in reality, nothing prevents a user from using the program and the platform of his choice. 

When a new user connects to a blockchain, he or she joins the network nodes. He can then start exchanging information with the other nodes and choose the role he wishes to occupy within the blockchain. Indeed, since control is not centralized, anyone can take the place they want in the network, regardless of their importance.

What are the different nodes in a blockchain ? 

To describe the different types of nodes that exist, we can take the example of Bitcoin, which is based on the very first blockchain.

As we have seen, any user can connect to the blockchain. They will then be considered as a new node of the network. It will communicate in different ways with the rest of the community, depending on his role:

• Full nodes: These are essential to the network and ensure the existence and security of Bitcoin. Generally speaking, full nodes are the "memory" of the blockchain: they are capable of storing a copy of all the blocks in the chain and all past transactions. In reality, they may contain only a portion of the chain. These nodes are essential for transmitting new transactions and adding them to the blockchain as blocks.

•  Super nodes: While "full nodes" often host a copy of the blockchain and its transactions, they are not required to share this information with the rest of the network. That's where the "super nodes" come in. They broadcast their information to any other user on the network and also serve as a communication bridge between community members.

• Mining nodes: as we will see later, the blocks that constitute the blockchain must be mined to be added to the chain. The "mining" requires a very important computing power, which means that not all computers are able to create the blocks. Two solutions are then possible:
  • If a miner is working alone, they will need to have a "full node" on their computer in order to create blocks.
  • Today, miners are mainly grouped in "pools" of miners: they share their computing power, so that the copy of the blockchain can be hosted by only one of the computers in the group.

• Thin clients: where "thick clients" have access to the blockchain's transactions through a complete or partial copy, thin client software allows access to information without having to download all the blocks. They are particularly used by those who simply want to look at the balance of their account and make new transactions. 

What is a block? How is it created?

The term "blockchain" means chain of blocks. This term refers to the very structure of this technology, which makes it possible to store information in the form of blocks of data chained together.

To explain how this works, we'll use the example of Bitcoin.

1. The creation of blocks

When a bitcoin transaction is created, it will first be added to a block of data. This block will be considered ready to be mined once it reaches 1MB of data. One of the last blocks mined, block 684326, had 1,652 transactions.

2. What is block signing?

The miners' role is to validate the transactions of the block, checking their integrity. If the block is validated, it will be added to the blockchain. 

To understand how miners do this, one must first understand how blocks are chained together.

To do this, imagine that each block in the chain has its own signature. The signature of a block is inserted in the block that follows: this is what makes it possible to link them together, as with a chain. In this way, we can quickly check that the blocks are in the right place, as long as they have the right signature corresponding to the right previous block.

The signature of the blocks is called "hash". It is generated thanks to a mathematical calculation. This calculation makes it possible to create a sequence of numbers from any data: text, numbers, etc. It is thus a process of cryptography. 

This calculation is called a "hash function", and it is applied to all the data in a block. The function used by Bitcoin is called SHA-256.

If you want to transform a text into a cryptographic sequence, some sites allow you to use this function for free. Here is an example made from the word "Coinaute", written in different ways:

Here, from different data (i.e. several lines of text), the SHA-256 function was used to create the number sequence: 

b411400f259dc89385157cd56d951968ea231442c82e87d6c360ed33e0974288 

This sequence of numbers will always be the same for this sequence of data: the hash function is deterministic. This means that the slightest change in a letter or a number will result in a completely different hash.

The SHA-256 function does exactly the same thing with the transactions contained in each block. It transforms all the data in the block into a sequence of numbers, which becomes the "hash" of the block.

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3. Block mining

Once a block has a hash, it can be mined. 

The objective of the miners is to find a second "hash", which will be the final signature of the block.

To do this, they have to modify the first hash slightly, adding a number to it, called "nonce" ("number used only once"). This number is very difficult to find, since the final hash must meet many requirements. Among other things, it must begin with a certain number of zeros and match the level of difficulty expected by Bitcoin. 

Finding the "nonce" requires an extraordinary amount of computing power, as the miner's computer must run through the possibilities very quickly to find the solution. Once a miner or pool of miners has found the solution, he pockets bitcoins generated especially for him. They also get back the transaction fees paid by users to trade or buy tokens, for example. 

On Bitcoin, a block is added on average every ten minutes (this is called "block time"). The difficulty of the solution to add a block to the chain varies with the number of mining nodes, and is expressed in numbers. 

To illustrate all this information, here is the record of the block n°684346, whose solution was found by the pool of miners Poolin :

The blockchain.com website allows us to have a lot of information about this block. Compared to what we have seen before, we can now decrypt some of the information on this sheet: 

• The hash found by Poolin for this block
• The number of transactions that the block contains (1948)
• The level of difficulty of the calculation to be solved
• The weight and size of the block
• The nonce found by the pool of miners
• The rewards received by the pool: bitcoins generated (about 6 BTC) and transaction fees (about 1 BTC).

Security and transparency of the Blockchain

We have just seen how the Bitcoin blockchain works, which is based on a "proof of work" system. In concrete terms, this means that a miner can add a block as long as he can prove that he has worked to solve a complex calculation. This work, as well as the result of this work, is governed by rules, which the entire network has agreed upon. This is why the "proof of work" is a consensus algorithm. The Bitcoin blockchain exists in a state of permanent agreement among its members, verified every ten minutes. 

This results in two main characteristics:

• Transparency: all data are distributed on the network. They are therefore public, and everyone can verify them. 
• The blockchain is incorruptible: the slightest change in the data of a block completely modifies its "hash". As the hash of the previous block is always added to the new block, it is easy to notice that a hash has been modified. The block with the modified hash is then removed from the blockchain. 

The security of the blockchain is also due to the fact that its data is stored on a decentralized network. The fact that it is not centralized makes hacking much more complicated, unlike the Internet. 

Since 2008, Bitcoin has not experienced any significant disruptions. The problems that have occurred have all been the result of human error or malicious intent, and therefore have had nothing to do with how it works. So blockchain technology seems to have a bright future ahead of it.

Les applications de la blockchain

As you may have noticed, blockchain technology is based on a decentralized, secure and transparent network. Its system makes it possible to speed up and ease transactions, to reduce the costs linked to intermediaries, and to reduce risks. If it is always associated with cryptocurrencies, it is however only one of its multiple uses. 

Here are some examples of real or future uses of blockchain:

• With DeFi (Decentralized Finance), many actors want to use blockchain to transmit values and create a finance for all, without intermediaries. For example, it would no longer be necessary to communicate one's identity to open a bank account or take out a loan.
• The blockchain, which is a large shared record, can also be used to ensure better tracking of products (medicines, food, assets, etc.). 
• It is also possible to write contracts directly on the blockchain. "Smart contracts" allow the clauses of a contract to be executed automatically, and to verify that it has been respected.

These uses concern many and varied fields, from finance to music, real estate, pharmaceutical industry, etc.

Blockchain could also be the source of a new, fully decentralized Web 3.0, which could do without the centralized services of Big Tech. 

Conclusion

As you may have discovered, blockchain technology is far from being used only by cryptocurrencies. Its decentralized, secure and transparent system could well revolutionize our everyday lives. One more reason to be interested in how it works, which may be a little clearer to you after reading this article. If not, don't panic: there's nothing to stop you from buying cryptocurrencies without knowing the blockchain inside out! And if you're passionate about blockchain, be sure to check out our other guides to becoming knowledgeable about cryptocurrencies.