You’re probably familiar with Bitcoin, and maybe even with other cryptocurrencies. But in concrete terms, how do these virtual currencies work? How can they be 100% digital?
It’s thanks to the magic of blockchains, the behind-the-scenes world of cryptocurrencies, without which they couldn’t exist.
Although we’re hearing more and more about these “blockchains”, the way they work remains obscure to most of us. And with good reason! It may seem difficult to understand this technology, which is far from a dream at first glance.
However, you don’t need to know anything about computer development, or even mathematics, to understand blockchain. You’ll soon see that it holds no secrets for you!
Why invent blockchain?
The place of the Internet in our society
For most of us, using the Internet has become an everyday, commonplace act. Internet access was even recognized as a universal right in 2016 by the UN.
It has to be said that with the democratization of the Internet, many media have begun to dematerialize. As a result, it’s now possible to listen to playlists online, stream a film, or even find out about current events via the Internet.
Similarly, more and more objects are connected to the “network of networks”, from smartphones and watches to coffee makers and refrigerators. This network of connected objects has been dubbed the “Internet of Things”. It enables information to flow more efficiently between humans, but also between humans and machines.
The Internet has thus interfered in many of our activities, in our interactions, in the way we consume content, and so on. The motto behind the “Internet of Things” sums it up quite well:
Anything that can be connected to the Internet, will be connected.
It seems only natural that this logic should also apply to money, which has not escaped the rise of the Internet. In fact, it’s now possible to check your bank account from anywhere, thanks to the Internet.
The invention of the “Internet of value
But why not go even further? Why not create completely virtual currencies, which could be exchanged directly via the Internet? It was with this in mind that the first cryptocurrency, bitcoin, was born in 2008.
More than ten years later, Bitcoin has been dubbed “digital gold” and serves as a benchmark for the crypto-currencies created in its wake, of which there are now more than 3,000. Cryptocurrencies have always been in the media spotlight, and more and more companies and individuals are investing in these new types of currency. Their existence is therefore widely known.
But while the idea of a digital currency may seem logical to us today, it’s necessary to emphasize the revolution that the creation of Bitcoin engendered. This revolution is that of the “Internet of value”, and is entirely linked to blockchain technology.
Blockchain is what lies behind the scenes of cryptocurrencies. It’s the system that enables them to be generated, stored and exchanged, as we’ll see later.
Bitcoin and digital scarcity
To understand why this technology is so innovative, we need to look at the nature of digital data.
Any information, any dematerialized file, seems to us to be necessarily falsifiable, duplicable: it’s possible to copy a Word file with a single click, for example. Similarly, managing information on the Internet involves copying files. For example, an e-mail is not “sent” to its recipient, but actually copied to his or her mailbox: the sender retains the original e-mail. Whereas if you send a letter by post, it no longer belongs to you once it has been deposited in the yellow box.
While it’s possible to duplicate an e-mail to get it to its recipient, it’s easy to see why this is impossible for money: you can’t copy a 10 euro bill to give it to someone, and keep the same bill on your side.
This is where blockchain technology comes in, enabling the creation of digital scarcity. This concept is at the root of the “Internet of Value”. In short, the blockchain behind 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 reserved for the real world. This is obviously the case with money: cryptocurrencies can be exchanged without fear of copying or malicious attacks.
But money is not the only asset based on scarcity. A huge number of goods, documents and objects need to retain their uniqueness to retain their value. This is the case of trading cards, for example. Blockchain has enabled the creation of Panini 2.0 cards: Sorare cards are entirely virtual, yet can be bought or exchanged just like their real equivalent.
But we can also think of real estate titles, contracts, intellectual property, works of art and so on. The blockchain can be used in many other ways, as we shall see later.
The concept of decentralization
Now that you’re familiar with the “Internet of value”, you know that Bitcoin revolutionized the Internet by enabling data to be distributed without being copied. That’s why cryptocurrencies can now be traded online, just like cash.
But crypto-currencies haven’t just created digital payment systems. With Bitcoin, Satoshi Nakamoto’s goal was to free himself from banks and all other intermediaries in the world of finance. Blockchain is therefore not only a dematerialized system, but also a decentralized one.
This is one of the reasons why the first block of the Bitcoin blockchain contains a sentence from the Times of January 3, 2009:
Chancellor on brink of second bailout for banks
The title refers to the global financial crisis of 2008, during which the British Chancellor had to inject billions into his country’s economy to save the banks. The title of this article dates the beginning of blockchain, but it has also served as an explanation for the creation of cryptocurrencies. According to this view, cryptocurrencies were created to save the banks.
The true origins of blockchain
Yet far from wanting to save the world of finance, blockchain technology was designed to do without it. It is in fact the culmination of a movement that began in the 1990s. At the time, the “cypherpunks” were seeking to safeguard privacy, which had been undermined by the development of the Internet. With this in mind, they set out to invent an independent payment system, given that no digital alternative to bankcards had emerged since the early days of the Internet. While Paypal-type payment systems may appear freer, they are not immune to censorship: the Wikileaks founder’s account, for example, was closed by the company in 2010.
In contrast, blockchain uses cryptography to propose a monetary system based on a network, rather than a central entity. It generates consensus, organizes transactions and stores data using computer code. It is no longer necessary to trust intermediaries to manage money, for example: mathematics replaces these verification and control stages. As we shall see, blockchain could eventually replace many procedures, documents and transactions that today require trusted third parties and are controlled by the state.
Theoretically, blockchain would enable greater transparency in many areas. This was also the plan for the Internet. In reality, transactions carried out on the Bitcoin blockchain are still controlled by the state, although its next update should improve user confidentiality.
Like the web, the operation of blockchains has become progressively centralized. But the concept of decentralization lies at the heart of its original project, and is no less essential to understanding 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 enables the storage and updating of data, which can be linked to a monetary system in the case of Bitcoin, for example.
But blockchain isn’t just about storing data. It can also be used to transmit information or money. For this, no trusted third party is required.
What is a “trusted third party”?
What is a “trusted third party”? Here’s 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, then update the first balance again.
In today’s monetary system, therefore, 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 accessing it or modifying it while that second person is working on it. On the contrary, blockchain can be likened to a shared document, on which all participants can write, while having access to an always synchronized and updated version of the text.
Another way of describing blockchain, according to mathematician Jean-Paul Delahaye (winner of the Prix d’Alembert), is as follows:
a very large notebook, which anyone can read freely and at no cost, on which anyone can write, but which is impossible to erase and indestructible.
Whereas the services of a notary, lawyer or banker are needed to draw up contracts or transfer money, the blockchain sets up an encrypted, decentralized service in which “code is law”. The principle of “mining” guarantees the security and integrity of legal acts or financial transactions, as we shall see. Reducing the number of intermediaries has multiple advantages: transactions are private, uncontrolled, faster and more secure, costs are reduced, and so on.
Where is blockchain stored?
Blockchains are unique in that they are not stored in a single place (on a single computer or server, for example).
Instead, they are operated by an independent community of thousands of computers, known as “nodes”. These nodes are all connected to an open network.
It’s open, in the sense that it’s possible to connect to a blockchain freely and without authorization: all you need is an electronic device (computer, telephone, printer, etc.) and Internet access. 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, there’s nothing to stop a user from using the program and platform of their choice.
When a new user connects to a blockchain, he or she joins the network nodes. They can then start exchanging information with the other nodes and choose the role they wish to play within the blockchain. Indeed, since control is not centralized, anyone can take the place they wish in the network, whatever their importance.
nodes
What are the different roles of “nodes” in a blockchain?
To describe the different types of node 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. He will then be considered a new node in the network. It will communicate in different ways with the rest of the community, depending on its role:
Complete nodes: they are indispensable to the network, ensuring Bitcoin’s existence and security. Generally speaking, full nodes are the “memory” of the blockchain: they are capable of storing a copy of all the blocks on the chain and all past transactions. In fact, they may contain only part of the chain. These nodes are essential for transmitting new transactions and adding them to the blockchain in the form of blocks.
Listener nodes: while “full nodes” often host a copy of the blockchain and its transactions, they are not obliged to share this information with the rest of the network. This is where the listening nodes (or “super nodes”) come in. They broadcast their information to any other network user, and also act as a communication bridge between community members.
Mining nodes: as we’ll see later, the blocks that make up the blockchain must be mined before they can be added to the chain. Mining” requires considerable computing power, so not all computers are capable of creating the blocks. Two solutions are therefore possible:
If a miner works alone, he will need to have a “complete node” on his computer to be able to create blocks.
Today, miners are mainly grouped into “pools” of miners: they share their computing power, so that the copy of the blockchain can be hosted by just one of the computers in the group.
Thin clients: where “fat clients” have access to blockchain transactions via a full or partial copy, thin client software enables access to information without having to download all the blocks. They are used in particular by those who simply wish to view the status of their account and place new transactions.
What is a block? How is it created?
The expression “blockchain” means chain of blocks. This term refers to the very structure of this technology, which enables information to be stored in the form of chained blocks of data.
To explain how this works, let’s take the example of Bitcoin.
1. Block creation
When a Bitcoin transaction is created, it is first added to a block of data. This block is considered ready to be mined once it reaches 1 MB of data. One of the last blocks mined, block 684326, contained 1,652 transactions.
2. What is block signing?
The role of miners is to validate block transactions, checking their integrity. If the block is validated, it will be added to the blockchain.
To understand how miners do this, we first need to understand how blocks are chained together.
To do this, imagine that each block in the chain has its own signature. The signature of one block is inserted in the block that follows: this is what links them together, as with a chain. In this way, you 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.
hash
Block signatures are called “hash”. It is generated by a mathematical calculation. This calculation makes it possible to create a sequence of digits from any data: text, numbers, etc. It is therefore a cryptographic process. It is therefore a cryptographic process.
This calculation is called a “hash function”, and is applied to all the data in a block. The function used by Bitcoin is called SHA-256.
If you’d like to transform a text into a cryptographic sequence, there are a number of sites that allow you to use this function free of charge. Here’s an example based on the word “Coinaute”, written in different ways:
hash function
Here, from different data (i.e. several lines of text), the SHA-256 function has been 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. In other words, the slightest change in a letter or number will result in a completely different hash.
The SHA-256 function proceeds in exactly the same way 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.
3. Block mining
Once a block has a hash, it can be mined.
The miners’ aim is to find a second hash, which will be the block’s final fingerprint.
To do this, they have to modify the first hash slightly, by adding a number called a “nonce”. This number is very difficult to find, as the final hash must meet a number of 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 inordinate amount of computing power, as the miner’s computer has to run through the possibilities very quickly to discover the solution. Once a miner or pool of miners has found the solution, he pockets Bitcoins generated especially for him. They also collect the transaction fees paid by users to exchange or buy tokens, for example.
On Bitcoin, a block is added on average every ten minutes (this is known as “block time”). The difficulty of finding a solution to add a block to the chain varies according to the number of mining nodes, and is expressed in figures.
To illustrate all this information, here’s the record for block no. 684346, whose solution was found by the Poolin miners’ pool:
block Bitcoin
The blockchain.com website provides a wealth of information on this block. Compared to what we’ve seen previously, we can now decipher some of the information on this record:
the hash found by Poolin for this block
The number of transactions contained in the block (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 (approx. 6 BTC) and transaction fees (approx. 1 BTC).
Blockchain security and transparency
We’ve just seen how the Bitcoin blockchain works, based on a “proof of work” system. In concrete terms, this means that a miner can add a block provided he can prove that he has worked to solve a complicated calculation. This work, and the results of it, are governed by rules agreed by the entire network. This is why the “proof of work” is a consensus algorithm. The Bitcoin blockchain exists in a state of permanent agreement between its members, verified every ten minutes.
This results in two key features:
Transparency: all data is distributed on the network. They are therefore public, and anyone can check them.
The blockchain is incorruptible: the slightest change in a block’s data completely alters its hash. As the hash of the previous block is always added to the new block, it’s easy to see that a hash has been modified. The block with the modified hash is then removed from the blockchain.
The security of blockchain also lies in the fact that its data is stored on a decentralized network. The fact that they are not centralized makes hacking much more complicated, unlike on the Internet.
Since 2008, Bitcoin has not experienced any notable disruptions. The problems encountered were all the result of human error or malicious intent, and therefore had nothing to do with its operation. Blockchain technology therefore looks set to have a bright future ahead of it.
Applications of blockchain
As you will have seen, blockchain technology is based on a decentralized, secure and transparent network. Its system speeds up and facilitates transactions, cuts the costs associated with intermediaries, and reduces risk. Although it is always associated with cryptocurrencies, this is just one of its many uses.
Here are just a few examples of real or future applications of blockchain:
With DeFi (Decentralized Finance), many players want to use blockchain to transmit value and create finance for all, without intermediaries. For example, it would no longer be necessary to disclose one’s identity to open a bank account or take out a loan.
The blockchain, which is a large shared register, can also be used to ensure better traceability of products (medicines, food, assets, etc.).
It is also possible to draw up contracts directly on the blockchain. Smart contracts” can automatically execute the clauses of a contract, and check that it has been respected.
These applications cover a wide range of fields, from finance to music, real estate, pharmaceuticals and more.
Blockchain could also be at the origin of a new, entirely decentralized Web 3.0, which could do without the centralized services of the GAFAMs.
Conclusion
As you may have discovered, blockchain technology is far from being used solely by cryptocurrencies. Its decentralized, secure and transparent system could well revolutionize our everyday lives. All the more reason to take an interest 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 buying cryptocurrencies without knowing blockchain inside out! And if you’re passionate about blockchain, be sure to check out our other guides to becoming cryptocurrency-savvy.
