Concepts You Must Know to Understand Blockchain

A particular strength of blockchain technology is its security. Much of that security is based on cryptography, which combines math, computer science, physics, and engineering concepts to protect data. Although you don't need a deep understanding of cryptography mechanics, grasping three fundamental concepts that secure blockchain transactions and cryptocurrency can be beneficial. These are (1) hash functions and values, (2) public/private key pairs, and (3) digital signatures. These three concepts are integral to how blockchain technology works and how cryptocurrency wallets integrate with the blockchain. If you are going to run your crypto exchange platform software, this data is crucial.

Hash Functions and Values

Everything stored or processed in a computer is digital, meaning it's a sequence of 1s and 0s called bits. For example, a movie on a DVD might have 40 billion bits. You can input the 40 billion 1s and 0s into a hash function formula, which will instantly compute a 64-character result unique to that input. It's like a "digital fingerprint" of the movie. Each time you run the same 40 billion bits into the hash function in the same order, it will always give the same result. Whether your digital data has 1,000 bits or 100,0000 bits, you always get a 64-character result that uniquely identifies the data.

The hash functions used with blockchain technology are one-way, meaning they only work in one direction. It's fast and easy to compute the hash value if you have digital information. But if you have a hash value, it's virtually impossible to recreate the digital information it represents. For example, suppose you compute the hash value of the MP3 file of your favorite song: F6D58553DE71E54ED03E262DA79A1064CD6043A68FEFB124950A23340ADB9CE1. Now, imagine that someone gives you this hash value and asks you to provide an exact copy of the 10 million bits in the original MP3 file. Technically speaking, it's not an impossible task. But it would take supercomputers millions of years to find the correct answer. To most people, that's the same as impossible.

Hash Value

Another trait of the hash functions used in blockchain technology is the avalanche effect. This means a tiny change to the input data will dramatically change the resulting hash value. This makes identifying if someone has tampered with the data in a block easy. The block's hash value makes it immutable and functions as the block's unique identifier. Blocks are linked together to form the blockchain by their unique identifiers. This further strengthens the security of the blockchain because changing the data for a block breaks the entire chain and becomes too expensive to cheat. The distributed nature of the blockchain makes it impossible to cheat unless more than 50 percent of the miners agree to the same cheat simultaneously. "Proof of work" in the Bitcoin blockchain also uses hash values to create cryptographic puzzles.

Bitcoin miners receive the upcoming block to be added to the chain and its corresponding hash value. However, the hash value provided doesn't match the contents of the league. The puzzle is for miners to determine what number to add to the block contents to generate a hash value less than or equal to the value provided. We refer to the solution as a 'nonce,' a number used only once. Solving the puzzle is an exercise in trial and error since the avalanche effect does not hint at how the hash value changes as the input changes.

Public/Private Keys

A unique hash function is reversible only if you know the secret password. Without the password, it's impossible to reverse-engineer the hash value. It works using two 64-character hash values that have a special mathematical relationship. One is called the private key, and the other is the public key. When you apply the private key to a hash created with the public key, the private key reverses the public key to reveal the underlying message. It's impossible to decode without the private key, like any other hash value. An appealing aspect of public and private keys is the ability to generate multiple public keys, which the same private key can decode.

Typically, we use public/private keys to secure a cryptographic wallet, treating the private key as the password for the wallet. Given that we can generate multiple public keys from the same secret key, the address used for each new transaction generally stems from a new public key explicitly created. Public/private key pairs are also why you can publicly post the destination address of a cryptocurrency transaction without worrying that a lousy actor will steal the coins.

Digital Signatures

Usually, a digital signature on a document or a blockchain transaction is applied using a combination of hash values and public/private key pairs. Your digital signature is a public/private key pair. When you sign a document or transaction, the system computes the hash value of the document's contents plus the public key of your signature. You are the only person who can decode the result with the private key. If someone changes the document's contents after you sign it, the hash value won't match. You don't necessarily need to understand how hash functions operate or how public/private key pairs get created; such detailed knowledge demands an advanced background in mathematics.

Conclusion

Blockchain isn't just tech jargon – it's a revolution. At its core, it's about trust, transparency, and a new era of digital transactions. From understanding cryptography to grasping decentralized systems, these concepts pave the way for a brighter, more secure digital future. Dive in, stay curious, and be part of this transformative journey.

Frequently Asked Questions on Blockchain 

Q1. What are the basics of blockchain?

Ans: Blockchain, a decentralized ledger system, ensures trust and transparency in digital transactions.

Q2. How does the blockchain ledger system work?

Ans: Each transaction gets recorded on blocks, which link together in a chronological chain.

Q3. What's the significance of decentralized blockchain networks?

Ans: Decentralization means no single entity controls the data, ensuring unbiased and tamper-proof records.

Q4. Why is cryptography vital in blockchain?

Ans: Cryptography secures data, ensuring only authorized individuals can access or modify it.

Q5. How do peer-to-peer transactions differ on the blockchain?

Ans: They bypass intermediaries, allowing direct, swift, and cheaper exchanges between parties.

Q6. What are blockchain nodes?

Ans: Nodes are computers in the blockchain network, validating and recording transactions.

Q7. Can you explain wise contract essentials?

Ans: Smart contracts are self-executing contracts with terms between parties directly written into code.

Q8. How does blockchain mining work?

Ans: Mining involves solving complex math problems, validating transactions, and adding them to the blockchain.

Q9. What's the difference between public and private blockchain?

Ans: Public blockchains are open for all, while private ones restrict access to certain members.

Q10. Why is blockchain seen as secure?

Ans: Due to its cryptographic principles and consensus algorithms, unauthorized changes become nearly impossible.