Glossary
The Technology of Blockchain: Key Concepts Explained
What’s the Technology of Blockchain?
The technologies used in blockchains include distributed ledger technology (DLT), cryptographic hashing, consensus algorithms, virtual machines, and smart contracts. Together, these technologies enable the creation of secure, transparent, and decentralized networks for various applications.
Most technologies used in blockchain are not new but have been combined innovatively to create a decentralized system. While the concept of a distributed ledger has been around for decades, blockchain technology has gained popularity due to its application in cryptocurrencies like Bitcoin and Ethereum.
Additionally, blockchains rely on game theory and economic incentives to maintain network security and integrity. This model ensures that participants act honestly and follow network rules. Blockchain networks often have a native token or cryptocurrency to pay transaction fees and incentivize participants.
Blockchain Technology — Key Concepts
- Artificial Trust: Trust in a system based on mathematical algorithms and cryptographic proofs rather than human judgment.
- Distributed Ledger Technology (DLT): A database shared and synchronized across multiple sites, institutions, or geographies. It allows multiple parties to access and record transactions securely and transparently.
- Consensus Algorithms: Protocols used to agree on the state of the blockchain and validate transactions. Changing the state of the blockchain requires consensus among network participants.
- Gossip Protocol: A communication protocol used by nodes in a blockchain network to share information about transactions and blocks. Nodes broadcast messages to their peers, who then propagate the information to other nodes in the network.
- Virtual Machines: Software environments that execute code and smart contracts on a blockchain network. They ensure the code runs consistently across all nodes in the network.
- Game Theory: The study of strategic decision-making in competitive situations. In blockchain, game theory models the behavior of network participants and ensures they act in the network’s best interest.
- Trees and Roots: Data structures used to organize and store information in a blockchain. Merkle and Patricia trees are commonly used to store and verify data integrity efficiently. The root of the tree is a hash representing the entire data structure.
- Digital Signatures: Cryptographic techniques used to verify the authenticity and integrity of messages. Digital signatures are used to sign transactions and prove ownership of addresses on a blockchain.
Artificial Trust
Blockchain technology is often called a trustless system because it eliminates the need for trust between parties. Instead of relying on intermediaries or central authorities, blockchain networks use cryptographic algorithms and consensus mechanisms to validate transactions and maintain the ledger’s integrity.
Artificial trust is the key innovation enabled by blockchain technology. It’s the first time we can transact with strangers without needing a trusted third party. Previously, we had to rely on banks, governments, or other institutions to facilitate transactions and ensure their security. With blockchain, we can trust the system to validate transactions and maintain the ledger’s integrity.
Trustless systems are more resilient to fraud, censorship, and corruption because they are based on mathematical algorithms instead of organizational structures. This makes blockchain ideal for applications where trust is difficult to establish or maintain, such as cross-border payments, supply chain tracking, and financial services.
Distributed Ledger Technology (DLT)
Distributed ledger technology (DLT) is a database synchronized across multiple network nodes. Each node maintains a copy of the ledger, and changes are propagated to all nodes. Network participants must validate changes through a consensus mechanism before being added to the ledger.
The technology behind blockchains reduces fraud and increases trust in digital transactions. DLTs are used in various industries, including finance, supply chain management, healthcare, and voting systems.
Eventual Consistency
DLTs are designed to achieve eventual consistency, meaning all nodes will eventually agree on the ledger’s state. However, temporary inconsistencies between nodes may occur due to network latency or other factors. These inconsistencies are resolved through the consensus mechanism, ensuring all nodes agree on the ledger’s state.
Forks can occur in a blockchain when nodes have a temporary inconsistency. When this happens, the consensus algorithm determines which branch of the fork is considered the valid chain. Eventually, the forked chain will be abandoned, and all nodes will converge on the same chain.
Blockchain Memory Pool
The memory pool is a temporary storage area where unconfirmed transactions are held before they are added to the ledger. Network validators take transactions from the memory pool and include them in the next proposed block.
The memory pool is public and can be viewed by anyone on the network. Transactions in the memory pool are prioritized based on factors like transaction fees and size. A block may not include Transactions with lower fees, especially during high network activity.
Block Confirmation and Finality
The confirmation process determines the consistency of a block or transaction. Once a sufficient number of nodes confirms a block, it is considered final and cannot be reversed. The number of confirmations required varies depending on the consensus algorithm used by the blockchain network.
On Neo, a block is considered final after one confirmation, while on Bitcoin and Ethereum, multiple confirmations are required to ensure its validity.
A block’s finality ensures the ledger’s state cannot be altered retroactively, providing security and immutability.
Blockchain Consensus Algorithms
The process of reaching an agreement on the state of the blockchain is known as consensus. Consensus algorithms are used to ensure the ledger is updated securely and decentralized. There are several consensus algorithms used in blockchain networks, each with strengths and weaknesses:
- Proof of Work (PoW): Requires network participants to solve complex mathematical puzzles to validate transactions and create new blocks. It is energy-intensive and has led to concerns about environmental impact. PoW is used in Bitcoin.
- Proof of Stake (PoS): Validators are chosen based on the number of tokens they hold. PoS is more energy-efficient than PoW but can lead to centralization if many validators control a large portion of the tokens. It is used in Ethereum 2.0.
- Delegated Proof of Stake (DPoS): Token holders vote for delegates who validate transactions and create new blocks. DPoS is faster and more scalable than PoW and PoS but can be less decentralized. It is used in EOS and Tron.
- Delegate Byzantine Fault Tolerance (dBFT): Similar to DPoS. Validators are elected to create blocks and govern the network. dBFT grants single-block finality, meaning once a block is confirmed, it cannot be reversed. It is efficient but centralized. It is used in Neo.
- Proof of Authority (PoA): Validators are approved by a central authority and are responsible for validating transactions. PoA is fast and efficient but relies on trust in the validators. It is used mostly in private and consortium blockchains.
- Proof of History (PoH): A consensus algorithm that uses a verifiable delay function to order transactions. Computationally intensive but more energy-efficient than PoW. Used in Solana.
Each consensus algorithm has security, decentralization, scalability, and energy efficiency trade-offs. The choice of consensus algorithm depends on the blockchain network’s specific requirements and the developers’ goals. The algorithms are continuously evolving, with networks researching and implementing new consensus mechanisms to address the limitations of existing solutions.
Gossip Protocol
The message propagation method in a blockchain network is known as the gossip protocol. Nodes are connected to multiple, but not all, network participants. When a node receives a new transaction or block, it broadcasts it to its peers, who then propagate the information to other nodes in the network. This distributes the workload of propagating information across multiple nodes and ensures that all nodes eventually receive the new data.
The gossip protocol is based on the idea that information spreads like gossip in a social network. Nodes share information with their neighbors, who then share it with their neighbors until all nodes in the network are aware of the new transaction or block.
Blockchain Virtual Machines
Blockchain virtual machines are software environments that execute . They are necessary to ensure the code runs consistently across all nodes in the network. The virtual machine abstracts the hardware and software differences between nodes, ensuring that the code produces the same output regardless of the node executing it.
The virtual machine executes the instructions in the script using a set of opcodes. Opcodes are low-level instructions that perform specific operations, such as adding two numbers or storing data in memory. The virtual machine interprets the opcodes and executes the corresponding operations, ensuring the code behaves predictably and deterministically.
The Neo Virtual Machine (NeoVM) and Ethereum Virtual Machine (EVM) are examples of blockchain-specific virtual machines that execute scripts on their respective networks. It’s impossible to run arbitrary code on a blockchain virtual machine, as the opcodes are limited to prevent malicious behavior and ensure ledger consistency.
Bitcoin doesn’t have a full-fledged virtual machine like Neo or Ethereum. It uses a reduced set of opcodes to make transactions and validate blocks.
Floating Point Arithmetic on Blockchains
Floating-point arithmetic is not supported in blockchain virtual machines due to the potential for rounding errors. Instead, all calculations are done using integers. Decimal numbers are represented as integers with a fixed number of decimal places, ensuring that calculations are precise and consistent across all nodes.
Wallets and applications that interact with the blockchain handle the conversion between integers and decimal numbers to display values correctly to users.
Game Theory in Blockchain
Game theory is used to model the behavior of network participants in a blockchain ecosystem. It helps predict how participants act in different scenarios and ensures the network remains secure and functional. Incentives and penalties are designed to encourage honest behavior and discourage malicious actors.
The game theory model assumes that participants act in their self-interest. By aligning the incentives of network participants with the network’s goals, blockchains can achieve consensus and maintain security without relying on trust. Participants are rewarded for contributing to the network’s security and penalized for attempting to subvert it.
Miners are rewarded with block rewards and transaction fees for validating transactions and creating new blocks on Bitcoin. On the other hand, trying to double-spend or perform a 51% attack would be costly and counterproductive, as it would undermine the network’s value and the attacker’s holdings. This ensures that the benefits of honest behavior outweigh the potential gains from malicious actions.
Digital Signatures
Digital signatures are cryptographic techniques used to verify the authenticity and integrity of transactions in blockchain technology. Each transaction is signed with a user’s private key, creating a unique signature that can be verified using the corresponding public key. This ensures the transaction is legitimate and unaltered. Blockchain networks do not store private keys on servers, relying on cryptographic proofs for security. Because digital signatures cannot be forged, altering the ledger or creating false transactions is impossible, ensuring the ledger’s integrity and immutability.
Trees and Roots in Blockchain
The Merkle and Patricia trees are data structures that organize and store information in a blockchain. These trees efficiently store and verify the integrity of data, ensuring that the ledger remains secure and tamper-proof. Cryptographic hashes link the tree’s nodes together, creating a chain of trust that all network participants can verify. The tree’s root is a hash representing the entire data structure, providing a concise and secure way to verify the data’s integrity.
Merkle trees store transaction data in a block, while Patricia trees store account balances and other state information. The trees are updated with each new block, ensuring the ledger remains consistent and secure.
Block headers contain the root hash of the Merkle tree, allowing nodes to quickly verify the transactions in a block without downloading the entire block. Since the hash is linked to the tree’s leaf nodes, it ensures that the transactions are valid and have not been tampered with. Combined with the consensus algorithm, trees and roots grant mathematical certainty to the blockchain’s integrity.
