Blockchain, also known as distributed ledger technology has been around since 1991, it is typically associated with cryptocurrencies however it has the potential to be used in other industry sectors.
Blockchain was developed as a part of the Bitcoin peer to peer crypto currency and allows individuals to transfer virtual currency to another person without an intermediary like a bank having to process the transaction.
What is a Blockchain?
A Blockchain is a ledger of records arranged in data batches called “blocks” that use cryptographic validation to link themselves together, basically, each block references and identifies the previous block by a hashing function which forms an unbroken chain and is a set of transaction data. Each block contains a record of a recent transaction with a timestamp, digital signature and fingerprint reference to the immediate preceding block.
The clever part of the block is that the ledger is not stored in a master location or managed by any particular body, it instead distributed amongst multiple computers at the same time so that anyone with an interest can maintain a copy of it.
Blockchain is independent, transparent and has a permanent database coexisting in multiple locations and shared and maintained by a growing community but controlled by no one and unable to be manipulated.
The Blockchain algorithm is determined by its purpose and operation and provides a network to exchange facts in a network of non-trusted peers. The simple idea is that the facts are grouped as blocks and there is only a single chain of blocks replicated in the entire network, however each block references the previous one, permissions can accommodate private centralised ledgers where transactions are no longer anonymous and where only approved administrators have the power to verify transactions.
Miners and nodes
A node is a computer running specific software, in the case of Bitcoin, one node is a Bitcoin program which connects to other Bitcoin nodes. A mining node is a validation node which also uses a combination of numbers and letters to verify a block. A mining node can team up with other nodes and send guesses to a common pool to increase the chances of guessing, but then counts as only one node.
Most miners opt to join a powerful pool to maximise their chances of mining a block and getting the rewards, in real terms 20 of the most powerful pools are mining almost all of Bitcoin, here is a list of the biggest mining pools, and it is interesting to note that most mining pools are based in China, with many of them having support and websites in mandarin only, the Chinese pools control 81% of the network hash rate.
Members of the network are anonymous individuals called nodes, and an individual becomes a miner by downloading a node that connects them to the Blockchain technology. All communication inside the network takes advantage of cryptography to securely identify the sender and the receiver.
Miners are a subset of nodes and miners can add blocks to the Blockchain as long as every other node on the network agrees that their block fits the consensus rules and accepts it.
A full node validates transactions and blocks and relays to other nodes, a miner is a full node that also extends the Blockchain by creating new blocks with the new transactions relayed from other nodes, since both miners and non-miners do validation, all participate in the consensus process, and if nodes disagree there is a fork in the system.
Blockchain holds promises through its simplicity and security through multiple node verification, which leads to faster and cheaper transactions however there are challenges due to its infancy, however the transparency, security and simplicity of the system is here to stay.
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Serenity Law LLP is a boutique London commercial law firm providing commercial legal services such as company commercial, real estate, litigation and employment services to UK and international clients.