Exchanging values across the Internet presents two challenges. First, every participant in the network must agree upon a shared state, and Second, the asset being exchanged should have a clearly defined owner. These challenges are commonly referred to as the Byzantine General's Problem  and the Double Spending Problem  respectively.
Blockchain, the technology underlying Bitcoin, and most cryptocurrencies solve the above problems using decentralized consensus.
Decentralized consensus refers to the set of rules that allow the participants of a distributed network to reach an agreement on the current state of the network.
With an understanding of decentralized consensus and what problems a blockchain solves, let's now look into what a blockchain is.
At a higher level, Blockchain is a data structure that's "append-only, totally-ordered and contains a replicated logs of transactions".
Let's expand on these terms to get a better overall understanding:
Append-only refers to a property of data storage such that new data can only be added to the end, and where existing data is immutable.
Totally-ordered refers to the binary relation on some data set which is Transitive, Antisymmetric, Reflexive, and Comparable.
Replicated means that each node (a computer that is taking part in decentralized consensus) that is part of a blockchain network contains the full of the blockchain.
A transaction refers to a signed statement that transfers the ownership of an asset from one cryptographic key pair to another.
Blockchain can also be thought of as a distributed network. Nodes in the network, append new transactions by packaging them into a block and then execute a leader election protocol which determines who gets to append the next block. This election protocol is determined by the underlying consensus algorithm of the blockchain. Each block contains some transactional data along with the cryptographic hash of the previous block, thus forming a chain of immutable records or blocks.
So far we have learned what a blockchain is and how it enables us to exchange value across the Internet. But why do we care?
As our lives are becoming more and more digital, we can say that we are transitioning into an Information Economy. And the most valuable asset in this economy is our data. Therefore, it's important that we own our data and have an easy means of exchange.
Blockchain with its native cryptocurrency enables a unit of account which serves as a means of exchange. Also as blockchains are built upon the concepts of public-key cryptography, it can serve as a base layer for building Decentralized public key infrastructures (DPKI), thereby enabling every individual to have a Self-Sovereign Identity.
Giving each individual a digital and economic identity that they control, is, in my opinion, one of the most important innovations of blockchains.
I hope this post helped in providing an understanding of blockchain technology and why it matters.
In the next post, we will look into how different blockchain protocols have evolved in the past decade.
- U. W. Chohan, “The Double Spending Problem and Cryptocurrencies,” Available at SSRN 3090174, 2017.