What on earth is Blockchain?

• Block chain is a digital concept to store data.

• This data comes in blocks, so imagine blocks of digital data. These blocks are chained together,
and this makes their data immutable.

• When a block of data is chained to the other blocks, its data can never be changed again.

• It will be publicly available to anyone who wants to see it ever again, in exactly the way it was
once added to the blockchain.

• That is quite revolutionary, because it allows us to keep track records of pretty much anything
we can think of (to name some: property rights, identities, money balances, medical records),
without being at risk of someone tampering with those records.

• Example- If I buy a house right now and add a photo of the property rights to a blockchain, I
will always and forever be able to prove that I owned those rights at that point.

– Nobody can change that piece of information once it is on a blockchain (well, there is one way, but this is
advanced material so I suggest you read it later, you can find it here though).

– So — Blockchain is a way to save data and make it immutable. That sounds great, but the big question of
course is: how does that work?
Step 1 — Transaction data
let’s start off with an example: the Bitcoin blockchain.

• The Bitcoin blockchain is the oldest blockchain in existence. The blocks on the
Bitcoin blockchain consist of approximately 1 MB of data each.

• At the time of writing it counts about 525,000 blocks, meaning roughly a total
of 525,000 MB has been stored on this blockchain.

• The data on the Bitcoin blockchain exclusively exists out of transaction data in
regard to Bitcoin transactions. It is a giant track record of all the Bitcoin
transactions that have ever occurred, all the way back to the very first Bitcoin
transaction.

• In this, we will assume that a blockchain stores transaction data, just like the
Bitcoin blockchain.
Step 2 — Chaining the blocks (with a hash)
• Imagine a bunch of blocks of transaction data (image 1).

• Three blocks, all containing some transaction data. Not quite special yet.

• You can compare it to some stand-alone word documents that simply describe what transactions
have occurred and how these have impacted certain balances.

• Document 1 would then chronologically describe the first transactions that have occurred up to 1
MB, whereafter the next transactions would be described in document 2 up to another MB, and
so on.
• These documents are the blocks of data. These blocks are now being linked (aka chained)
together.
• To do this, every block gets a unique (digital) signature that corresponds to
exactly the string of data in that block. If anything inside a block changes,
even just a single digit change, the block will get a new signature.

• How this works? This happens through hashing and will be thoroughly
explained later in step 3.

• Let’s say block 1 registers two transactions, transaction 1 and transaction 2.

Imagine that these transactions make up a total of 1 MB (in reality this would
be much more transactions).

• This block of data now gets a signature for this specific string of data. Let’s say
the signature is ‘X32’. Here is what this looks like:
Remember, a single digit change to the data in block 1
would now cause it to get a
completely different signature!

The data in block 1 is now linked to block 2 by adding

the signature of block 1 to the data of block 2.

The signature of block 2 is now partially based on the

signature of block 1, because it is included in the string
of data in block 2. Here is what this looks like:
• The signatures link the blocks to each other, making them a chain of blocks.
• Let’s picture adding another block to this chain of blocks; block 3. Here is
what this looks like:

• Now imagine if the data in block 1 is altered. Let’s say that the transaction
between Damian and George is altered and Damian now supposedly sent
500 Bitcoin to George instead of 100 Bitcoin.

• The string of data in block 1 is now different, meaning the block also gets a
• The signature that corresponds with this new set of data is no longer X32. Let’s say it is now
‘W10’ instead. Here is what happens now:

• The signature W10 does not match the signature that was previously added to block 2
anymore.

• Block 1 and 2 are now considered no longer chained to each other.

• This indicates to other users of this blockchain that some data in block 1 was altered, and
because the blockchain should be immutable, they reject this change by shifting back to
their previous record of the blockchain where all the blocks are still chained together (the
record where Damian sent 100 BTC to George).

• The only way that an alteration can stay undetected, is if all the blocks stay chained to each
other.
• This means for the alteration to go undetected, the new signature of block 1 must replace
the old one in the data of block 2.

• But if the data of block 2 changes, this will cause block 2 to have a different signature as well.
• The blocks on a blockchain are publicly available to
anyone. So, if an alteration is supposed to stay
undetected on a blockchain, all the blocks need to stay
properly chained (otherwise people can tell that certain
blocks don’t properly link to each other).
• This means that altering a single block requires a new
signature for every other block that comes after it all the
way to the end of the chain.
• This is considered to be near impossible. In order to
understand why, you will need to understand how the
signatures are created.
Step 3 — How the signature (hash) is created
• So, let’s picture a block again; block 1. Block 1 is a record of only
one transaction. Thomas sends 100 Bitcoin to David.

• This specific string of data now requires a signature. In blockchain,

this signature is created by a cryptographic hash function.

• A cryptographic hash function is a very complicated formula

that takes any string of input and turns it into a unique 64-digit
string of output.

• You could for example insert the word ‘Jinglebells’ into

this hash function (there are other variants of hashing algorithms
as well, but we use this one for this example), and you will see
that the output for this specific string of data is:
• 761A7DD9CAFE34C7CDE6C1270E17F773025A61E511A56F70
0D415F0D3E199868

• If a single digit of the input changes, including a space,

changing a capital letter or adding a period for example, the
output will be totally different.
• If you add a period to this word and make it ‘Jinglebells.’
instead, you will see that the output for this specific string of
data is:

• B9B324E2F987CDE8819C051327966DD4071ED72D998E0019
981040958FEC291B
• If we now remove the period again, we will get the same output as before:

• 761A7DD9CAFE34C7CDE6C1270E17F773025A61E511A56F700D415F0D3E
199868

• A cryptographic hash function always gives the same output for the same
input, but always a different output for different input.

• This cryptographic hash function is used by the Bitcoin blockchain to give

the blocks their signatures.

• The input of the cryptographic hash function in this case is the data in the
block, and the output is the signature that relates to that. Let’s have a look
at block 1 again.
Thomas sends 100 Bitcoin to David.
Now imagine that the string of data from this block looks like this:
Block 1: Thomas -100 David +100

If this string of data is inserted in the hashing algorithm, the output

(signature) will be this:

BAB5924FC47BBA57F4615230DDBC5675A81AB29E2E0FF85
D0C0AD1C1ACA05BFF

This signature is now added to the data of block 2. Let’s say that David
now transfers 100 Bitcoin to Jimi. The blockchain now looks like this:
The string of data of block 2 now looks like:
Block 2 David -100 Jimi +100
BAB5924FC47BBA57F4615230DDBC5675A81AB29E2E0FF85D0C0AD1C1ACA05BFF
If this string of data is inserted in the hashing algorithm, the output (signature) will
be this:
25D8BE2650D7BC095D3712B14136608E096F060E32CEC7322D22E82EA526A3E5
And so, this is the signature of block 2.
• The cryptographic hash function is used to create the digital signature for
each unique block.

• There is a large variety of hash functions, but the hashing function that is
used by the Bitcoin blockchain is the SHA-256 hashing algorithm.

• But how do the signatures stop someone from simply inserting a

new signature for each block after altering one (a change goes
undetected if all blocks are properly linked, people won’t be able
to tell there was a change)?

• The answer is that only hashes (signatures) that meet certain

requirements are accepted on the blockchain. This is the mining
process and is explained in step 4.
Step 4 — When does the signature qualify, and who signs a block?
• A signature doesn’t always qualify. A block will only be accepted on the blockchain if its
digital signature starts with — for example — a consecutive number of zeroes. For
example; only blocks with a signature starting with at least ten consecutive
zeroes qualify to be added to the blockchain.

• However, as explained in chapter 3, every string of data has only one unique hash bound
to it.

• What if the signature (hash) of a block doesn’t start with ten zeroes? Well, in order to

find the block a signature that meets the requirements, the string of data of a
block needs to be changed repeatedly until that specific string of data leads
to a signature starting with ten zeroes.
• Because the transaction data and metadata (block number, timestamp, et cetera)
need to stay the way they are, a small specific piece of data is added to every
block that has no purpose except for being changed repeatedly in order to find an
eligible signature.
• This piece of data is called the nonce of a block. The nonce is a completely
random string of numbers (note: pictures show other digits as well, but a nonce
can only be numbers).
• To summarize what was just explained, a block now contains; 1) transaction
data, 2) the signature of the previous block, and 3) a nonce.
• The process of repeatedly changing the nonce and hashing the block’s data to
find an eligible signature is called mining and is what miners do.
• Miners spend electricity in the form of computational power by constantly
changing the block composition (nonce) and hashing it until they find an eligible
signature (output).
• The more computational power they have, the faster they can hash
different block compositions and the more likely they are to find an
eligible signature faster. It is a form of trial and error. You can picture it
like this:
NOTE: Nonce needs to be a number
• Any user on a blockchain network can participate in this process
by downloading and starting the according mining software for
that specific blockchain.

• When a user does this, they will simply put their computational
power to work in order to try to solve the nonce for a block.
• Here is an example of a block of transactions that was recently
added to the Bitcoin blockchain, block 521,477
• As you can see, the hash (signature) of this block and the hash of the previous block both
start with a number of zeroes. Finding a hash like that is not easy, it requires a lot of
computational power and time, or a lot of luck.
• Yes, it sometimes occurs that a miner gets incredibly lucky and finds a matching signature
with very little computational power in a matter of minutes. An extremely rare example
recently occurred on block 523,034.
• A very small miner with only very little computational power found an eligible signature real
fast, while all other miners combined had 7 trillion times as much computational power.
• In comparison, the chances of winning the powerball lottery jackpot are one in 292 million,
meaning it is 24,000 times easier to win the powerball lottery jackpot than it was for this
miner to win the competition versus the rest of the network.
• Talk about a number of zeroes. Anyway, important to understand from this chapter is that
finding an eligible signature is hard.
Step 5 — How does this make the blockchain immutable?

• As discussed previously in step 3, altering a block will unchain it from the

subsequent blocks.

• In order for an altered block to be accepted by the rest of the network, it

needs to be chained to the subsequent blocks again.

• See where this is going? It was previously explained that this requires every

block that comes after it to get a new signature.

• And that signature needs to meet the requirements! Giving all of these

blocks a new signature will be very costly and time-consuming, although it

doesn’t seem impossible. It is considered impossible anyway though, and

here is why:
• Let’s say a corrupt miner has altered a block of transactions and is now
trying to calculate new signatures for the subsequent blocks in order to
have the rest of the network accept his change.
• The problem for him is, the rest of the network is also calculating new
signatures for new blocks.
• The corrupt miner will have to calculate new signatures for these blocks
too as they are being added to the end of the chain. After all, he needs to
keep all of the blocks linked, including the new ones.
• constantly being added. Unless the miner has more computational power
than the rest of the network combined, he will never catch up with the rest
of the network finding signatures.
• Millions of users are mining on the Bitcoin blockchain, and
therefore it can be assumed that a single bad actor or entity on
the network will never have more computational power than
the rest of the network combined, meaning the network will
never accept any changes on the blockchain, making the
blockchain immutable.

• Once data has been added to the blockchain, it can never be

changed again. There is an exception though.
What if a bad actor has more computational power than the rest
of the network combined?
• Theoretically yes, this is possible. It is called a 51% attack and
has occurred on various blockchains in the past.

• In reality though, a 51% attack on the Bitcoin blockchain would

be far more costly to execute than it would yield in return.

• It would not just require an immense amount of hardware,

cooling equipment and storage space for the computational
power, but also involves the risk of prosecution means
examination and, more importantly, would dramatically harm
the ecosystem of the corresponding blockchain, rendering the
potential returns in Bitcoin to drop significantly in value.
• Attempting a 51% attack is practically trying to fight all the
other users on a blockchain just by yourself. This is also the
reason that the more users participate in the mining
process, the more secure a blockchain becomes.

• Congrats on still being here! Hopefully, you now

understand why a (large) blockchain is considered
immutable.

• An important question arises. How are miners stopped

from adding corrupt data to the blockchain (like falsified
transaction data)?
• That is technically impossible
Step 6 — How is the blockchain governed? Who determines the rules?

• The Bitcoin blockchain follows a governance model of democracy, and therefore updates

its’ record of transactions (and thus the Bitcoin balances) according to what the majority

of its’ users say is the truth.

• The blockchain protocol does this automatically by always following the record of the

longest blockchain that it has, because it assumes that this chain is represented by the

majority.

• After all, it requires the majority of the computational power to create the longest version of the

blockchain. This is also how an altered block is automatically rejected by the majority of the network.

• The majority of the network rejects an altered block automatically because it is no longer chained to

the longest chain.

• On the Bitcoin blockchain, all transaction history and wallet
balances are public
• Anyone can look up any wallet or transaction that has ever
occurred all the way back to the first transaction that was ever
made (on January 3rd, 2009).
• Although wallet balances can be checked by anyone publicly, the
owners of those wallets remain largely unknown.
• Here is an example of a wallet still containing 69,000 Bitcoin
, at the time of writing worth about roughly 500 million dollars.
It was last used in April 2015, only to show no activity ever since.
Final step, step 7 — Where does this leave cryptocurrencies?
• Cryptocurrencies are basically an altered form of Bitcoin.

• Most cryptocurrencies are built upon their own blockchain protocol that may have different

rules from the Bitcoin blockchain.

• Bitcoin is supposed to be a currency, meaning it is explicitly supposed to function as money.

• Monero is a cryptocurrency with the same function, but its blockchain protocol has

implemented some extra rules that make it a more private currency (transactions are much

harder to trace).

• Cryptocurrencies can however be given any kind of value, depending on their issuer.

• They could be referred to as ‘tokens’. These tokens can give the owners the right to

‘something’, varying from a gaming license or access to social media to downright electricity

or water, you name it.

• Any sort of value can be attached to a ‘cryptocurrency’ token.

• All these cryptocurrency transactions are registered on various blockchains and

can be exchanged online through cryptocurrency exchanges such as Binance.

• It is the new money of the internet. A good example of an industry that might be

affected is the stock market industry.

• There is a good chance that company shares and other property rights will be

registered as tokens on a blockchain in the future

• But blockchains are not just limited to registering materialistic value in the form

of tokens.

• Blockchains also have the potential to safely register data in the form of medical

records, identities, history records, tax records and much, much more.

• This is why the technology is so huge, and I haven’t even mentioned

decentralization yet (another big aspect of blockchain).