Blockchain 

A blockchain is a growing list of records, called blocks, which are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Blockchain has been in a lot of buzz these days. And that is mainly because it is backbone of the very famous cryptocurrency in the world - the Bitcoin. Many Governments and leading Banks have decided to bring many of their conventional transactions based on Blockchain concept. The applications and potential of this framework is huge and is considered to be changing the way transactions are made in various domains.

In recent years, there is a lot of buzz on Blockchain. Many have described this as a most disruptive technology of the decade. Especially, the financial markets could be the most affected ones.

The technology is being adapted into many verticals like Healthcare, Medicines, Insurance, Smart Properties, Automobiles, and even Governments.

However, so far the most successful implementation of Blockchain is the Bitcoin - A Peer-to-Peer Electronic Cash System, which incidentally is also the first implementation of blockchain technology. Thus, to understand blockchain technology, it is best to understand how Bitcoin System is designed and implemented.

In this article, you will learn what is Blockchain, its architecture, how it is implemented and its various features. I will site Bitcoin implementation while describing the intricacies of blockchain.

The blockchain architecture is not so trivial and many have written good articles, tutorials including several videos. These range audience from Novice to Professionals. In this tutorial, I will focus on the conceptual understanding of blockchain architecture, keeping both Novice and Professionals on mind. Before delving into the blockchain, it is important to know why the need for this new technology emerged? The answer to this question lies in what is known as Double − Spending.

Consider a situation shown in image −

As clearly seen here, Bob is tendering a $10 bill to Lisa in exchange of a book. Once the Lisa receives this physical $10 bill, there is no way for Bob to re-use this money for some other transaction, as the physical currency is now in Lisa’s possession.

Now, consider a situation where the money is paid in Digital form. This is illustrated in image −

As the format for money exchange is in the digital format, it is essentially a binary physical file stored somewhere on Bob’s device. After Bob gives this file (digital money) to Lisa, he can also a give a copy of the file to Alice. Both now think that they have received the money without having any means of authenticating the digital coin and would thus deliver their respective goods to Bob. This is called double-spending where the sender spends the same money at more than one place for obtaining services or goods from multiple vendors.

To solve this problem of double-spending, one would employ a centralized authority to monitor all the transactions. This is illustrated in image −

The centralized authority, which in common terms is your bank, maintains a ledger book recording all the transactions. Now, Bob has to send his digital money to the bank who would make an entry into its ledger debiting Bob’s account. After ensuring that Bob has sufficient balance to pay for the digital money which he wants to send, would send the money to Lisa crediting her account in its ledger.

Now, it is guaranteed that Bob cannot double spend the money. If every digital transaction is routed through a centralized authority like this, the problem of double-spending would be solved. This also provides another benefit in validating the authenticity of each coin (digital money) that it receives in the transaction. So the fake money (duplicate money as in the case of Bob paying to Alice using a copy) would be easily detected and prevented from the circulation.

The introduction of centralized authority though it solves the double-spending problem, introduces another major issue - the cost of creating and maintaining the centralized authority itself.

As the banks need money for their operations, they start cutting commissions on each currency transaction they do for their clients. This sometimes can become very expensive, especially in overseas transfer of money where multiple agents (banks) may be involved in the entire deal.

All the above issues are solved by the introduction of digital currency, called Bitcoin. I will now give you a brief background on what Bitcoin is before delving into its design and architecture.

The Bitcoin was introduced in this world by Satoshi Nakamoto through a research-style white paper entitled Bitcoin: A Peer-to-Peer Electronic Cash System in the year 2008.

The Bitcoin not only solved the double-spending problem, but also offered many more advantages, One such advantage worth mentioning here is the anonymity in the transactions. Satoshi who created the system and did transact few coins on this system is totally anonymous to the entire world.

Just imagine, in this world of social media, when the privacy of each individual is at stake, the world is not able to trace out so far who is Satoshi? In fact, we do not know whether Satoshi is an individual or a group of people. Googling it out also revealed the fact that the bitcoins Satoshi Nakamoto holds is worth about $19.4 billion - that money now remains unclaimed in the Bitcoin system. So what is Bitcoin - let us have a look!

What is Bitcoin?

As you saw earlier, the bank maintains a ledger recording each transaction. This ledger is privately held and maintained by the bank. Satoshi proposed that let this ledger be public and maintained by the community.

The moment you make such a ledger public, several considerations would come to your mind. This ledger has to be tamper-proof so that nobody can modify its entries. As each entry in the ledger is publicly visible, we will have to figure out how to maintain the anonymity - obviously you would not like everybody in the world to know that I paid you one million dollars.

Also, as there is only one single ledger keeping track of each and every transaction in the world, the size of ledger would be another great concern. Providing a solution to these intricacies was not trivial and that’s what I am attempting it here to make you understand underlying architecture of Bitcoin in simple words.

This underlying architecture is the Blockchain and that’s what this tutorial is about. To understand the Blockchain architecture, you need to understand a few key features on which it is based on. So, let us get started with PKI - Public Key Cryptography.