Blockchain Basics

For centuries, people have tracked information using a ledger: a simple chronological list of data. Bushels of wheat. Hogsheads of wine. Deaths from plagues and curses. Days since all those locusts. Ledgers!

As the scope of human activity has expanded, so have ways to track and synchronize data. Last century, information became (primarily) digital and our collective ledgers moved from paper to computers. This opened up many new possibilities, and databases—systems of enhanced, interrelated, electronic ledgers—were invented to harness the power of this new paradigm. Information was suddenly searchable, sortable, shareable, and transportable.

Today, databases underpin nearly every digital service. But the database’s origins in the pre-internet, pre-global era have begun to limit its usefulness, or at least call into question its ubiquity. Databases need a central authority to maintain them, and that authority has absolute power over what the database contains. For example, if Facebook wanted to change your Instagram to be just pictures of awesome swords, they could do that, unilaterally. You would just have to accept the swords. Or if a bank wanted to deduct 100 dollars from your checking account, they could do it. There, you’d surely notice and complain. But what if they only took a penny a day?

As the world has become more connected and our interactions more digital, we’ve needed something more resilient and more collaborative, something that will work at scale but not be subject to any single political ideology, personal motive, or corporate incentive, to manage our data.

Invented in 2009, blockchain is an answer to that need.

Blockchain is a method for keeping data synchronized across multiple, independent stakeholders. Where a traditional database is perfect for tracking records for a single entity, blockchain allows a group of entities, who might be unrelated and who might all have an incentive to alter their shared data, to agree on and maintain a single dataset.

Since the incentive to edit data in your own favor is very strong in financial systems, blockchain has so far been most useful for tracking money. Here’s the generic idea of how it works.

First, computers that want to share data join together on a network by running the same blockchain software. As data comes into the network — for example, as people spend and send money — the data is grouped together into “blocks” for verification. Then, on a regular schedule, usually every few minutes or even every few seconds, the connected computers vote on the current block of data, saying, in effect, “yes all this looks good to me” (or not). If the current block is rejected, then the network will vote on it again when the next block is submitted. If the current block is accepted, meaning the network agrees the data it holds is valid, it’s appended to the system’s entire past history of validated data blocks. So the data is “chained” together. Eventually, a long, connected chain of blocks forms.

This chain is stored on each computer on the network, and the appending happens using cryptographic functions that make it easy to tell if any past transaction has been altered in even the slightest way. So each time a block of data is added, the integrity of all previous data is, in effect, confirmed by the whole network.

If you wanted to cheat and, say, alter any past transaction (for example, to pretend you have more money than you are supposed to), you’d have to somehow alter the histories across all the independent computers on the system. Or join the network with enough new computers to vote your cheats into “fact.” This is called a 51% attack. In large systems like Bitcoin, such an attack would be impossibly expensive — you’d have to run too many computers. On the Stellar network, such attacks are impossible, by design, thanks to the Stellar network’s Proof-of-Agreement consensus mechanism. Submitting bad data in real-time also doesn’t work because eventually your selfish intention will be voted down and the network will agree on the right data.

There’s quite a bit of technical detail that goes into all this. The initial paper describing the first blockchain system is ingenious, and we highly recommend reading it.