What is the blockchain: origin, definition, operational protocol, and advantages of a revolutionary concept.
The blockchain is inseparable from Bitcoin and its eventful history. It is not always easy to understand what the blockchain consists of. Beyond the achievable financial gains, the blockchain is currently disrupting the monetary concept in particular, by allowing you to invest, store, and spend your money.
Being well-informed, understanding what a blockchain is and its advantages, and knowing the technical vocabulary, is indispensable to grasp tomorrow's world and benefit from it. The Paymium team accompanies individuals wishing to inform themselves step by step, regardless of their level of knowledge. This mini-guide is for you.
An Eventful History
The blockchain, born alongside Bitcoin, has become over the years the backbone of numerous other cryptocurrencies. Its history begins with that of Bitcoin's inventor, hiding behind the pseudonym Satoshi Nakamoto, whose goal was to create a decentralized currency to bypass banks. It was in 2008 that the implementation of the first blockchain became concrete with his invention.
Alexandre Stachtchenko, co-founder of Blockchain France, provides its definition:
"The blockchain is a digital protocol managing a peer-to-peer network that records ownership and creates trust."
It was in 2012 that interest in the Blockchain surfaced, with a first Central Bank report on virtual currencies. The year 2015 was truly the year of the blockchain. The Economist magazine, highly reputable in economic circles, announced that "the technology behind Bitcoin could change the world," thereby granting full credibility to the blockchain. From then on, several major corporations began to take an interest in this technology (such as IBM, Orange, and UBS).
What Does the Blockchain Consist Of?
Blockchain technology was long considered the underlying protocol to Bitcoin. It gradually established itself as possessing considerable and highly promising potential. To understand the blockchain, we can compare it to a shared Excel or Google spreadsheet, allowing multi-user layout on a single document simultaneously.
In the blockchain, data is partitioned into blocks based on unique identifiers in the form of a cryptographic hash, guaranteeing data integrity. Information not validated by the community cannot be recorded, nor can existing information be modified, thanks to the consensus algorithms used by the blockchain.
The consensus algorithm of the Bitcoin blockchain is Proof-of-Work, which allows an agreement to be reached on the network to confirm transactions and create new blocks. Fraud and data falsification are thus prevented.
The blockchain therefore appears as a shared and secured ledger. Sharing a common and secured baseline allows people's trust to increase, thanks notably to data immutability and decision-making based on verifiable information.
The distinctive feature of the blockchain is data decentralization, as it is no longer hosted by a single server, but across multiple computers. Each individual can verify the information themselves, without having to resort to an intermediary.
Although the term blockchain is often used on its own, there are currently numerous blockchains, each meeting its own characteristics. Apart from the blockchain that contains Bitcoin transactions, one can cite, for example, the Ethereum blockchain which contains Ethereum transactions.
The Bitcoin Blockchain
Its distinctiveness lies in the transaction history, which is stored on multiple synchronized computers and constitutes the blockchain. The payment of transactions is secure and anonymous. Access to the blockchain is available to all individuals; it is public and allows the use of bitcoins.
To do so, one merely needs to create a virtual wallet allowing the purchase of goods or services or an exchange with other currencies. Our French exchange platform, Paymium, is a pioneer of the Bitcoin universe in Europe. It notably allows you to buy bitcoins and sell them for euros in total security. Allied with leading technological players, such as the Blockstream federation, we master all essential subjects related to the evolution of a high-performance and secure platform.
The Ethereum Blockchain
Vitalik Buterin created a new cryptocurrency in 2015, Ether, with its own blockchain. His priority was the creation of an easily programmable, complete, and malleable blockchain.
It uses "smart contracts," which are applications that execute automated operations without the intervention of a central institution. Inalterable and transparent, they can be controlled in the form of an audit of the different lines of code.
To deploy smart contracts, algorithmic procedures require running a program in a loop without interruption. Bitcoin's simpler programming language does not allow this, as it was originally designed to save resources, constitute a stable monetary model, and be more resistant to structural attacks.
The Distinctive Feature of NFTs
NFT is the acronym for "Non-Fungible Token." It serves to authenticate any unique object that is not interchangeable, such as photos or artworks. Thanks to blockchain technology, it allows a digital file to be made unique and linked to an unforgeable certificate of authenticity.
How Does the Blockchain Work?
Discover the operational principles of the blockchain and how its underlying technology is implemented in reality.
The operational principles of the blockchain
The Bitcoin blockchain is a ledger tracing the transaction history of network participants since its inception. Originally, identification via a secret private key allows each participant to sign transactions and proceed with transfers. Transactions are recorded in encrypted and interconnected blocks. A block includes between 2,000 and 3,000 transactions, depending on their size.
They are hosted simultaneously by numerous computers, called "nodes." Each node can host its own copy of the blockchain. With each additional piece of information, a consensus algorithm among all nodes allows the system to be secured because, once validated, transactions can no longer be modified.
The mining process consists of adding a new block, linked to the previous one, whose copy is sent to all nodes. The integration is chronological, immutable, and prevents the falsification of transactions.
The technology underlying the blockchain
The blockchain can function properly thanks to its underlying technology. At the base of this technology, a distributed system allows a network of computers to share common information. Through a cryptographic process, information is identified and stored on the servers of all computers on the network. It can thus be controlled and validated by the network.
Thanks to the blockchain, users can share decentralized information without having to resort to a central authority. The blockchain is a succession of blocks linked to one another in which data records and information are stored: amount of cryptocurrencies, wallet addresses, transaction fees, and metadata.
Once the information is validated and the block is produced, it is immutable: the information can no longer be modified and is certified forever. The size of the blocks varies: it is 1MB for Bitcoin. To guarantee a regular recording of data, blocks are produced regularly: every 10 minutes. Nevertheless, the issuance of bitcoins is limited to 21 million units. This ingenious monetary concept differs from fiat currencies controlled by states.
The architecture of the blockchain is based on a network of linked nodes, allowing all information to be validated and secured thanks to powerful consensus algorithms.
The Important Role of Nodes
The blockchain is a complex system, integrating components such as nodes, which are inherent to its proper functioning. Their role is important in the different processes of validation, transmission, and storage of blockchain transactions.
Each node is autonomous in completing validation tasks, managing entries in distributed ledgers, and synchronizing between all computers on the network. This is not to mention the essential role they play in terms of security and transparency. The validation of processes by multiple computers contributes to the decentralization of the network and decreases the vulnerabilities of the blockchain against external attacks.
Two major types of nodes exist:
- The full node: it requires a large storage capacity, as it records all transactions and blocks, so as to guarantee the integrity of each transaction.
- The light node: it does not store the entirety of transactions; it contents itself with verifying payments via a simplified system, leaving the validation process to the full node.
The Concepts of Mining and Cryptographic Hashing
The processes of blockchains can differ. For Bitcoin, the security of the network is ensured by "miners" or data centers that practice verifications on transactions occurring on the cryptocurrency. To do this, the party proceeding with the mining must perform powerful calculations.
Bitcoin's consensus algorithm is designed according to a calculation linked to a cryptographic process. Miners are put into competition, after having created a valid data block, to propose it to the network and obtain a reward. For them, it is a matter of creating a block by finding its unique fingerprint (hash) among thousands of possible combinations, matching the requirements of the protocol.
To do this, they will have to pass the block's data through the hash function to find a valid fingerprint. As soon as the miner proposes a block whose fingerprint meets the system's requirements, they provide proof-of-work and obtain a reward. Mining is a very complex operation, requiring numerous attempts, as functions to directly guess the unique fingerprint are non-existent.
For other blockchains, transactions are verified by validators: this is what is called proof-of-stake. In this case, validators are required to lock or hold a certain quantity of cryptocurrency, thereby proving their interest, to be able to validate additional blocks and claim an associated reward.
The Advantages of the Blockchain
The storage and exchange of decentralized information presents numerous advantages:
- Peer-to-peer value exchange: conducted directly between two individuals without the necessity of passing through a trusted third party, security being ensured by the network itself. Sending money to a person can be done anywhere in the world instantaneously, without resorting to banks.
- Reinforced security: the validation being carried out by the numerous users of the network avoids the risk of malice, as nodes control each other. As a reference, since its creation, the Bitcoin protocol has never been hacked and remains inviolable to this day.
- Complete traceability: ensured thanks to an audit trail at every stage of the journey. Data is immutable and unforgeable once recorded.
- Total transparency: the use of a distributed ledger allows all authorized network participants to see the identical information at the same time. Users can consult the history of a transaction in its entirety.
- High settlement speed: transactions are very fast, the validation of a block taking only a few seconds in some newer networks.
- Reduced costs: the computer protocol that organizes exchanges allows reducing the costs of centralization that exist in the traditional banking sector, increasing the overall efficiency of the system.
Why Turn to the Paymium Team?
Created in 2011, Paymium is the first cryptocurrency exchange platform in Europe. It is registered with the Autorité des marchés financiers and specializes in the purchase and sale of cryptocurrencies for euros.
Despite the popularity it has gained, the Bitcoin universe remains complex and technical. Our team has, above all, a pedagogical mission, which is to raise awareness about the current malfunctions of the traditional banking system and to open access to information in the field of Bitcoin to all people anxious to be correctly informed.
We are a gateway to an alternative system that allows for greater autonomy in terms of wealth management and better protection of personal data. To allow everyone to access Bitcoin simply, we place the emphasis on the security of our service, offering a product compliant with regulations. To learn more or get started, do not hesitate to contact us or visit paymium.com.
FAQ
What is the fundamental difference between Bitcoin and the blockchain?
Bitcoin is a decentralized digital currency and a payment network, while the blockchain is the shared ledger technology that allows Bitcoin to operate securely. To make an analogy, Bitcoin is comparable to an email, and the blockchain is the underlying internet protocol that allows this message to be sent and stored. Today, there are many other blockchains independent of Bitcoin.
Why is blockchain technology considered unforgeable?
Each block of transactions is mathematically linked to the previous one by a unique fingerprint called a hash. Modifying a single piece of past information would break this chain and require recalculating all subsequent blocks on thousands of computers simultaneously. This decentralized architecture makes any attempt at fraud or falsification technically and economically unfeasible.
What is the purpose of a smart contract on a blockchain?
A smart contract is an autonomous computer program hosted on a blockchain, mainly Ethereum's. It automatically executes predefined conditions without any human or institutional intervention (such as triggering a payment as soon as a delivery is validated). This allows for securing contractual agreements, removing intermediaries, and reducing management costs.
What is the role of nodes and miners in the network?
Nodes are connected computers that store a copy of the ledger and verify the compliance of transactions according to the protocol rules. Miners, for their part, use computing power to group these valid transactions into new blocks and seal them permanently. This security work is compensated by the issuance of new tokens.
