How Blockchain-based Startups Could Replace Major Players Part 5

How blockchain-based startups could replace Uber, Airbnb and other major players in the sharing economy market. Part 5. Tamper-proof nature of transactions on blockchain networks.

 

Not only does blockchain technology record everything that occurs on a blockchain network to the network’s blockchain (or ledger) so that double spending becomes impossible, it does so in a way that is tamper-proof. This means that once a record becomes a part of a blockchain, it is impossible to change it. This is true of blockchain technology in general, not only of blockchain as applied to Bitcoin, which makes the technology extremely valuable and applicable to industries where the history of records matters, such as transportation, medical records, the authenticity of products, service records, and more.

The Bitcoin network seals the blocks of its blockchain with cryptography hashes. The Bitcoin blockchain uses cryptography algorithm SHA-256 developed by the National Security Agency (NSA).

Cryptography hashes have several important properties. First, a set of data under a cryptography algorithm can only have one hash.

Second, the same set of data would always return the same hash and it is possible to recreate the hash if you have the data, but it is impossible to recreate the data if all you have is the hash. This means that hashes make it easy to validate and verify data. Suppose you have a set of data with information about 1000 transactions, including amounts, times, wallet information and so on. This information could be about financial transactions, but it also could be about medical records, diplomas, or something else. Let’s also suppose you store this information in several locations for security purposes and want to make sure that your backups did not get damaged. With cryptography hashes, there is no need to compare the actual sets of data. All you have to do is compare hashes. Because a cryptography algorithm will return one and only one hash for a set of data, you know that if a hash from the backup copy matches the hash from the main copy, the copies are identical.

Third, a hash is much shorter than the data is corresponds to. For example, block #523620 of the Bitcoin blockchain contains information about over one thousand transactions, including input and output addresses, amounts, times and more, yet all of this information is summarized in the hash for the block that is equal to 00000000000000000036b7682dd925a2b8d86343eebe384c80caceaecec1c501 (you can see the hash for the block and all the other data about it on the official Bitcoin blockchain explorer at https://blockchain.info/block/00000000000000000036b7682dd925a2b8d86343eebe384c80caceaecec1c501 ).

Hashes on the Bitcoin network start with a lot of zeros because the network has the parameter of difficulty. For modern computers, creating a hash for a set of data using a cryptography algorithm is a very easy task. Because of this, if all that blocks on the Bitcoin blockchain required was a hash for the data about transactions, then anybody could create the hash almost instantly. Not only could they create hashes for individual blocks, but they would also be able to change information about transactions that have occurred in the past, create new hashes for the edited information and create new versions of the Bitcoin blockchain.

For this reason, Bitcoin blockchain uses an algorithm called proof-of-work. Proof of work makes it impossible to create multiple versions of the Bitcoin blockchain and this is yet another breakthrough of blockchain technology because if parties agree on the validity of previous blocks, then the information becomes sealed.

With proof-of-work, miners (which is a term for network members who create blocks of blockchain) need to create hashes that correspond to a certain level of difficulty. In practical terms, for the Bitcoin network, this means that the hashes need to start with a certain number of zeros. To come up with a hash that starts with zeros, miners add a number to the data about transactions and then generate a hash for the data and the number. The number is called nonce, which is short for “number used once.” If the hash matches the requirements, the miner creates a block and the winning nonce becomes a part of the data about Bitcoin blockchain block and the blockchain. If a hash that a miner creates does not satisfy the requirements, the miner tries again. On the Bitcoin network, miners get incentives to buy the equipment necessary to run software that generates hashes and competes for creating blocks on the Bitcoin blockchain because the Bitcoin network rewards miners for creating blocks of the blockchain by giving them rewards in Bitcoins, which is how the Bitcoin network adds new coins to circulation.