The blockchain not only provides digital rapture, but also a lot of question marks. We explain to you Bitcoin how the blockchain works.

Hardly any IT innovation has provided much talk in recent months than the blockchain . The technology should be tamper-proof thanks to a clever combination of proven technologies and encryption mechanisms. In addition, it should make its users independent of monolithic systems and the associated risks. And: Blockchain should form the basis for completely new business models .

The best-known blockchain application to date is Bitcoin – a worldwide, decentralized payment system with digital currency. Around 236 million Bitcoin transactions have been completed over the past 24 months. The Bitcoin example illustrates how the blockchain principle works.

This is how the Bitcoin Blockchain works

Like all blockchains , Bitcoin Blockchain is a decentralized database operated by multiple parties. It documents all previous transactions in “chained” blocks. New transactions are added in new blocks. In the language of accountants, the blockchain would be the general ledger in a gigantic accounting system. However, in the case of Blockchain , the information is not stored centrally, but is held redundantly on all nodes of the chain.

The network subscribers manage the decentralized Bitcoin database using the associated protocol and make Bitcoin transactions. As senders and receivers they are participants of the network and can understand at any time , how many Bitcoins were transferred from where to where – but the persons behind the addresses remain anonymous.

The so-called Miner operate and secure the Bitcoin network, by consolidating multiple transactions and validate. New transactions are documented in a new block and appended to the end of the chain. With each new block, the chain updates on every node in the blockchain network. This gives each participant in the network the same information and prerequisites to participate in the system and to add new information. In principle, Miner can be anyone who downloads the open-source Bitcoin software and makes his computer capacity available.

That’s the Bitcoin Wallet

Bitcoin accounts can be managed using a virtual wallet (English “wallet”). The wallet generates a key pair consisting of a private and a public key. The public key is converted to a public address – the “account number” visible to everyone. The private key is not revealed. It is part of a digital signature with which each transaction is to be signed. The nearly infinite number of possible keys makes it almost impossible to “guess” one.

A Bitcoin transaction requires:

  • the public address of the recipient account
  • the transfer amount
  • the public address of the sender account
  • the private key to this public address to sign transactions from this account

Information such as card numbers, names or addresses are not required. The participants also process their transactions without an intermediary.

What’s up with Blockchain, Bitcoin and Co.?

1.Ethereum

Another cryptocurrency based on the blockchain principle. Provides a platform for programmable smart contracts. The “ethers” are regarded by fans as a legitimate successor to the Bitcoins (see also above picture).
Ethereum.org 

2.Cryptlet

Microsoft Azure cloud-built service that allows users to put external data into a blockchain without destroying their security and integrity. As an individualized middleware, cryptlets can also be developed by Azure users themselves – in any programming language – and build the bridge from the blockchain to new business services in the cloud.

Azure Blog: Introducing Project Bletchley 

3.cryptocurrency

Digital money, without coins and bills. Cryptography builds a distributed, secure and decentralized payment system. Does not require banks, but computing power and technical aids such as the blockchain.

4.block Chain

A blockchain is a distributed database that maintains an ever-growing list of transaction records. The database is extended chronologically linearly, similar to a chain, at the lower end constantly new elements are added (hence the term “block chain” = “block chain”). If one block is complete, the next one is created. Each block contains a checksum of the previous block.

The blockchain technical model was developed as part of the cryptocurrency Bitcoin – a web-based, decentralized, public accounting system for all Bitcoin transactions ever made.

5.Bitcoin

A globally available decentralized payment system and the name of a digital monetary unit. You do not need a bank to handle Bitcoin payments – everything is done through a peer-to-peer network of computers and the blockchain as the central database.
Bitcoin.de 

6.Bitcoin Core

The open source software validates the entire blockchain and was released in early 2009 by a certain “Satoshi Nakamoto” under the name “Bitcoin”. Bitcoin Core was in C ++ soon to be programmed especially for Windows systems. A little later the porting to GNU / Linux followed. Because the developers are divided, there are now some derivatives of Bitcoin software, including Bitcoin XT, Bitcoin Unlimited or Bitcoin Classic.
Bitcoin Core 

7.BigchainDB

The “scalable blockchain database” can manage up to one million writes per second, store petabytes of data, and still have a latency of less than a second – all managed in a decentralized manner and with the highest data integrity. The technical basis is blockchain technology.

BigchainDB

8.Distributed Ledger

Financial term for “distributed account management”. Bitcoin is a completely new technical approach to distributing information about specific assignments. There is no longer a classic account managed centrally at a bank, but “account management” is based on a network of communicating systems.

9.Smart contract

A computer log that can depict or review contracts or provide technical support for negotiating a contract. Could in future replace the written contract.

10.R3CEV

The startup R3 CEV builds the blockchain-based “Global Fabric for Finance”. With around 50 financial partners, the largest block chain in the world to be developed – a first test run with eleven banks, including Barclays, Credit Suisse, HSBC, UBS and UniCredit has already been successfully completed. R3CEV has entered into a strategic partnership with Microsoft to develop blockchain infrastructure and technology in the Azure Cloud.
R3CEV 

11.ERIS

A free software with which every user can develop their own blockchain application.
eris Industries 

12.ripple

An open source protocol for a payment network – currently under development. P2P payment method and foreign exchange market in one, based on the cryptocurrency “XRP”. However, ripple users are not set to this one currency, but can use any currency – including euros, dollars or yen, for example.
Ripple Labs 

How Bitcoin Mining works

Newly initiated transactions are attached to the blockchain with the help of the miners . For this purpose, the miners summarize transactions of a certain period of time and try to create a new block. This new block will be created through a special consensus process. In the case of the Bitcoin Blockchain, a cryptographic task must be solved for the generation of the new block. Among other things, the miners use the hash function SHA-256 .

The following three variables serve as input for the task:

  • the previous hash (256 bits): latest block of the blockchain as a point of attachment.
  • the Merkle Root : a value generated by pairwise “hashing” the transactions to be hovered using a hash tree. The last hash value is the root hash / merkle root.
  • the nonce : arbitrary value to ensure that a solution can be found (variable by which the task must be resolved).

According to the Bitcoin protocol, output must be a new hash, with the first 17 bits filled with zeros. This new hash is only to be found by the Miner calculator plodding around and over and over again until the task is solved. This extremely compute-intensive consensus process is called “proof of work” (PoW) .

The miner who first calculates the new hash publishes the block in the network. At this moment, the nodes involved in the blockchain check whether the newly created block is valid. This is the case if the used input variables (“Previous Hash” and interwoven transactions) together with the selected nonce result in the new hash value with x leading zeros. The examination of this fact – that is, the recalculation of the solved task – takes only a fraction of a second, whereas finding a solution can take several minutes.

Miners are rewarded for maintaining the network by providing computing power and generating new blocks. The miner who first generates the next block receives, among other things, a protocol-based reward of currently 12.5 Bitcoin.

So it came to Bitcoin Blockchain Fork

When creating a new block, it may happen that several miners find new blocks at the same time. The blockchain branches then for a short time in several possible sequels, which compete with each other. A so-called fork (English “fork”) is available. If there are several continuation strands, the miners dock at their ends until a strand is longer. The block with the most supporters finally prevails. The longest chain is accepted by all nodes as the valid one because behind it is the largest computation effort.

Bifurcations occur even if the blockchain code is changed, but not all miners and network subscribers follow the new rules. This is the case, for example, when there is disagreement in easing or tightening the rules for verifying a block. In the worst case, a part of the community follows its own concept and accepts a spin-off from the original Blockchain . Then, if both strands are maintained, the result is two blockchains, each functioning according to its own rules.

Roundtable Computer Week Blockchain

1.Discussion about the blockchain

Experts from the professor to the practitioner gathered at the Computerwoche editorial office in early February to dissect the myth Blockchain.

2.Franz Nees, University of Karlsruhe

Professor Franz Nees, Karlsruhe University of Applied Sciences Technology and Business: “Is it about new value creation models – or ‘just’ more efficiency?”

3.Olaf Stöwer, Faizod

“The good thing about the blockchain hype is that we question existing paradigms,” says Olaf Stöwer, Head of Operations at Faizod, a Dresden-based company.

4.Robert Bosch, Bearing Point

Dr. Robert Bosch, Partner at Bearingpoint: “Many market participants are taming the horse from behind, with the motto: ‘We have a new technology, what can we do with it now?'”

5.Dr. Rainhard Z. Bengez, Capgemini

Professor Rainhard Z. Bengez, Senior Manager at Capgemini Consulting: “We are trying to commercialize mistrust.”

6.Raimund Gross, SAP

Raimund Gross, Innovation Manager Blockchain at SAP: “We move away from centralized systems to the decentralized. This requires new thinking and acting in networks. That’s hard for many. ”

7.Andrea Martin, IBM

Andrea Martin, Chief Technology Officer at IBM: “We are only interested in use cases.”

8.Burkhard Blechschmidt, Cognizant

Burkhard Blechschmidt, Cognizant’s CIO Advisory: “It’s an ingenious combination of some long known technologies and mathematical models.”

At the beginning of August 2017, such a split was deliberately enforced on the Bitcoin Blockchain: a so-called User Activated Fork (UAF). This created an alternative chain: Bitcoin Cash . The spin-off was preceded by a year-long dispute over increasing the maximum block size of Bitcoin. A group of miners, developers, investors, and Bitcoin users did not want to accept the block size limitation to a maximum of one megabyte. Because the size of the block limits how many transactions can be made per second. According to the Bitcoin protocol, these are currently seven transactions per second.

That’s a problem given the huge growth of the network and the growing number of transactions. However, with only part of the community advocating far-reaching code changes, the split was almost certain. Bitcoin Cash was split off as a copy of Bitcoin Blockchain. By maintaining this chain, a software update is being implemented to increase the block size to eight megabytes. This will allow more transactions to be performed per second in the future. Whether Bitcoin and Bitcoin Cash can coexist in the long term must be proven.

The eternal blockchain

According to the classic Bitcoin protocol, a new block is created and added to the chain approximately every ten minutes. Once this has been done, the transactions documented in the new block are considered formally confirmed. The “new hash” now becomes the starting point for the generation of the next block. After four to six acknowledgments – ie newly added blocks – bitcoin transactions are considered immutable in practice and are therefore part of the “eternal” blockchain .

By the consecutive storage of data in a blockchainis a subsequent change not possible without damaging the integrity of the entire system. If an attacker tried to manipulate a transaction by changing an existing block in the chain, he would also have to change the stored hash. A check of the block with the hashing function would immediately expose the block as a forgery because the changed hash does not match that in the blockchain. Since each hash of a block is used to generate the hash of the next block in the blockchain, manipulation would also affect all subsequent hashes. This makes the manipulation of data in the blockchain almost impossible. An attacker would have to provide more than 50 percent of the computing power of the entire network,

There are already blockchain applications that enable smart contracts . Smart contracts are programs that are executed by all nodes of the blockchain (also called chaincode). Based on the “if-then” principle, these programs implement appropriate measures of the contract, which are linked to specific contract terms. The contractors interact directly through the blockchain. Agents such as notaries, lawyers, stock exchanges or banks are no longer needed. Smart contracts can also be used to implement binding, inter-machine communication via IoT – for example, when entering a toll route and paying for the car directly via the blockchain.

The blockchain principle should pave the way for completely new, digitally supported business models. (Fm)

The operation of Blockchain

block Chain

Blockchain will become the key technology in IT in the years to come.

1. Transaction

The transaction is the basic element of the blockchain. Two parties exchange information with each other. This may be the transfer of money or assets, the conclusion of a contract, a medical record or a document that has been stored digitally. Transactions work in principle like sending emails.

2.Verification

The verification verifies that a party has the appropriate rights for the transaction. The check is instantaneous or it is written to a queue which will later check. At this point, nodes, ie computers or servers in the network, are integrated and the transaction is verified.

3.Structure

The transactions are grouped into blocks, which are encrypted with a hash function as a bit number. The blocks can be uniquely identified by assigning the hash value. A block contains a header, a reference to the previous block and a group of transactions. The sequence of linked hashes creates a secure and independent chain.

4.Validation

Before the blocks are generated, the information must be validated. The most widely used concept for validating open source blockchains is the “proof of work” principle. As a rule, this method represents the solution of a difficult mathematical task by the user or his computer.

5.Blockchain Mining

The term mining comes from the mining industry and means the “mining”. In this process, the block is generated and hashed. To get to the train, the miners have to solve a mathematical puzzle. Whoever has the solution first, will be accepted as a miner. The miner receives for his work a Honroar in the form of crypto currency (Bitcoin).

6.The chain

After the blocks have been validated and the miner has done his work, the copies of the blocks in the network are distributed to the nodes. Each node attaches the block to the chain in a steady and unmanipulatable manner.

7.Defense

When a dishonest miner tries to change a block in the chain, the hash values ​​of the block and subsequent blocks are also changed. The other nodes will recognize this manipulation and exclude the block from the main chain.