If you want to grasp how a Bitcoin-like Blockchain functions, then a Blockchain operational overview is a good start. The above sketch shows the three operational roles and the interactions between them in a Bitcoin-like Blockchain. The numbers state the flow of the transaction-creation under number 1 to its insertion in the Blockchain under number 6.
A Blockchain has the potential to redefine from the ground up the processes and interactions between economic and societal actors. Hence, stakeholders and decision-makers will have to assess the broad-ranging consequences. This task requires a fundamental understanding of the Blockchain technology and its powerful trust paradigm shift!
A Blockchain is, first of all, an infrastructure and a protocol that essentially notarises transactions. The radical novelty resides in the replacement of the trusted third party, like a notary, by a consensus system that runs between the participants. Unlike a bank, for example, it’s the participants themselves that manage the Blockchain infrastructure and database.
The Blockchain operational overview shows the roles participants can take on and the logical interactions between them. The following paragraphs detail the processes from the creation of a transaction to its insertion in the Blockchain.
A wallet is a piece of software that a participant in the system can download on a computer. The wallet allows the participant to create identification credentials and start transactions on owned assets in the Blockchain database. Once the participant signed the transaction, it’s sent to the network of nodes as an unverified transaction (see number 2).
2) NODES – as transaction auditors
A node is a piece of software that allows a participant to “be its own bank”. Indeed, if one audits and holds an autonomous copy of a transaction database, one becomes independent. Continuing from number 1, the wallet sends its transaction to the nearest node. The latter receives the unverified transaction and audits it (number 2) by verifying and validating two elements: the transaction’s signature and its accounting coherence.
After a transaction passes the audit, the node accepts it and inserts it in its pool of “verified-but-unconfirmed-transactions” and forwards it to neighbouring nodes (number 3). Those nodes also audit autonomously the transaction, confirm it, insert it in their pool of unconfirmed transactions and forward it to their neighbouring network nodes. And so on and so on, until the entire network received and audited the new transaction.
3) NODES – as memory pools of verified but unconfirmed transactions
The mempool (number 3) gathers validated transactions that are not yet inserted in the database. Transactions are confirmed and prepared for insertion in the Blockchain through mining (number 4).
A miner is, in essence, a combined piece of hard- and software that enables Blockchain participants to create and propose new transaction-blocks. The latter are like pages in an accounting journal. To create a block (number 4), a miner selects and insert transactions from the pool of unconfirmed transactions (number 3). For a block to be eligible as a Blockchain addition-proposition, it has to be accompanied by its digital fingerprint. It’s the computation of this digital fingerprint that is called mining.
A miner finds his motivation in the reward received for a block accepted by the network (number 5). The network nodes accepts a new block on 2 conditions: it must pass the audit of its content, and it must be the first to be proposed. The fulfilment of the latter condition is designed to be extremely difficult and expensive. This approach imposes a race between miners and achieves 2 objectives in the production of blockchain blocks: truthfulness and immutability.
Making a block expensive to create is realised by imposing a very restrictive and difficult to compute format on the digital fingerprint. Mining is the process that searches for a conform format of the digital fingerprint or hash. Our previous article, “Bitcoin Mining Simplified“, gives a more detailed insight in the actual mining process.
This mining process accomplishes in one shot both before mentioned objectives of truthfulness and immutability. First, because mining is extremely difficult and expensive, the block proposer -a.k.a. miner- will insert only truthful transactions as otherwise its block won’t pass the audit (number 5) and will miss the opportunity to receive a reward. Second, because mining is extremely difficult and expensive, the content of the block can’t be changed without huge monetary investments. Indeed, having to redo the mining work requires exorbitantly expensive material, making fraud unprofitable.
5) NODES – as block auditors and Blockchain database creators
The block that reaches first a network node (number 5), will again be subject to a complete audit of all included transactions for signature authenticity and accounting coherence. Additionally, the node verifies and validates the correctness of the computed digital fingerprint.
The node inserts the validated block in its local copy of the Blockchain database and forwards it to neighbouring nodes. The latter verify and include the new block in their local copy of the Blockchain database and forward it to their neighbours. And so on and so on until the entire network received, audited, validated and inserted the new block.
In conclusion, the Blockchain operational overview shows how nodes and miners create a consensus on the transactions they will add to the Blockchain. Through a system of economic incentives and checks and balances, the Blockchain protocol implements a solid process for collective verification, validation and creation of a Blockchain transaction database without the need for a trusted centralised third party.