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Blockchain Basics Explained

Blockchain refers to three related but distinct concepts: (1) cryptocurrencies like Bitcoin, (2) the specific blockchain that underlies a cryptocurrency, and (3) the idea of blockchains more generally. A blockchain is a distributed ledger that records transactions in cryptographically-chained blocks. It allows transactions to be gathered into blocks and recorded across multiple servers without a central authority. Blockchains use cryptography and consensus protocols to validate transactions and add verified blocks to the distributed ledger in a way that makes alterations extremely difficult. Distributed ledgers have the potential to transfer value, record asset transfers, and allow asset owners to exercise associated rights without central authority.

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184 views11 pages

Blockchain Basics Explained

Blockchain refers to three related but distinct concepts: (1) cryptocurrencies like Bitcoin, (2) the specific blockchain that underlies a cryptocurrency, and (3) the idea of blockchains more generally. A blockchain is a distributed ledger that records transactions in cryptographically-chained blocks. It allows transactions to be gathered into blocks and recorded across multiple servers without a central authority. Blockchains use cryptography and consensus protocols to validate transactions and add verified blocks to the distributed ledger in a way that makes alterations extremely difficult. Distributed ledgers have the potential to transfer value, record asset transfers, and allow asset owners to exercise associated rights without central authority.

Uploaded by

Kush
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We take content rights seriously. If you suspect this is your content, claim it here.
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A BRIEF INTRODUCTION TO BLOCKCHAIN

NANCY LIAO ’05


JOHN R. RABEN/SULLIVAN & CROMWELL EXECUTIVE DIRECTOR
YLS ASSOCIATE RESEARCH SCHOLAR IN LAW
“BLOCKCHAIN” HAS MANY MEANINGS

“To understand the power of blockchain systems, and the things they can do, it is
important to distinguish between three things that are commonly muddled up, namely
the bitcoin currency, the specific blockchain that underpins it and the idea of
blockchains in general.”
The Trust Machine, THE ECONOMIST, Oct. 31, 2015
“BLOCKCHAIN” HAS MANY MEANINGS

Phone Blockchain

• The idea of a • The idea of


phone network blockchain
• A specific phone • The specific
network (e.g., blockchain that
AT&T) underlies Bitcoin
• A specific use of or another coin
the phone network offering
(e.g., fax) • Bitcoin or another
cryptocurrency
WHAT IS BLOCKCHAIN?

A technology that:

permits transactions to be
gathered into blocks and recorded;
cryptographically chains blocks
allows the resulting ledger to be
in chronological order; and
accessed by different servers.
WHAT IS A DISTRIBUTED LEDGER?

Centralized Ledger Distributed Ledger

Client A Node A

Node E Node B
Client
B Bank Client
C

Client D Node D Node C

• There are multiple ledgers, but Bank holds the “golden record” • There is one ledger. All Nodes have some level of access to that
• Client B must reconcile its own ledger against that of Bank, and ledger.
must convince Bank of the “true state” of the Bank ledger if • All Nodes agree to a protocol that determines the “true state” of
discrepancies arise the ledger at any point in time. The application of this protocol is
sometimes called “achieving consensus.”
WHAT IS A DISTRIBUTED LEDGER?

Single Entity Multiple Entities


HOW MIGHT A DISTRIBUTED LEDGER WORK?

Users initiate Users Broadcast One or more Nodes aggregate


transactions their Nodes begin validated
using their Digital transactions to validating each transactions into
Signatures Nodes transaction Blocks

Nodes Broadcast Consensus Block reflecting


Blocks to each protocol used “true state” is
other chained to prior
Block
WHERE MIGHT BLOCKCHAIN USE CRYPTOGRAPHY?

Initiation and Broadcasting • Digital Signatures


of Transaction • Private/Public Keys

Validation of Transaction • Proof of Work and certain alternatives

Chaining Blocks • Hash Function


THE POWER OF DISTRIBUTED LEDGERS

It can be used to It can be used to allow


It can be used to record those owners of assets to
It can be used without a central transfer value or the transfers of value or exercise certain rights
It can be used to ownership of assets associated with
BLOCKCHAIN
authority by individuals or
entities with no basis to trust
create value or issue
assets
ownership of assets
• A human being or a • These records may be ownership, and to
each other Smart Contract can very difficult to alter, record the exercise of
initiate the transfer such that they are those rights.
sometimes called
effectively immutable • Proxy Voting

The degree of trust between users determines the technological


configuration of a distributed ledger.
HOW MIGHT DISTRIBUTED LEDGER PROPOSALS DIFFER?

Participation Open Closed


Permission Permissionless Permissioned
Ledger Design One ledger One ledger or Segregated ledgers
Validation Methodology depends on degree of trust between nodes. Where there is no basis
for trust, may be achieved through proof of work, which requires the algorithmic
solving of a cryptographic hash.
Consensus Mechanism Mechanism depends on degree of trust between nodes. Where there is no
centralized authority, consensus may be determined algorithmically.
QUESTIONS?

Nancy Liao
nancy.liao@yale.edu

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