This article is dedicated to my interpretation of blockchain and the concepts I want to highlight as I study this technology.
In the picture below, you can see the mind map that explains the basics of blockchain.
What is blockchain
In Decentralized Finance, Blockchain can be defined as a database of transactions. As the goal of decentralized finance is to remove the central counterparty, we need a way, i.e, a technology that can serve as a form of trust. Hence, the blockchain stores the history of transactions that can be traced back to prove that the recipient and the sender indeed possess the money in their accounts. All transactions are grouped in blocks and the blocks are forming a chain, hence, we get the name definition block-chain.
The following attributes of a transaction are recorded in the database:
- timestamp
- counterparties
- amount
How is data stored
The next pillar of blockchain technology is the way the data on transactions is stored. Here we are introduced to encryption. In the blockchain, the data on transactions is not directly disclosed. Instead, the data is hashed using a hash function.
As shown on the mind map, the hash function takes some arguments and creates a storage value. This value can point to the data but does not disclose the details of the data. The zero-knowledge encryption example explains what is supposed to happen:
Suppose you need to verify transaction A. Zero-knowledge encryption can point that A is True while not disclosing what A is.
Conclusion
The encryption makes blockchain a powerful technology which allows the economic agents to interact with each other without the central counterparty which mitigates the risk in traditional finance. However, the technology is also criticized for its environmental impact and the lack of security given that it relies on mining. Mining goes refers to the process of verification and the consequent electricity consumption.
I will disclose these concepts in my later articles.