Blockchain - A security chain for digital transactions

The topic of block chaining is currently popular with computer scientists, economists, but also with financial institutions and insurers.

As a basis for digital currencies, also called crypto currencies, the block chain is in principle a very long digital journal as known from business administration. Here, all business transactions ever made and newly created are entered and stored. The special feature of this type of database is its strong security against manipulation attempts.

This security is based on two special features: Integrity and decentralization. Integrity in this context means a strong counterfeit protection against attacks by unauthorized persons. To understand this principle, the structure of the block chain must be considered. The basic elements of its structure are transactions. In the case of crypto currencies such as Bitcoin, these are transfers of digital payment units from one account to another. These transactions are grouped into units called blocks. A block contains all transactions made in a certain period of time. For Bitcoin, this period is approximately 10 minutes. To make these blocks secure against unauthorized access, i.e. subsequent changes to transactions, a technique known as hash function is used. The principle of the hash function is based on the fact that a block that logs the transactions over a certain period of time is used to generate a digital signature that is unique to a particular block and uniquely identifies it. It is very easy to find the corresponding block using the signature, but extremely difficult to create this signature for a block.

The hash function

The hash function is therefore sometimes referred to as the fingerprint function, because it can be used to create a digital fingerprint of a file. A hash function can be used to identify an existing data block beyond any doubt, since the principle applies here that every change to a data block also generates a change to the associated hash. Thus, a hash function can protect an input from being subsequently changed. The block chain makes use of this property by generating a hash value from each block within the file, which is written to the beginning of a new block. In this way, each subsequent block protects its predecessor. The blocks within the file are thus connected like in a long chain. If an attacker wanted to change even a single detail within the database, the chain of blocks would have to be changed, because part of each block is the signature of its predecessor, which is also passed on to the successor as part of its own signature.

The decentralisation

Now the question arises, who or what generates these signatures. This is where the second principle of the block chain comes into play: decentralization. In a sense, the system provides a virtual infrastructure for transaction processes. The tasks involved (logging and signing) are not performed by a central instance, but within the network. A network consists of all users participating in the system, or more precisely, the computers participating in the system, behind which there is of course a user. The tasks of grouping transactions into blocks and securing them with hash signatures are distributed decentrally within the network. The participating computers make their computing power available to perform the necessary actions in the network. A copy of the block chain file is located on each individual computer in the network. If the data set is changed on only one computer, this change is immediately passed on to all participants in the network. The decentralized organization within the network thus has three decisive characteristics: No central administration point is required for the tasks to be performed, the computing power required for operation is taken over by the computers within the network and the network serves as a backup by storing the complete block chain file. If large parts of the network were to fail, there would still be enough copies of the database available for the system to continue operating. The concepts of validation and decentralization thus make the file safe from external attacks.

Hedging of transactions

The participants within the network are therefore responsible for logging and securing the transactions and blocks. Since the block chain database is distributed on all computers, that is, each participant is always informed about all transactions in the network, the respective blocks are generated on each computer. The constant exchange of information between the users ensures that everyone is always up to date on the transactions taking place in the network; everyone has access to the same blocks. Creating a log of all transactions is a simple task for a computer anyway. The first step is to generate the hash value for the respective block. The first-come, first-served principle applies here. All participants feverishly search for the correct signature and whoever finds it first is rewarded. This is the basis of the so-called mining of digital currencies like Bitcoin. With every hash found, new digital coins are created at the same time. With these coins the users are paid for their computing power.

Other developments

Due to the simplicity, but also the security of the system, the block chain technology can be used wherever there are transactions. Simple payment mechanisms could be used especially in the online area. In the meantime, there are a number of digital currencies that are intended to function as digital cash. But the block-chain system can do even more: In theory, a transaction is not only tied to amounts of money. A transaction can also be a democratic vote. These transactions could be recorded in a block chain database, counted and secured by a hash. Especially in the field of general transaction theory, further developments are expected here.