What was blockchain used for before Bitcoin?


Hardly any IT innovation has provided more talking point in the past few months than the blockchain. Thanks to the ingenious combination of proven technologies and encryption mechanisms, the technology should be tamper-proof. 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 decentralized payment system with digital currency that can be used worldwide and which is an example of how the principle of the blockchain works.

This is how the Bitcoin blockchain works

Like all blockchains, the Bitcoin blockchain is a decentralized database that is operated by several parties. All previous transactions are documented in it 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 the blockchain, the information is not stored centrally, but is held redundantly on all nodes of the chain.

The network participants manage the decentralized Bitcoin database using the associated protocol and make Bitcoin transactions. As sender and recipient, they are participants in the network and can see at any time how many Bitcoins have been transferred from where to where - the people behind the addresses, however, remain anonymous.

The so-called miners operate and secure the Bitcoin network by combining and validating several transactions. New transactions are documented in a new block and appended to the end of the chain. With every new block, the chain is updated on every node in the blockchain network. This means that every participant in the network has the same information and requirements to participate in the system and add new information. In principle, anyone who downloads the open source Bitcoin software and makes their computer capacity available can be a miner.

This is the Bitcoin wallet

Bitcoin accounts can be managed with the help of a virtual wallet. The wallet generates a key pair consisting of a private and a public key. The public key is converted into a public address - the "account number" that is visible to everyone. The private key is not disclosed. It is part of a digital signature with which every transaction is to be signed. The almost 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 in order 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.

  1. Ethereum
    Another cryptocurrency based on the blockchain principle. Provides a platform for programmable smart contracts. The "ethers" are seen by fans as the legitimate successors of the Bitcoins (see also the picture above).
  2. Cryptlet
    Service developed by Microsoft for the Azure cloud, with the help of which users can enter external data into a blockchain without destroying its security and integrity. As individualized middleware, cryptlets can also be developed by Azure users themselves - in any programming language - and are intended to bridge the gap from the blockchain to new business services in the cloud.
  3. Cryptocurrency
    Digital money, without coins and bills. With the help of cryptography, a distributed, secure and decentralized payment system is built. Does not require banks, but computing power and technical aids such as the blockchain.
  4. Blockchain
    A blockchain is a decentralized database that keeps a constantly growing list of transaction data records. The database is expanded linearly in chronological order, comparable to a chain, to which new elements are constantly being added at the lower end (hence the term "blockchain"). When a block is complete, the next is created. Each block contains a checksum of the previous block.

    The technical model of the blockchain was developed in the context of the cryptocurrency Bitcoin - as a web-based, decentralized, public accounting system for all Bitcoin transactions that have ever been made.
  5. Bitcoin Core
    The open source software validates the entire blockchain and was approved at the beginning of 2009 by a certain " Satoshi Nakamoto " published under the name" Bitcoin ". Bitcoin Core was initially programmed in C ++ primarily for Windows systems. Porting to GNU / Linux followed a little later. Because the developers fell out, there are now some derivatives of Bitcoin software, including Bitcoin XT, Bitcoin Unlimited or Bitcoin Classic.
  6. BigchainDB
    The "scalable blockchain database" can manage up to a million write operations per second, store petabytes of data and still have a latency of less than a second - all of this managed in a decentralized manner and with the highest data integrity. The technical basis is blockchain technology.
  7. Distributed ledger
    Financial term for "distributed account management". Bitcoin is a completely new technical approach to distribute information about certain mappings. There is no longer a classic account that is managed centrally at a bank, but "account management" is based on a network of communicating systems.
  8. Smart contract
    A computer protocol that can map or check contracts or provide technical support for the negotiation of a contract. Could replace the written contract in the future.
  9. R3CEV
    The startup R3 CEV is building the blockchain-based "Global Fabric for Finance". The largest blockchain in the world is to be developed with around 50 financial partners - a first test run with eleven major 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.
  10. Ripple
    An open source protocol for a payment network - currently still in development. P2P payment method and foreign exchange market in one, based on the crypto currency "XRP". However, Ripple users are not limited to this one currency, but can use any currency - for example, euros, dollars or yen.

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 procedure. In the case of the Bitcoin blockchain, a cryptographic task must be solved to generate the new block. To do this, the miners use the SHA-256 hash function, among other things.

The following three variables serve as input for the task:

  • the previous hash (256 bit): the most recent block of the blockchain as a connection point.

  • the Merkle Root: a value that is generated by hashing the transactions to be woven into pairs using a hash tree / Merkle tree. The last hash value is the root hash / Merkle root.

  • the nonce: freely selectable value to ensure that a solution can be found (variable according to which the task must be solved).

According to the Bitcoin protocol, the output must be a new hash in which the first 17 bits are assigned zeros. This new hash can only be found by trying out the miner's computers and exchanging the nonce again and again until the task is solved. This extremely computationally intensive consensus procedure 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 when the input variables used ("previous hash" and interwoven transactions) together with the selected nonce result in the new hash value with x leading zeros. Checking this fact - i.e. recalculating the solved problem - only takes 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 creates the next block receives, among other things, a protocol-based reward of currently 12.5 Bitcoin.