5.1 Fundamentals of blockchain technology

Blockchain technology revolutionizes digital record-keeping with its decentralized, immutable, and transparent nature. It eliminates central authorities, creates tamper-resistant records, and enhances trust through public visibility of transactions on networks like Bitcoin and Ethereum.

The blockchain's structure of linked blocks, cryptographic hashing, and public-private key cryptography ensures secure, verifiable transactions. While offering advantages like enhanced security and faster settlements, blockchain faces challenges in scalability, energy consumption, and regulatory uncertainty compared to centralized systems.

Blockchain Technology Fundamentals

Key features of blockchain technology

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• Blockchain technology functions as distributed ledger technology, creating digital record-keeping system across network of computers
• Decentralization eliminates need for central authority, operates on peer-to-peer network (Bitcoin, Ethereum)
• Immutability ensures tamper-resistant records through cryptographic hashing, making data alteration extremely difficult
• Transparency allows public visibility of transactions, enhancing auditability and trust (public blockchains like Bitcoin)

Structure of blockchain systems

• Blocks serve as containers for multiple transactions, linked chronologically to form chain
• Transactions record data transfers or exchanges, validated by network participants (cryptocurrency transfers, smart contract executions)
• Cryptographic hashes create unique digital fingerprints for each block, securely linking them
• Hash functions possess one-way transformation property, small input changes cause significant output differences (avalanche effect)

Public and private keys in blockchain

• Public key cryptography utilizes asymmetric encryption for secure communication
• Public keys shared openly, function as addresses for receiving transactions (Bitcoin addresses)
• Private keys kept secret by owners, used to sign and authorize transactions
• Digital signatures prove transaction ownership, ensure non-repudiation
• Privacy measures include pseudonymous transactions and secure key pair generation

Blockchain vs centralized systems

• Advantages: Enhanced security through distributed network, reduced intermediaries lowering costs, increased transparency for all participants
• Improved traceability of transactions and assets, faster settlement times compared to traditional systems
• Limitations: Scalability challenges (transactions per second), high energy consumption (proof-of-work blockchains)
• Regulatory uncertainty in many jurisdictions, complexity for end-users, irreversibility of transactions
• Distributed control vs single point in centralized systems, consensus mechanisms replace central authority
• Data redundancy across network vs single database in traditional systems