manual processes. (Exhibit 2) Once complete, the transaction
is recorded at the county recorder’s office.
For a blockchain-based transaction, the authorization and
verification of available funds are nearly instantaneous. The
transaction of A>>>B is digitally “signed” by the person making the transfer, and the blockchain software can verify that
the digital signature is from the account owner. The
software then verifies the account owner has sufficient funds, and the transaction is executed.
This concept can further be
explained using an analogy.
Let’s say there are two
people who want to
verify that they are in
fact brothers. Before
DNA testing was
readily available, proof of
identity would be needed, and
their birth certificates would be
required to compare and confirm that
the father and mother’s names matched.
However, with DNA testing, these two can easily
and quickly confirm they are brothers – the parents are
not even required to be involved! (Exhibit 4) This leap from
manually reviewing physical documents to a process based in
math and science is like the leap from a manual signature to a
digital signature verification.
Digital signatures have a similar structure to DNA testing – a
user generates a key, which should always be kept private.
That key is used to create an account and also digitally sign
transactions drawn on that account.
Anyone can confirm that the digital signature and account are
related, much like the two brothers. By confirming that the
digital signature for Transaction A is related to the account
and that there are sufficient “funds,” the transaction can be
verified. (Exhibit 5)
Like the father in the previous example, the key in this
example isn’t known either. In fact, it’s vitally important to
keep the key private, just like a very important password.
If this key becomes lost or stolen, control over that account
is also lost or stolen.
Be aware that each digital signature is only unique to one
specific transaction, which prevents forgery.
WHEN DID THE TRANSACTION OCCUR RELATIVE TO
The order in which transactions occur in the blockchain is extremely important. To understand
how it differs from a traditional system with
one centralized database, consider the
Let’s suppose there is $1
million in a checking
account; the account
owner issues a check
for $1 million and then
a second one for $1 million.
The first check that the bank
receives will clear, but the second
will be rejected.
However, in a blockchain system, there are multiple computers processing transactions simultaneously,
How does blockchain technology solve this significant and
very real risk? Essentially it’s like a lottery, where the
computer with the most processing power has the highest
chance of winning. Once it wins, it’s awarded the right to add
the latest batch of transactions to the database. (In the case
of bitcoin, that computer is also rewarded with some bitcoin
for its efforts.)
This solution slows the system down, batches transactions
together, and allows only one computer at a time to add
a fresh batch of transactions – called a “block” – to the
database. That way, there is agreement on the order in
which transactions can occur. This is cleverly accomplished
through what can be referred to as “digital fingerprints.”