Blockchain technology is the basic structure of most cryptocurrency systems, as it protects any type of digital money from duplication or destruction. It is also used in other contexts where data is invariably and securely valuable, for example there is a strong correlation between blockchain security and the integrity of the digital currency itself. Blockchain is secured by a variety of mechanisms, including the use of cryptography, encryption, and a range of other methods, such as smart contracts.
Blockchain security is far from a simple issue, and indeed it is one of the most complex and complex aspects of any digital currency.
It is therefore important to understand the basic concepts and mechanisms that provide robust protection for this innovative system. Of the many features that come into blockchain security, the two most important are embedded in the concepts of consensus and immutability. Consensus refers to the ability of nodes in a distributed blockchain network to agree on the true state of the network and the validity of transactions. The process of reaching consensus usually depends on so-called consensus algorithms.
Immutability, on the other hand, refers to the blockchain’s ability to prevent the destruction of already confirmed transactions, such as blockchains. These transactions concern transactions often associated with the transfer of cryptocurrencies, as well as other types of transactions.
Consensus and immutability in combination form the framework for data security in a blockchain network. Invariability guarantees the integrity of data and transaction records through a consensus algorithm that ensures that system rules are respected, that all parties agree on the current state of the network and that new block data is validated.
Blockchains rely heavily on cryptography to ensure their data security, and so-called cryptographic hashing functions are essential in this context.
A hash is an algorithm (hash function) that receives an input size of data during the process, and an output hash that contains a predictable fixed size and length. Regardless of the size of the input, the output will always be the same length and if it changes, it will be completely different. Even if the input does not change, the resulting hash remains the same no matter how often the hash functions are executed.
In a blockchain, the output value known as a hash is used as a unique identifier for the data in the block. To create a chain of linked blocks, a hash block is created in relation to the previous block, which is responsible for creating a new block of the same size and length as its predecessor. The hash of a block can be generated from the data contained in that block and is the result of the hash algorithm that establishes the relationships between the hash data of previous blocks. The hash of a block depends on the information it contains, which means that any change to the data would require a change to its hash.
Hashes are also used in the consensus algorithm to validate transactions, and their identifiers are used to ensure the security and immutability of the blockchain. In Bitcoin’s blockchain, for example, the proof-of-work algorithm (PoW) uses a hash function called SHA-256. As the name suggests, it needs some data input and returns the hash value of 256 bits (64 characters).
Cryptography also plays a role in protecting transaction records and accounts, as well as ensuring the integrity of the wallet used to store units of the cryptocurrency.
A relatively new concept in crypto-economics plays a role in maintaining blockchain network security. Asymmetric public key cryptography allows a coupled public and private key, which allows users to receive and send payments, to be generated using a combination of two private keys: the user’s public key and the private key in his wallet. The privatekey is used to generate a digital signature for each transaction, which allows the ownership of all coins sent to be authenticated. Although the details go beyond the scope of this article, asymmetric cryptography prevents anyone but the key holder from accessing it as long as the owner decides to spend the funds stored in the wallet of the cryptocurrencies and keeps those funds in a safe place so that they are not shared or compromised.
This is related to a field of study known as game theory, which mathematically models situations in which rational actors make decisions according to predetermined rules and rewards. While traditional game theories have been applied in a number of cases, crypto economics describes the behaviour of nodes in distributed blockchain systems. Security in crypto economics is based on the assumption that the blockchain system provides a secure environment for nodes that act honestly and do not adopt malicious or incorrect behaviour. In short, it is the possible outcomes that blockchain protocol design can present to its users based on the behaviour of its participants.
Once again, the algorithm used in bitcoin mining to prove – the – working consensus is a good example of an incentive structure. When Satoshi Nakamoto created the framework for bitcoin mining, it was conceived as a costly and resource-intensive process. POW Mining requires considerable time and money to find a mining hub and to mine Bitcoins. This structure therefore forms the basis for the structure of incentive structures in the Bitcoin network and other blockchain systems.
While honest and efficient miners have the potential to receive significant block rewards, dishonest and inefficient nodes are excluded from the blockchain network. Similarly, the balance of risk and benefit also provides protection against potential attacks that could undermine consensus by placing the majority of the blockchain network in the hands of a single group or entity. Such attacks, known as 51 percent of attacks, could be extremely damaging if successfully executed.
Given the relatively large number of nodes in the blockchain network, the likelihood that a malicious actor will gain control of the majority of these nodes is extremely low. Moreover, both the cost and computing power required to gain 51% control of a large majority (or even a small majority) of the network would be astronomical, and would provide a significant incentive to make the blockchain more vulnerable to attacks by malicious actors and their allies.
This fact has contributed to the blockchain being known as Byzantine Fault Tolerance (BFT), which is essentially a distributed system that continues to function normally even if some nodes are compromised or maliciously attacked. As long as the cost of building a majority of nodes remains prohibitive and there is a better incentive for honest activity, the system will be able to flourish without major disruption.
However, it is worth noting that a small blockchain network is vulnerable to attacks by the majority, because the hash rate of the system as a whole is significantly lower than that of Bitcoin. By combining BFT with the fact that it is a decentralised system, blockchains can achieve a high level of security.
A careful balance between decentralisation and security is crucial to building a reliable and effective cryptocurrency network. With the development of blockchain applications, their security systems also meet the needs of different applications. Private blockchains now being developed for businesses rely much more on security, such as access control, than the game-theory mechanisms and crypto-economics that are essential to the security of most public blockchains. In almost any system, however, it is essential to apply these two areas of knowledge correctly.