How blockchain works

Proof of Work is probably the most well-known and established consensus mechanism, as it is utilized by Bitcoin. Creating a block in PoW requires the nodes to solve an arbitrary mathematical problem or complex equations, which prevents the network from being hacked, and also provides a high level of security. The term 'Proof of Work' stems from how the crypto miners effectively 'prove' that they have accomplished the necessary tasks to create a correctly formed block of transactions that will be added to the blockchain. As shown in the image above, this can be thought of as a competition whereby the miners are attempting to outdo each other by using a significant amount of energy to mine a block. In reality, this is achieved by solving complex mathematical equations which are only solvable by a try-and-error approach, which in turn then allows them to add the next block to the blockchain. Hence, this results in the miners receiving a reward for this in the form of tokens or coins. For more information, see Proof of Work (PoW).

To explain PoS briefly, users can stake an asset/token which in turn opens up the possibility to be chosen as a validator of a new block.

The proof-of-stake mechanism uses an algorithm designed to select users that have the highest stakes as validators. The highest stakeholders are expected to have a high motivation to keep the network secure and healthy, as users with the highest amount of tokens or coins have the most to lose if something goes wrong in the network. Subsequently, it is in their interest to ensure the network continues to grow. Therefore, the PoS algorithm favors users with high amounts of tokens and provides them with a much higher chance of being selected as the next validator, as compared to users with a smaller stake of tokens. This is highly beneficial for consensus building and eliminates the need for complex mathematical calculations, hence reducing the overall computing power and energy required.

DPoS works similarly to PoS, however, one of the key differences is that it utilizes a delegation and voting mechanism, where users deploy their staked collateral to vote for delegates. Every user account can register as a delegate by spending a certain amount of tokens. A predefined number of delegates with the most votes are allowed to add new blocks to the blockchain in turns. A delegate who has enough votes to be allowed to forge is called an active delegate. The forging process is divided into forging rounds. A forging round lasts until all the blocks in that round are forged. After each round, the list of active delegates is calculated again based on their current number of votes. To allow this mechanism to be both efficient and effective at performing transaction validations, various components of DPoS exist. In this system, generally users, or as they are known in DPoS, delegates are voted in based on their reputation.

DPoS utilizes a unique election system that can select users that can perform block verification. In this system, generally, delegates are voted in based on their reputation or (financial) incentives that they offer to their voters. Delegates can also be thought of as witnesses or users producing blocks. With DPoS, it is possible to vote on delegates by entering your tokens into a staking pool and linking them to a specific delegate. In DPoS a limited number of delegates exist (usually from around 20 to 100), and the delegates are voted in by other users. So the users that are chosen to generate each block, may not be the same users who were chosen to generate the preceding block. In addition, it is this limited number of delegates that oversee the governance of a blockchain deploying the DPoS consensus mechanism. Each user who holds a minimum of one token/coin with the DPoS blockchain can vote specifically for the delegates that they want to perform the transaction validations. Dependent on these votes, certain delegates are allowed to add blocks to the blockchain in a specific order.

This is the simplest method, as 1 common key is used for both the encryption and decryption process, and is also referred to as secret-key cryptography as shown in the illustration below. In this case, it is necessary to ensure the transfer of the common key can be performed safely from the sender to the recipient. Symmetric cryptography is used in the banking sector, a good example being card transaction payment applications. Examples of some of the most widely used symmetric encryption algorithms are AES, Blowfish, and RC6. However, although it offers secure protection, it is necessary that all parties involved have to exchange the secret key that has been used to perform the encryption before it can be decrypted. Nevertheless, blockchain uses an even more enhanced encryption methodology known as Asymmetric Encryption, as described in the following paragraph.

This type of encryption functions by using a pair of keys. This comprises an encryption key, and a decryption key, and is more commonly known as a public key and a private (or secret), key. The algorithm deployed for this method generates both a secret, key and a unique public key. The secret key as its name implies, is kept secret, and the public key is openly shared. Furthermore, the asymmetric encryption method has an additional element of security, although the symmetric method of encryption is faster, nevertheless, they are both very effective.

It is quite common with regard to the management of cryptocurrencies that with the asymmetric model of encryption, the public key is generally the actual address that 'contains' the tokens or coins, and is publicly viewable. Therefore, when a transaction is created, this has to be digitally signed with the secret key. Once this has been received by the blockchain network, it can be verified with the same public key, therefore this proves the authorization of the transaction is genuine by the owner of the secret key or any entity with knowledge of the secret key. In asymmetric encryption, anyone can decrypt the message using the owner’s public key so this does not keep the identity of the user confidential. Nevertheless, the sender’s identity can be verified, as if the associated public key decrypts the data, then it is only possible that it could have been encrypted with the user’s private key. Subsequently, the public key is used for identity management and the account address, and the secret key is derived from the passphrase of the user account to access the funds in the account associated with the address, and hence is able to authorize and then perform any actions required. The recipient can only decrypt the ciphered text if he or she holds the identical symmetrical encryption key. Therefore, this can be transmitted over an unsecured medium, as regardless of any third party or malicious actors intercepting this, they would not be able to decrypt the text, rendering it useless to them.

This function does not utilize any keys, as it takes the contents of the plain text and deploys a cipher, which is used to generate a hash value of a fixed length from the plain text. Hence, the contents of this plain text can’t be unraveled from the cipher text. Therefore, hashing outputs can be used to efficiently verify the inputs without revealing the input itself. In the context of blockchain, the hashing function properties are used mainly within the consensus and application domains. A popular use case for hashing in the blockchain is to create a hash of the previous block and include that hash in the next block. This way, a block is cryptographically connected to all its former blocks, forming the classical chain of blocks. Even the smallest change in one of the former blocks would create a very different hash of that particular block, which wouldn’t match the hash in the header of the next block. This would break the chain of blocks immediately. Therefore, hashing is an important factor to ensure the immutability of the blockchain.

A hash converts the required data into a string of characters. Hashing is able to store data efficiently, as the hash is of a fixed size, and in addition, provides security through encryption. Other hashing functions are also used in the blockchain world, for example, Ethereum deploys the Keccak-256 cryptographic hash function. There are numerous benefits of hashing, as it meets the encrypted requirements demanded by a blockchain network. Its characteristics consist of being able to accept a message of any length, whilst producing a fixed-length message digest. Furthermore, the hash is irreversible, ensuring it is impossible to generate any message from the message digest.

As described earlier on the What is blockchain page, it is also deterministic and is the key component in providing immutability of the blockchain data as well, which as we have learned is highly beneficial.

Klayr maintains a cryptography package that contains all the cryptographic functionalities required when interacting with the Klayr ecosystem and can be used on both the server and client sides.