Understanding Decentralized Account Management with Blockchain Technology

How can user accounts be managed decentrally?

With the white paper of Bitcoin and the blockchain of this cryptocurrency, the secure use of a decentralized currency was realized for the very first time. Therefore some people ask themselves how transactions can be run that way exactly. No bank or other central institute can take care of the many users and their problems. Nobody will tell you your IBAN or BIC and you can’t call anyone if you want to block your account, for example. So what is different here than usual? In order to investigate the question of the decentralized management of user accounts, we first look at the practice, namely how a transaction takes place in detail and how it can take place in the first place. The process of a transaction for cryptocurrencies is briefly explained below using Bitcoin as an example, but this can be transferred just as well to almost any coin or token whose transactions are based on a blockchain.

The course of a transaction

First of all, two things are needed to allow a transaction to take place: a public or “Bitcoin” address and a private key. Both are generated by a so-called “wallet”, which allows you to participate in the Bitcoin network and allows Bitcoins to be sent or received. The wallet can be compared to the account at the bank: Here you can see the account balance (the number of bitcoins/altcoins) and money can be received or sent. The Bitcoin address is best imagined as the bank details of an account (IBAN & BIC) that are needed to send money to another person. Only with the difference that this is only information, the public address. This address is randomly generated and consists of 27-34 randomly generated letters and numbers. That’s all you need to identify the recipient of the bitcoins. You don’t have to specify an account holder as with online banking, just this one piece of information is enough. A comparison can be made with PayPal, since only the email address of the recipient is required to send amounts of money.

The private key can be compared to the PIN of a bank account: a numeric code that verifies you as the account holder and without which transfers would be impossible. Here, too, there are strong differences between banks and Bitcoin. Like the address, the private key is randomly generated and also consists of letters and numbers. The word “private” is more than mandatory: As a beginner, it is extremely important to remember that a private key cannot be replaced or renewed! The key is mathematically linked to the respective address and its bitcoins. So if another person learns the private key, they have full access to the bitcoins without being able to change anything. If you lose your PIN and/or bank card, you can block your account at any time and have a new PIN sent to you, this is not possible in a blockchain! Don’t worry, there are plenty of ways to protect yourself from theft of the “private key“.

Why is my address “public” at all?

The reason for this lies in the Bitcoin network, because every Bitcoin user can track every transaction that has ever been made on the Bitcoin blockchain. Privacy is protected here by anonymity: Each participant, both sender and recipient, can only be viewed as their address in the blockchain. So if someone knows about an address and knows the person behind it, they can use the BTC blockchain to see which transactions they made and when. Only the purpose remains secret from the public. The (public) address can be compared to a transparent safe: Everyone can see what is in it, but only the person who has the (private) key is able to remove or add something there.

How private are you in the Bitcoin network?

Bitcoin is often seen as a completely anonymous payment network, but in reality it is a bit different. Of course, the fact that you only participate in the Bitcoin network with your address offers a high level of anonymity, but transparency is the problem here, because, as already mentioned, every transaction in the blockchain is traceable. Over time, a so-called pseudo-anonymity can arise, as more and more information about shareholders is available. The “account” is still anonymous, but at the same time the anonymity decreases due to the money flows stored forever.

As well as for the secrecy of the private key, each user is also completely responsible for his own privacy in the network. An important piece of advice, for example, is to create a new address for each new amount of Bitcoin received or sent. Why? As already described, the only piece of information in the bitcoin network that allows bitcoins to be sent from user A to user B is the respective address. Now, when addresses are used, a history of all transactions in which they are involved is automatically attached to them. Multiple wallets should also be kept for different things. In this way, private transactions can be easily separated and are therefore not recognizable to other people from the outside. It is also not advisable to publish the address on social networks or websites. This should only happen if e.g. B. is called for public donations. While reading, some of you may have lost the desire to create a new wallet every time transactions are made. Later in the book a very simple and uncomplicated solution will be described how this can be done without much work.

A transaction in the bitcoin network

Let’s go back to the actual process of the transaction: After a wallet has been installed and both have now been generated, we can start sending bitcoins. Let’s say Max wants to send Vincent 1 BTC. Vincent first tells Max his address, after which Max copies it and pastes it into the recipient line of his wallet. Now all Max has to do is confirm the transaction by verifying himself by entering his private key. The process is now finished.

IMPORTANT: It is mandatory to always copy & paste the address of the recipient completely, otherwise the amount sent will be lost! I do not advise anyone to quickly and inattentively copy and paste addresses or even to type them in by hand, as the long sequence of numbers and letters means there is a likelihood of omitting the last digit or the last two digits or making a typo very easily. As with the lost or stolen private key, you are responsible for this yourself and there is no institution that can withdraw or cancel transactions. Once sent & confirmed with the private key, a transaction can no longer be reversed!