Blockchain technology is said to be the most disruptive invention after the internet. That could be very true because its application cuts across many spheres. If you’re conversant with the cryptocurrency industry, you would have come across blockchain as a theme. What is blockchain and how does it work?
Blockchain is the technology behind cryptocurrencies such as Bitcoin. Its mechanism was proposed by some cryptographers at least a decade before Bitcoin was invented. It is the storage and distribution of data in a sequence and form that is novel. The data are collated in blocks and stored using cryptography. When a block is filled with data, it is added to the block before it.
This makes it possible for the blocks of data to form a chain. This is where the name comes from. What makes blockchain peculiar is that the information on it is stored in a sequence and timed. The latest block is connected to the one before it and all are time-stamped. All the data in a block are secured with cryptography. This makes it impossible for the chains to be hacked.
First Blockchain Application
Now it is important to note that the first practical application of the blockchain is Bitcoin. What makes Bitcoin unique is that the computers storing the blockchain data are not owned by a single entity. Thousands of computers owned and operated by several entities secure the integrity of the Bitcoin blockchain because each computer (node) contains a complete copy of the blockchain. This means that no one can alter the transactions made on it, even if they try.
The fact that every node has the complete copy of the blockchain data makes it impossible to distort processed data. If one or several nodes alter the data, the other nodes cross-check the authenticity of the data by comparing it with the data on other nodes. This way, the blockchain can detect the authentic data and can only confirm transactions based on general consensus of the majority of the nodes.
It is important to note that what makes blockchain such as we have with Bitcoin peculiar is its decentralized form. The fact that no single entity controls it assures its integrity. Also bear in mind that not all blockchain are decentralized. There could be in-house blockchain that are owned by an entity such as a company as we have with Ripple (XRP). The company provides its cryptocurrency platform with security.
With the decentralized blockchain such as Bitcoin, it is secured by majority of the nodes and by the fact that it would be disingenuous to attempt to breach the network security, knowing that the cost in terms of time and resources far outweighs any benefits, if the hacker could get any. For instance, with thousands of nodes securing the Bitcoin network, a hacker would need to have control of 51% of all the nodes to successfully carry out an attack on the network. Since these nodes are controlled by the miners who benefit from the network, the incentive to contemplate such does not exist.
Layman’s Explanation of Blockchain
Sunny Lu, the CEO of Vechain has an interesting way of explaining blockchain. According to Lu, you could deny a fact if there is no witness to the contrary. For instance, if you professed love to a girl in a restaurant where there were just two of you, you could deny it later if an issue arises. It would be the girl’s words against yours.
However, if you professed love to the same girl or another in the presence of your friend, you could succeed in denying it if you convince your friend to help you do so. This is a centralized system such as we gave an example with Ripple.
Nevertheless, you would be at a loss on how to deny the profession of love to the girl if you made it in the presence of many people who you do not know. This is a decentralized system. It is what makes the decentralized blockchain secure: no single individual or entity can alter the data in it because there are thousands or millions of nodes that have one thing in common – the protection of the integrity of the data.
Attributes of Blockchain
To better understand how blockchain works, let us look at some of its features.
Some call this provenance. It means that it is easy to track every transaction made on the blockchain. If the blockchain asset is bitcoin, the sender of the coin would be able to know if the asset they sent has been received by checking its history using a block explorer. It is also possible to know the history of the assets since it was added on the blockchain.
No one has the ability to alter a transaction after it has been added to the blockchain. It is permanent as every data is hashed with cryptography and time-stamped. This makes them unalterable. If something is wrong with a transaction, the network can correct it through another but it would never delete a transaction or alter it has been added to the blockchain.
Blockchain eliminates the need for third parties because it is designed to make the sending and receiving of data from one point to another without the need for intermediaries such as banks and brokers as seen with Bitcoin.
Every node on the blockchain network must agree before a transaction is confirmed. However, the confirmation is based on a set of rules which all the nodes are ‘signatory’ to. In a sense, it means that if a transaction does not follow the said rules, the network would never confirm it.
Transactions on a blockchain are final. This finality is what makes people trust the technology. A banking transaction could be reversed if there are issues. There are many payment processing platforms that would reverse transactions, but not blockchain. This has a lot of advantages and disadvantages also. This is why you must be careful before making any transactions on a blockchain network.
This is a general overview of what blockchain is. It has uses not just in finance but in many other fields such as logistics, storage and documentation.