What is Blockchain Technology?

What is Blockchain Technology?

With cryptocurrencies gaining more popularity, chances are you’ve heard of blockchain technology a couple of times. But, what exactly is this thing called blockchain and how does it work?

What is a blockchain?

A blockchain is a ledger; remember those bulky old ledgers accountants used back in the day? Well, a blockchain is something like that; it is a digital ledger that is used to keep records of transactions. According to Don and Alex Tapscott: “the blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually anything of value.” It is a group of blocks or a group of transactions that are chained together as a distributed database for sharing and storing information. 

Another way to think of blockchain is to see it as a database. A regular database collects information to be stored electronically in a tabular format on the computer. This tabular format is what allows you to easily search and filter out information that you are looking for. A blockchain, however, is not structured in a tabular format, instead, it collects data in groups and when these groups which are also known as blocks are filled with data, they are chained to previously filled blocks.

One key thing to note about blockchain is that it creates a permanent record of transactions that cannot be easily changed. This is due to the fact that the network doesn’t depend on a single external party to authenticate and verify these blocks of transactions, instead, it is shared to a large number of users who have equal control and would all have to agree to change the information on the blockchain in order for it to happen.

The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually anything of value. - Don and Alex Tapscott

Different types of blockchain

Blockchain can store different types of information but its most common use has been to serve as a ledger for storing transactions. However, a blockchain can be used for various reasons. Here are the different types of blockchains that exist, each serving different functions.

Public blockchain

Public blockchain just as the name implies is a public network that can be accessed by anyone on the internet. It is a non-restrictive system and there is no permission required to be a part of it. As long as you have a working computer and you are connected to the internet, all you have to do is log on to a blockchain system and you become part of the network.

Private blockchain

The private blockchain is the opposite of the public blockchain and cannot be accessed by just anyone. It is a restrictive system that requires permission. This type of blockchain is used in organisations and institutions and only allows a specific set of people within the organisation to add and verify blocks of transactions. Private blockchains are nearly similar to public blockchains except that they are controlled by an organisation and have restricted access. An example of a private blockchain is the Ripple blockchain; only permissioned people within the organisation can access it.

Consortium blockchain

A consortium blockchain is a variant of the private blockchain and is used among different organisations. Unlike a private blockchain that is used within one single organisation, consortium blockchains are used by cross-organisations and are restricted to only these selected groups or organisations.

Hybrid blockchain

A hybrid blockchain is a combination of the public and private blockchain. It makes use of select features of the private blockchain and the public blockchain. The hybrid blockchain can be restrictive and nonrestrictive at the same time, users can decide who gets access to the network and who doesn’t. In the same light, it can choose to keep some of the transactions and information public and the rest private and accessible only by the organisation.

How does blockchain work?

Within every block contained in a blockchain, there are details of transactions performed on that blockchain; these details could include things like unique details of the sender, the receiver and how much was sent. Blocks also have something called a Hash. A Hash is like a digital fingerprint used to identify a block. Each hash is generated by a cryptographic hash algorithm that hashes the block header twice and transforms it into a string of alphanumeric characters of a fixed length. In the case of bitcoin, the hash function used is the Secure Hash Algorithm 256 (or SHA-256) thus the output is always a 256-bit hash (i.e. a 32-byte hash).

Along with the data stored in blocks and the hash, every block has the hash of the previous block. The first block in a blockchain is called the Genesis block because it has no predecessors but all succeeding blocks have data, their unique hash and the Hash of the previous block. This seemingly small feature of the blockchain is actually powerful and is what keeps the information within it safe and secure from attackers. Take the case of four blocks in a blockchain: Say an attacker is able to break through the strong walls of the blockchain and manages to tamper with the information in Block 3, automatically since changes have occurred the Hash of Block 3 changes but the hash for Block 3 recorded on Block 4 does not change and this invalidates all the blocks after the altered block.

Proof of work is a complex computational problem that is required for verifying each block. Blocks in the blockchain network for Bitcoin require about 10 minutes to solve. If a hacker wanted to tamper with any of the four hypothetical blocks above, they would have to perform proof of work for all the blocks in order to validate the entire chain of blocks. However, there is no guarantee that they would be selected to solve for 4 consecutive blocks

The final layer of security of blockchain lies in its peer-to-peer network. Rather than allow a central entity to manage the system, blockchain makes use of a peer-to-peer network of people from around the world. When a new block is created, it is sent across to all the people on the distributed network. Each of them will then verify the block to ensure it hasn’t been tampered with before adding it to the chain. And, since the more blocks added to the blockchain the harder it gets to alter previous blocks already existing in the blockchain, consensus algorithms with peer-to-peer network make it difficult for data to be altered on the blockchain.

The creation of a block starts from a transaction:

  • When a new transaction is made, it is broadcasted to a network of computers (known as nodes) around the world. 
  • These nodes then solve complex problems to validate the transaction. 
  • Once that is done, the transactions are grouped together to form a block (the number of transactions that can be contained in a block is usually determined by the maximum size that a block can be). 
  • These blocks are then chained together to form a permanent record of transactions.

Importance of blockchain

The importance of blockchain keeps growing as more and more companies adopt the technology worldwide. 

Security

One of the major purposes of blockchain is that it is used for security. Every day databases can be tampered with and information changed or stolen. Due to its distributed nature and multiple security mechanisms, however, blockchain helps keep databases and information safe and almost permanent.

Transparency

A blockchain is a form of open technology. Transactions are visible to every user on the blockchain network and whatever changes are made are public. This makes it harder for someone to try to cheat or defraud the system.

Time-saving

In financial cases, blockchain is very helpful in cutting down the time of verification of transactions. Transactions take a shorter time to complete because the blockchain has managed to solve the problem of lengthy verification and settlement periods through its peer-to-peer network. In a matter of minutes, transactions backed by blockchain technology can be verified.

No middlemen

Blockchain takes out the involvement of middlemen, therefore, cutting down the costs incurred as a result of using middlemen to facilitate transactions, especially in scenarios like digital payments. By eliminating the need for middlemen and reducing costs, blockchain helps institutions to maximise efficiency.

Prevention of fraud

The transparent nature of blockchain makes it easy to detect fraudulent activities in companies and institutions. As opposed to traditional ledgers or databases which are based on centralised management, blockchain's open technology allows fraud to be easily detected and stopped.

It has multiple use cases

Many people only recognise blockchain with cryptocurrencies like bitcoin. However, it is used and can be used for far more than cryptocurrencies. Blockchain could be used for a number of things ranging from peer-to-peer lending, smart contracts, digits currencies, voting, crowdfunding, healthcare and record-keeping among many others.

In conclusion...

The invention of blockchain technology was a game-changer to not just the financial world with the creation of cryptocurrencies but also to various sectors that have previously relied on centralised management. Blockchain’s key features such as decentralisation, transparency and improved security makes it a viable solution for several real-life situations.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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