Blockchain is the technology behind cryptocurrencies. It was invented along with the creation of Bitcoin, but its use is spreading much further nowadays. If you find it hard to envision how blockchain works, keep on reading.
What is blockchain?
The word “blockchain” is commonly associated with cryptocurrency. Although it stretches further than that, you need to understand blockchain if you want to understand crypto.
A cryptocurrency is a digital currency that serves as a medium of exchange through a computernetwork that is not reliant on any central authority to maintain it.
That decentralized computer network is the blockchain.
Definition:
Blockchain is a technology where data – secured by cryptography – is stored in blocks that are linked together.
The most important characteristics of blockchain:
- Cryptography is used to secure the data in the blocks
- The blocks cannot be altered
- All blocks are linked together, forming a chain that continues to grow
- The blockchain is a public database
- The blockchain is typically managed by a peer-to-peer network, not a third party authority (such as a bank)
How does blockchain work?
The simple explanation:
A blockchain gathers data and secures it in a place for everyone to see. You could compare it to a an accountancy book where all transactions of a community are being kept. Once a transaction is written down in the book, it can never be changed anymore. It is possible to add new transactions though. After every couple of transactions the page will be automatically seal itself.
The book remains open for every member of the community to read. All members of the community write down their transactions, they have all taken on the function of bookkeeper.
The hard explanation:
Let’s take the Bitcoin blockchain as an example:
whenever someone makes a transaction with Bitcoin, it will appear on a block. The block collects all transactions made within 10 minutes and will then be full. In order to seal the block, Bitcoin miners will have to calculate a key using mathematic techniques.
A sealed block cannot be opened or altered again, and a new block will be created. The process continues for as long as there are transactions.
What is Bitcoin mining?
Satoshi Namkamoto – the creator of Bitcoin – programmed the technology in a way that only a really complicated math problem can generate a key to seal each block. You need a powerful computer to calculate the key, but basically everyone with the right equipment could do it. The first person to solve the problem receives a Bitcoin payment as a reward for sealing the block.
These are new Bitcoins that weren’t on the blockchain before, they are now ‘mined’. In addition to the new Bitcoin, the miners also get the fees charged on Bitcoin transactions.
Why will blockchain change the world?
Blockchain technology is the backbone for cryptocurrencies, but the possibilities stretch much further than the crypto world. It works in a different way than what we are used to and it has several advantages.
Security
Because of the strong encryption, blockchain technology is very secure. It could be used to battle fraud since it is impossible to alter any of the information on the chain. Anything that is written on paper or saved in a computer file can be changed by someone with bad intents, but information stored on the blockchain is incorruptible.
Decentralization
There is no need for a third party authority, such as a bank. This will not only result in less middleman fees, but also less risk of corruption. The blockchain relies on a peer-to-peer network instead of a centralized authority which makes it very fair.
Transparency
The blockchain is a public ledger, open for every member to consult it (remember the community book?). There is no harm in keeping it accessible for everyone since the encryption makes sure that the information cannot be adapted or deleted.
In other words: there is no risk in showing the content because nobody can access it. It’s a read-only history that can take away any form of discussion around a transaction.
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Possible uses for blockchain
Maybe you think “I’m not into crypto, so I probably won’t ever get to deal with blockchain”. But there are so many possible uses for this technology. Here are a few examples:
- Real estate: nowadays you still need a notary to officially seal the purchase of a piece of real estate. Using a blockchain network will simplify the process and make it a whole lot cheaper.
- Elections: people can cast their vote from a smartphone or a computer in a secure way. The encryption makes sure nobody can tamper with the results. This is also ideal to reach people who live remotely or aren’t able to leave their house.
- Finance: wether it’s crypto or fiat money, blockchain can definitely revolutionize finance as we know it. There is still a large amount of people who don’t keep their money at a bank, simply because there is no agency nearby or they don’t trust it. Decentralized, digital finance could offer a solution to those people.
- Charity projects: when you donate money to a charity there is always the risk of someone in the organization taking their share. With blockchain, you can exactly track the whereabouts of your money and what it is used for. More and more charities are looking for ways to implement blockchain in their projects.
So it’s perfect then?
No, it is not. There are ways to hack into and corrupt a blockchain, despite all of the security measures. Obviously the system is not perfect, but it sure is a giant leap forward from the systems we currently rely on.
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