What is blockchain? As the technology at the core of many cryptocurrencies, blockchain is used to record information in a way that is immutable, secure, public, and decentralised. It’s these qualities that make it a very handy technology for the record of financial activity.
Simply put, without blockchain technology, cryptocurrencies wouldn’t exist in the form that we know them. Yet, as with so much regarding crypto, understanding blockchain can be tricky for many people.
That’s why in this article we’ll be answering the most common questions about blockchain technology. What is blockchain? How does blockchain work? What can blockchain do beyond cryptocurrency? We’ll cover them all. But don’t worry – we’ll take it slow.
What is Blockchain in Simple Words?
Let’s start simple. When trying to define blockchain, you can find yourself knee-deep in jargon. It’s all good to be told about a “decentralised public ledger”, yet this doesn’t necessarily clarify anything.
In the simplest terms, blockchain can be seen as a diary of transactions that can be viewed publicly – to borrow an analogy from Ryan Shea, founder of app-development platform, Blockstack.
In this digital diary, data regarding transactions is written and verified – say, “x has given a coin to y”. The data can be viewed by everyone in near real time, but once it is recorded it cannot be changed. The record of the transaction between x and y remains forever.
Why? Because this diary is not stored in a central location. Rather, it is “decentralised” or “distributed” across many different computer servers globally. This is for the purpose of security: if a hacker manages to change one diary’s record, many different copies tell the world that that hacked copy is wrong.
This system is fundamental to how cryptocurrency works. In fact, blockchain technology was invented to function as the basis for the decentralised cryptocurrency, Bitcoin. And you can see why cryptocurrencies would need it: if you want a currency that avoids a central authority (as Bitcoin does), you need a way to keep transaction data secure and unmodifiable.
We told you it needn’t be so complex.
What is Blockchain and How Does it Work?
At this point, let’s get a bit more detailed. We know that blockchain technology is “distributed” and publicly visible, but how does it actually work? And why do we call it blockchain?
Again, things may be simpler than you were expecting. Blockchain, in its own visual terms, is a “chain” of “blocks”. More precisely, however, these “blocks” are units of information – like the diary above – that are tied together in a sequence (the “chain”).
What is a Blockchain Transaction?
Like the diary again, blocks record the details of lots of different transactions. Yet, “x has given a coin to y” is not sufficient information. Rather, everyone involved in the transaction has a unique signature, which needs to be recorded alongside the timestamp and value of each transaction.
However, to make sure that this record cannot be tampered with, every block – the record of lots of transactions – needs to be verified with a complex code or “hash”. This hash is developed using cryptography – the word that gives cryptocurrency its name – and is produced through the solution of mathematical problems. Importantly, the hash for a given block relies upon that of the previous block. In this way, there is no means by which to change one record without changing every single one.
Alongside its decentralised nature, it is the cryptographic hash that ensures the security of the whole blockchain system. Every hash is publicly displayed alongside the transaction information and in this way confirms that transaction’s legitimacy.
As such, the blockchain is a long series of blocks containing transaction information. Every block is verified using the hash and every transaction is visible to everyone else in the network.
What is Blockchain Good For?
All of this brings us around to probably the most crucial question of all: what exactly is the point of blockchain? And why use it?
There are a number of reasons why blockchain proves essential for the running of a cryptocurrency – and these explain why cryptocurrencies from Ethereum to Bitcoin Cash all use them. We’ve pointed to some of these above, but let’s take a closer look.
Balancing Decentralisation with Security
Back in 2008, in the midst of the financial crisis, the pseudonymous developer (or group of developers), Satoshi Nakamoto, envisaged a currency that wasn’t based around a central bank or governing authority.
In a famous whitepaper, Nakamoto outlined the birth of Bitcoin, a currency that, by being networked, did not rely on the whim of a central authority or on any political decision-making. Rather, decisions would be made by the community of developers involved.
This faced a problem, however. Where central banks or governments could prosecute hackers or people who took advantage of the system, a decentralised community couldn’t. The solution to this problem of security was blockchain.
One of the crucial features of how blockchain works is the fact that it doesn’t rely on a central authority and yet remains exceptionally secure. It’s cryptography that allows this, by enabling verification to happen in a decentralised environment.
Optimising Transaction Speed
As the infrastructure on which currencies are based, blockchain enables transaction speeds to be quick. How? By cutting out the intermediaries that make up the conventional banking system.
In conventional currencies – like GBP or USD – an international transfer can sometimes take up to five days to be processed. Through SWIFT, the system by which these transfers are usually made, this is because the instructions for payment cannot always be transferred directly from one bank to another. Rather, it might have to go through an intermediary bank in which both banks hold an account.
Blockchain, however, works on a peer-to-peer basis, in which no intermediary is required. This keeps transaction costs low as well – as no third party takes a cut. That’s why companies like Ripple use blockchain-like technology to facilitate global payments, too.
Encouraging Transparency and Trust
The blockchain system is famed for its security. However, the benefit here is that the system remains secure whilst also being transparent. In contrast, whilst central banks are secure, it is not clear to everyone what goes on inside. By making all transaction data publicly available at all times, blockchain allows individual users to track transactions and do verification themselves.
Blockchain Beyond Cryptocurrency?
Blockchain technology need not only be used for recording cryptocurrency transactions. Rather, over the years since its invention, blockchain has been put to many different uses – and people are continually coming up with new applications for the technology.
For example, researchers at MIT have been exploring ways to simplify electronic medical records through a scheme known as MedRec. This would record medical data on the blockchain in the same way as transaction data is used in Bitcoin.
Similarly, the computer company, IBM, have been ploughing resources into blockchain. According to reports, the company is currently investigating ways to use blockchain technology in contexts way beyond currencies – from shipping to food safety. Blockchain may have a long future ahead of it.
For more information about blockchain and cryptocurrency, check out our related blog posts:
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