If you have been following banking, investing, or cryptocurrency over the last ten years, you may be familiar with “blockchain”, the technology behind the Bitcoin network. However, blockchain is a lot more than just Bitcoin.
So before we define what blockchain is, let us clarify a few common misconceptions:
Blockchain ≠ Cryptocurrency Blockchain ≠ Cryptography Blockchain ≠ Computer Algorithms
What is Blockchain?
Blockchain refers to a completely novel technology. At its most basic level, blockchain is literally just a chain of blocks, but not in the traditional sense of those words. When we say the words “block” and “chain” in this context, we are actually talking about digital information (the block) stored in a public database (the chain).
In short, it works as a secure record of digital information that does not rely on any external authority for regulation or validation. Typically, this technology is used to keep track of financial transactions, but in theory it could be used to store any sort of information.
How does Blockchain Work?
In trying to learn more about blockchain, you've probably encountered a definition like this:
“blockchain is a distributed, decentralised, public ledger."
Let us break this definition down to something that we can easily understand. When a block stores new data it is added to the blockchain. Blockchain, as its name suggests, consists of multiple blocks strung together. To further understand how this process works, we must know some key concepts:
Cryptographic Hash: A cryptographic hash function is a mathematical function used in cryptography. They are mathematical functions that transform or map a given set of data into a bit string of fixed size, also known as the hash value. Simply put, every single input of the hash function will produce a different output, and the result is always deterministic, i.e. if you use the same input, the output value will be always the same. This has important applications in computing systems for tasks, such as checking the integrity of messages and authenticating information. For example, bitcoin, the original and largest cryptocurrency, uses the SHA-256 cryptographic hash function in its algorithm.
Immutable Ledger: Thanks to Hash Functions, we know that every hash is unique. Within a blockchain, since every block contains the Hash of the previous one, it is not possible to modify any block without changing the entire chain. Hence, the chain works as an immutable digital ledger. This means that one cannot change the data within the blockchain unless they do so for every block of the chain.
Peer-to-Peer Network: The unique properties that we have discussed so far, mean that the Blockchain does not need any external or internal trust authority. As we have discussed, every connected computer has its own copy of the transactions and hashed blocks, and they spread the information of any new transaction to the entire network. This way, it is not possible for anyone to alter the information in the chain since it is not stored by an individual entity but for an entire network of node users. Even if an attacker were to modify your local chain, the network will not accept any block from the altered blockchain.
Consensus Protocol: The functioning of the Peer-to-Peer network brings up new questions. What separates a fake transaction from a real one? How do users come to an agreement on the legitimacy of the chain before adding more blocks to it? Every time a node adds a new block, all the users have to validate the block by using a common protocol. Typically, the nodes reach a consensus about the correctness of a new block by Proof of Work or Proof of Stake methods. The nodes check that the new block meets the requisites of their Proof method, including validation for all the transactions inside the block. If the block is valid, they consider it as a part of the Blockchain and keep adding new blocks. Typically, the system will meet an agreement about the correct chain while at least 2/3 of the total nodes have consistent records.
Block Validation or Mining: Yes, this does refer to ‘Mining’ Bitcoin. However the process of mining has applications in many blockchain platforms. The term mining refers to the act of meeting the Proof of Work requirements for adding a new block with pending transactions to the Blockchain. There are many different mining methods, as they are custom defined for the chain. In fact, some blockchain platforms do not use Block Validation.
So what is Blockchain Really?
Blockchain is an ever evolving technology that has applications in diverse sectors. Fundamentally, it consists of an immutable ledger that allows users to create a reliable and immutable system for recording any kind of transaction or information. Its unique properties mean that it does not need an external or internal authority. The technology relies on every user following predetermined rules to ensure the integrity and authenticity of the data. Blockchain could potentially be the democratization of data.