In the past few years, you’ve probably heard the term blockchain. With the surge of bitcoin and other crypto currencies in 2017, it is almost impossible not to hear the term. Yet, in the last quarter of 2017, only 21 million people in the world owned a blockchain wallet, or a wallet where they store crypto currencies.
What you need to understand is that bitcoin is a currency, a digital version of an asset, much like gold. Blockchain is the technology that underpins bitcoin. Without blockchain, there would be no bitcoin, or any other crypto currency. Blockchain has the potential to change the world drastically. How is that? Let’s explain some of the basics of blockchain technology.
Blockchain is something like the internet. When the internet was first introduced, not many people believed it in it. Nowadays, we cannot imagine our world without internet. Blockchain is the brainchild of a person or a group of people known under the pseudonym “Satoshi Nakamoto”. Since its birth, the blockchain has evolved into something greater.
Blockchain technology created the backbone of a new type of internet by allowing digital information to be distributed, but not copied. The internet allows that but by copying digital information. The similarity is that much like the internet, you do not need to know how the blokchain works in order to use it. You need however, some basic knowledge.
The simplest graphic explanation of blockchain is to imagine a spreadsheet that is duplicated thousands of times across a network of computers. Now, this network is designed to regularly update the spreadsheet. That is the basic understanding of the blockchain.
The information that is held on the blockchain exists as shared and continually reconciled database. The database is not stored in a single location, which means the records the blockchain keeps are truly public and easily verifiable. The tech is hosted by millions of computers simultaneously, and the data is accessible to anyone on the internet.
Another way to explain blockchain is to compare it to Google Docs. Here is the traditional way of sharing documents. You send a Microsoft Word document to another recipient, and you ask him/her to make revisions. The problem is you need to wait until you receive the receive copy before you can see or make other change. You are locked out of editing until the other person is done with the document. That is how the database works today. Two owners cannot edit the same document at once. In the same way, banks lock money and access. They maintain money balance and transfers by briefly locking access or decrease the balance while they make a transfer. After that they update the other side, re-open access.
With Google Docs, both parties have access to the same document at the same time, and the single version of the document is always visible to both parties. It is like a shared ledger, but it is a shared document. Blockchain works in a similar way. Imagine the number of legal documents that can be shared in the ledger, instead of transferring and passing them to each other back and forth? You do not need blockchain technology to share documents, but the analogy is a great one.
By its design, the blockchain technology is a decentralized technology. Anything that happens on the blockchain network is just a function of the network as a whole. Stock market trades become almost simultaneous on the blockchain. Decentralization is already a reality. A global network of computers uses blockchain technology to jointly manage the database that records all of the transactions. That means that bitcoin, for example, is managed by its network, and not by one central authority. The network operates on a peer-to-peer basis. Decentralized networks will be the next huge wave in technology, and we are just getting started.
The network lives in a state of consensus. The blockchain automatically checks in with itself every ten minutes. This type of self-auditing ecosystem of digital value reconciles every transaction that happens in ten-minute intervals. Each group of these transactions is referred to as a “block”. That is why the network is called blockchain. Because of this system, the two important results are:
- Transparency data is embedded within the network as a whole, by definition it is public
- It cannot be corrupted as altering any unit of information on the network would mean using a huge amount of computing power to override the entire network
In theory, that is possible, but in practice it is impossible. In a way, blockchain solves the problem of manipulation. How many people in Africa, India, Russia, or Eastern Europe do not trust organizations and corporations? Blockchain solves the trust problem.
Let’s explain what blocks are, and how the blockchain network works. A block is a record of a new transaction, and that block contains the location of the crypto currency, medical data, or even voting records. The network, or the block can carry any information you want. Once each block is completed, it is added to the chain, creating a chain of blocks, or a blockchain.
Crypto currencies are encrypted, and processing any transaction means solving complicated math problems. As the blockchain grows, these problems become more difficult and require more computing power. People who solve these equations are rewarded with crypto currency in a process called “mining”.
When you own a crypto currency, what you have is the private key (a very long password) to the currency address on the blockchain. Using this key you can withdraw the currency to spend. However, if you lose your key, there is no way to get your money back. Each account also has a public key, which lets other people to send crypto currencies to your account.
The information on the blockchain is publicly available, meaning it is decentralized. No single computer or entity owns the information. Any transaction made is instantly visible to everyone on the network.
This is why the blockchain is also called a public ledger. Once you send bitcoin, or any other crypto currency to a friend, or sell it, that information is publicly available on the network. Other people may not know your identity, but they can see how much value has been transferred from one person to another.
All of the previously said brings us the last question, which is why we need the technology. Almost everything we do nowadays, involves a creation and movement of data. For example, when you buy a house, you transfer data. When you use a credit card, when you vote, when you travel by car, or even when you are getting ill.
Blockchain helps store and move that. Instead of holding the data in a single place (like nowadays), the blockchain atomizes the information and spreads it over thousands of nodes across a network. All of the nodes are locked together with clever cryptography.
At the moment, the data that rules our lives is kept in big lumps in one place. Whether that is a private server, in the cloud, or on paper in libraries or archives. That makes it vulnerable to attack. Blockchain cannot stop hackers from getting into your computer system if your password is weak. However, when hackers use brute force or sheer computer power to attack a system, blockchain makes that almost impossible.
For example, you do not need to break into one house, you need to break into an entire town.