The concept of blockchain can be hard to grasp for some, and in particular, cryptocurrency newcomers. This guide offers a simple definition of what blockchain technology is, how it works and what its future looks like.
What is blockchain?
Blockchain technology may seem complicated, and although there are complex aspects to it, the core concept is quite simple. A blockchain is a unique database that collects information and stores it. Unlike transitional databases that store information on a single server, information stored on a blockchain is spread across a network of computers, also referred to as nodes. So far, the most common use for the blockchain has been as a ledger for transactions, such as Bitcoin transactions. However, there are many different types of data that can be stored on a blockchain. Anyone can search the records stored on a public blockchain and verify their validity.
The computers, or nodes, that run and store the blockchain are decentralised, meaning they are not controlled or owned by any one company or country. Being decentralised makes this a very fast and low-cost process.
By contrast, our current system relies on the Central Bank of each country (e.g. the Reserve Bank of Australia and the Reserve Bank of New Zealand) ‘clearing’ each transaction that passes from one bank to another. This process costs the banks money, which is why we face credit card surcharges for the interchange fees between banks and high conversion fees on international money transfers.
Source: WIRED (Facebook)
How does a blockchain work?
In a nutshell, a blockchain is a publicly managed record of transactional data. Data is stored in ‘blocks’ which are all chained to each other. As new information is retrieved, it is put into a fresh block. Once the block has been completely filled with data, it is then connected to the previous block, meaning blocks are chained in chronological order – hence the term ‘blockchain.’
Blockchains rely on network participants known as nodes to validate transactions using a pre-defined algorithm known as the consensus protocol. The nodes of a blockchain are in charge of preserving the true record of transactions and guarding it against tampering.
Transactions on a blockchain are also quicker and cheaper than conventional systems because it cuts out the middle man between banks and between individuals. Furthermore, since blockchains are global ledgers, an international transaction on a blockchain can be quicker and cheaper than a domestic transaction.
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Is blockchain secure?
Blockchain technology tackles security issues in a number of different ways. Firstly, new blocks are always stored chronologically with timestamps, meaning data contained within blocks cannot be changed or tampered with. This makes it extremely impractical to manipulate data contained on the blockchain, thus securing data and eliminating centralised points in which cybercriminals repeatedly target. Blockchain technology is still a relatively young technology and is constantly evolving every day. Security issues and vulnerabilities are identified and patched up quickly. Analysts at the Washington Times have deemed that the Bitcoin Blockchain technology could be used as cybersecurity at the Pentagon, which reinforces the level of security that blockchain offers.
What are nodes?
Nodes are the guardians of a blockchain network, and they keep track of transactions on their own computers. The more nodes in a blockchain, the more stable and decentralized the network becomes. The blockchain nodes collectively check the validity of transactions in the absence of a central authority to authorise and record transactions. The nodes connect the new collection of transactions (stored in blocks) to the already validated transactions once they have been authenticated. The ‘blockchain’ is created by adding new blocks of transactions to previously validated blocks.
What is hashing and cryptography?
Cryptography is an encryption technique that transforms data into arbitrary text in order to protect it. However, a cryptographically encrypted document can be decrypted. This is why blockchains use a one-way cryptographic hash function/algorithm that accepts transaction information as input and outputs a hash of a fixed length. To produce the input, this output cannot be decrypted. Through doing so, the blockchain guarantees that a transaction’s confidential data is encrypted and unreadable by the general public.
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What is the difference between blockchain and bitcoin?
First and foremost, it’s important to understand the difference between Bitcoin and Blockchain. Bitcoin (BTC) is a decentralised digital currency that runs on the Bitcoin blockchain. It’s decentralised because it can be bought, sold or exchanged without the need for a third-party intermediary like a bank. Blockchain is the underlying technology that powers Bitcoin, however blockchain has many other uses beyond acting as a distributed database for Bitcoin. There are several other cryptocurrencies that have their own blockchain and distributed ledger systems.
The future of blockchain
Blockchain technology has gone mainstream in large thanks to Bitcoin’s growth, but blockchains can be used for much more than digital payments. Blockchains are essentially digital ledger technology that allows data to be securely sent, stored, and verified without the need for central intermediaries. The future of blockchain is very exciting, yet it is unknown. The technology is constantly evolving and new innovations are entering the market at a rapid rate, promising more uses for the blockchain. As more active blockchains networks provide real transformative change to a number of industries, more companies of all sizes will continue to adopt the technology.