You are probably aware that there are a lot of highly technical aspects to blockchain and we will not be discussing these here.
What we will be doing is explaining what blockchain is so that you have the right amount of knowledge to consider how it can help you in your business.
Contents
What is the Blockchain and how does it work?
So, what exactly is blockchain? In the simplest of terms blockchain is a digital record of who owns what that is updated continuously. With blockchain there are individual blocks of data that are encrypted and these are all joined together. Hence the name “blockchain”.
These data blocks can contain different types of information such as the owner of an asset, the date and time of transactions, the monetary amounts involved and a lot more. Every block is encrypted using cryptography which is where the name “cryptocurrencies” emanates from.
Imagine an everyday deal between two parties. There will be information about the deal that needs to be confirmed and all of this is stored in an individual block. A block can include a lot of different records about a deal or transaction which is part of the initial design of the blockchain.
A blockchain network will store details of many transactions conducted and each transaction has its own unique block. There could be millions of individual blocks in a blockchain and they are all linked together in a secure way.
In a cryptocurrency transaction there will be two parties that we will call party 1 and party 2. With a blockchain there will be records of these two people and the different coins that they own. So, if party 1 wants to sell some of their crypto coins to party 2, there are digital signatures in the individual blocks that require verification.
The job of the blockchain network is to check all of the details of the proposed transaction to ensure that everything is valid. There are computer nodes which perform these checks. If the nodes validate the transaction, then records are added to the blockchain.
All Blocks are Unique
Every individual block in a blockchain is totally unique and has a special code identifier known as a “hash”. As all of the blocks are connected together, the unique code will also include the hash of the block that previously connected to it. Everything is done in order and the hashes are used to link all of the blocks together properly.
There is a complex mathematical function used to create each individual hash. Using this function, a unique string of characters, including numbers and letters, is generated to create the unique hash.
A blockchain network uses a uniform hash system so it doesn’t matter how large or small an individual block is the hash codes used will always be the same length. There is a database used with a blockchain and this is distributed across a network of computers. It is designed so that no single computer has the same information stored on it.
Blockchain networks continuously check block information to ensure that every single copy of the database is fully up to date. There is no margin for error with a blockchain network. Records on a blockchain are immutable.
This means that they cannot be easily changed. Any changes made by the legitimate owners will change the database and create new hash codes.
Blockchain is very difficult to Hack
It is extremely difficult to hack a blockchain. Very experienced hackers have tried and failed. A hacker would need to recalculate hashes for the blockchain so that they can hack it and this is almost impossible as the original has used will always remain. This has a knock-on effect to all of the blocks connected together.
To even stand a chance of hacking a blockchain you would need to use vast amounts of computing power. This would be very expensive and would take a great deal of time to do as well. Are you beginning to see the possibilities here?
Most conventional transactions are based on client server setups. This means that there is one central server (computer) that holds all of the important information and other computers (clients) connect to it to make the transactions.
The problem with client server technology is that it is a lot easier to hack. Companies and organizations that deploy the latest cutting-edge security methods have fallen foul of experienced hackers. Records are not immutable and if someone knows what they are doing they can change them without being noticed.
Blockchain is Decentralized
There are no centralized authorities controlling any of the cryptocurrencies which is why they appeal to so many people. Any user of a blockchain can have access to the same information as another user.
The blockchain platform is very appealing because it provides total transparency.Unlike with client server applications, there is not a central database involved with blockchain. It is a lot easier for a hacker to gain access to a central database and cause havoc. With blockchain, the information is spread over several different computers.
As blockchain is decentralized there is no requirement for a trusted third party to verify the transactions that take place. Users of a blockchain network are anonymous and you may think that this can cause trust issues. How do you know if some users are untrustworthy and will try to game the system?
The way that blockchain overcomes this trust problem is by testing all new computers that want to join the network. A new computer has to pass a consensus test which is a way to prove their trustworthiness. One of these is through the use of mining.
Blockchain Mining
New users of a blockchain have to prove their credibility and they can do this by solving a complex mathematical puzzle when they want to add a new block to the network. This process is called “mining” and requires a great deal of computational power to solve the required puzzles. You may have heard of Bitcoin mining or Ethereum mining.
In order to mine these crypto coins you need a powerful computer rig to solve the complex puzzles. This is a way of verifying blockchain transactions and successful miners are rewarded with crypto coins.
Proof of Stake
Another way that a computer can prove trustworthiness on a blockchain is through proof of stake. To achieve this, tokens are purchased which allows a new computer to access the blockchain.
The fact that a new user has spent money to purchase tokens provides a high degree of proof that they can be trusted. You can purchase cryptocurrencies such as Bitcoin in exchange for fiat currencies such as the US dollar