What is Blockchain?
Since I was in high-school (~2008), there has always been hype around blockchain and bitcoin. At first, I thought they were the same thing (awkward) and didn’t really understand the hype over digital money. Lately, there has been even more discussion about the benefits about blockchain so I decided to find out, what is blockchain and why is it considered to be so amazing.
Blockchain is a public ledger of transactions that is composed of two parts: Peer-to-peer network, and a decentralized, distributed database. A block is a collection of data that has 4 main properties:
- Time-stamped — each block has the exact time of creation
- Decentralized — each block is recorded in multiple places
- Open — there is no central authority
- Secure by design — once the block is created, it is basically written in stone, making it extremely difficult to modify or hack
The chain connects each block together. Each block refers to the one before building up the chain.
Basically, it’s just a record. A blockchain is like a ledger that a bank would use to keep track of all customer transactions. However, in a bank, the ledger is controlled by the bank and only the bank can see the transactions. In blockchain, there is no central authority. It is like a giant, global spreadsheet that runs on millions of computers and doesn’t require any single person to authenticate or settle transactions.
Let’s walk through a more concrete example of this concept. Let’s say I want to sell my best friend Alice a bracelet. We meet up and I give her the bracelet and she gives me $5. Now she has the bracelet and can do whatever she wants with it. I don’t have any more bracelets so I can’t sell the bracelet to anyone else. This is an example of a simple physical transaction between the two of us. We did not need a third party to confirm that the bracelet went from me to Alice.
Let’s now consider what would happen if I wanted to sell Alice a digital bracelet. How would Alice know the bracelet is mine and that I wasn’t selling it to 100 people at the same time? The bracelet needs to be tracked. If I use a digital ledger to track the bracelets, I would need to put a third party in charge of the ledger so that I won’t cheat my inventory or sales numbers. So I’m going to ask Bob to be my accountant. But Bob could do the same thing which defeats the purpose of hiring Bob. Also, having Bob as my accountant costs me money which means that my bracelets became more expensive. It seems like a lose-lose situation.
Then what’s the happy solution? Instead of Bob being in charge of my ledger, I’ll give the ledger to everyone. Now it is on everyone’s computer, not just Bob’s or mine and every bracelet transaction is recorded. This is great! Now no one can create 100 digital bracelets or say they have bracelets that they don’t have because the ledgers on everyone else’s computer won’t support the inaccuracy of the ledger on the scammer’s computer. The more ledgers in the system, the harder it is to cheat.
This example illustrates one of the main advantages of blockchain, that it allows us to record transactions in a trustworthy manner. Blockchain is permanent, once written, you cannot alter the information. Additionally, it is verifiable because it is in public record, not under the control of a single entity. This also means that there is no single point of failure, providing more resiliency. There are many more advantages (and disadvantages) of blockchain technology but the few outlined in this article demonstrate why this technology has amassed so much hype over the years!
