What Is The Blockchain?

In early January 2017, I blindly invested $500 in whatever cryptocurrencies my friend’s hairstylist, Albie, touted as “hot”. For two days, I felt like the next Warren Buffet. For the two years following, my crypto value plummeted to $120 and I felt like a complete moron. As a current dual degree candidate in Accounting and Computer Science, I hope to regain some measure of self-respect by mastering blockchain technology beyond its obvious applications to cryptocurrency. Let’s start this journey by breaking down what the blockchain is.

A New Form of Record Keeping

A quick Google search explains: “A blockchain is an ongoing set of cryptographically linked data that utilizes the hash of the previous blocks…” In simpler terms, blockchain is a new record-keeping technology.

To understand how blockchain is a new form of record-keeping requires an understanding of current record-keeping methods. Currently, almost all transactions involving digital assets or information are recorded on a ledger (a chronological book of transactions). In order for a transaction to be recorded, it usually must be recognized by a centralized organization or clearinghouse. This clearinghouse authorizes, “Yes, this transaction is legitimate,” then posts the transaction. For example, when Person #1 sends money to Person #2 via PayPal, although it may seem like a direct transaction, in the background every successful transaction has been validated by a third-party clearinghouse.

Blockchain technology eliminates the need for this centralized clearinghouse, therefore decentralizing (no centralized organization needed) the transfer of information or assets. This creates a truly direct transaction. Additionally, blockchain technology creates a ledger of transactions that are immutable (unchangeable), so nobody can sneak back and change any of the transactions. Lastly, the blockchain creates a trustless (no trust needed) record because no centralized organization is required to legitimize transactions.

How Blockchain Works

To explain how the blockchain works, I will use an analogy of receipts and paper clips. Imagine that every time you purchase items at a grocery store, the clerk prints a receipt and, using a paperclip, chains that receipt to the previous receipt you received from the store. This “growing chain”, however, extends beyond just you. Your paperclipped chain includes not only your receipts but the receipts of everyone who purchases from that grocery store. Furthermore, everyone who purchases from that grocery store has his or her own identical copy of the same “receipt chain”.

Essential to this analogy is the understanding that a person paying for groceries does not require a centralized clearinghouse to validate the transaction. Instead, the consumer simply hands over cash, which, upon entering the cash register, generates a receipt. This is how blockchain works; the record (the receipt) is tied to the actual transaction (the transfer of cash). One can’t exist without the other. This is how blockchain decentralizes transactions and obviates the need for third-party authorization.

Suppose someone, possibly harboring nefarious motives, wants to add, delete, or alter a receipt within that receipt chain. She must swap the original receipt for a substitute receipt, but in the process must remove the original receipt from the chain, therefore breaking the chain. Because every blockchain recipient has a copy of the same original “receipt chain, the blockchain won’t allow receipt editing to occur undetected, thereby rendering blockchain immutable and trustless.

The Technology Behind Blockchain

Blockchain is comprised of three parts: a digital token (analogous to cash) tied to an asset or piece of information, a block (analogous to a receipt) recording the transactions of those digital exchanges, and a cryptographic chain (analogous to the linked paperclips) of those blocks.

Consider the non-blockchain PayPal transaction; a person sending money via PayPal is merely proposing a record. The record is actually posted only after a third party has accepted the money, transferred it to another person’s account, and verified the deposit. In this situation, the transaction and the record are separate events, both relying upon the authorizing third party.

Contrast the aforementioned example with this cryptocurrency transaction: when a person clicks to send digital tokens such as Bitcoins to another person, the block’s record of that transaction is immediately added to the cryptographic chain because a digital token purchase tied to Transaction X automatically ties its corresponding block’s record to that same Transaction X, which is then added to the entire cryptographic chain of transactions.

Unlike the receipt and paper clip example, transaction receipts are not added individually to the chain. Instead, numerous transactions are added to a block, then that block is added to the chain, similar to adding numerous receipts to an envelope, then paper clipping that envelope to the previous envelope of receipts.

A cryptographic chain of blocks is necessary because those blocks aren’t actually chained with paperclips. Instead, each block has three digital references, similar to ID numbers, called hashes. One hash refers to the block itself, one hash refers to the previous block’s hash, and one hash refers to the next block’s hash. Blocks connected by hashes create a chain of blocks or a blockchain.

Conclusion

• A blockchain is a new form or recordkeeping that is decentralized, immutable, and trustless.
• You can imagine a blockchain as a paperclipped chain of receipts from every transaction in your grocery store. Everyone who shops there has an identical copy of that chain.
• A blockchain is comprised of three parts, a digital token tied to an asset or piece of information, a block recording the transactions of those digital exchanges, and a cryptographic chain of those blocks.

Other Resources

• How Blockchain Technology Works. A Guide For Beginners: https://cointelegraph.com/bitcoin-for-beginners/how-blockchain-technology-works-guide-for-beginners
• Blockchain Expert Explains One Concept in 5 Levels of Difficulty | WIRED: https://www.youtube.com/watch?v=hYip_Vuv8J0
• Blockchain and Bitcoin Fundamentals | Udemy: https://www.udemy.com/course/blockchain-and-bitcoin-fundamentals/