Building blocks of the Block chain: A 101 read

You have heard of the buzz term “Block chain” before. Perhaps you read about it in a Bitcoin article or overheard your techie friends talk about it at length. In the world of the next best thing, the Block chain is being touted as it. The hope is that it will empower humanity, redefine trust and change the way we conduct transactions. But what is it really and why should you care.

So, let’s break it down. Block chain at its most basic element is a general ledger. For the non-financial people, A general ledger is a list of all the transactions that occurred during the life of for example a corporation, a department etc. The Block chain got its start with Bitcoin, the digital currency. Bitcoin used the Block chain to create a ledger and record all the transactions of the digital currency. So, if Bitcoin is purchased, the information related to the purchase is added to the general ledger, the Block chain.

Currently, financial transactions are recorded on a closed ledger, administered by a centralized clearing house, the middle man. Alternatively, the Block chain is open source software allowing for universal access to the ledger. The universality is not just a gift to human empowerment, the essential elements of the Block chain work only with universal involvement partnering up to step into the shoes of the middle man.

How does it work? The Block chain is basically a peer to peer platform where anybody can access, view and use the software. Each time an event occurs, a block is created that captures the information within it. Each block is added to the chain in a linear, chronological order. The chain is constantly growing as new events are recorded into blocks. At any point in time, the Block chain contains complete information from the genesis block to the block you just created. The block can be made up of any type of information. Bitcoin, for example, creates blocks that record sale and purchase transactions among other information.

Each block contains a hash. A hash is a cryptographic function, i.e. a unique string of code that takes the event and the details surrounding such as date, time and block place and makes a key to encrypt it. The hashes link the blocks on a chain to each other as each hash contains information about to the prior block(s) on the chain. This functions protects the integrity of the Block chain making it impossible to later modify a block because the hash in the edited block would no longer match with what came before and what came after.
Another protective function is embedded in the inner working of a general ledger. The most important method for accounting is Double Entry Accounting. This method requires that each transaction be recorded in at least two accounts. One to balance and verify the other account. For example, if a company takes out a loan the company has more cash, so it would increase its cash account. Simultaneously, the company also now has a loan for the same amount and records it in a loan payable account balancing and verifying that the company did indeed receive an influx in cash and vice versa. The Block takes the Double Entry Accounting method and uses it in the same way. To ensure the veracity of the information of the block, a balancing block is created to verify the event. For example, when you purchase Bitcoin, a block is created to record the purchase and simultaneously a block is created on the seller side to record the sale.

Why does all this stuff matter to you, to us? We all know probably since early childhood that information is power. Who holds information today, governments and large businesses? Yet, even the information they hold is only the tip of the iceberg. Sure, we get splits and splats from the internet and other sources. The Block chain gives us access to all the information that is made up by us. The transactions, the events, everything. The Block chain establishes trust, accountability and transparency. It reduces the need for middle men and the inefficiency that comes along with it. We will supply the checks and balances necessary to go on with our lives.

Let’s take back the power from interested parties and put in the hands of the people.