What is blockchain? How does it work? Why is it so important?
The tech and business worlds are abuzz with the term blockchain. This technology was originally created for the digital currency Bitcoin, but promises a myriad of potential uses for many industries and consumer needs. This technology is evolving so quickly that even for the well informed it’s easy to feel out of the loop. As The Blockchain Realists, we are here to bring you a greater understanding of how blockchain works and why it matters.
In future lessons, we’ll dive into cryptocurrency, variations of blockchain technology, and business use cases. For now, let’s focus on the basics:
What Is Blockchain?
Blockchain is a decentralized database, meaning that it is not controlled by any one authority. At its core, it is a distributed digital ledger that records all transactions taking place between parties. It is the underlying technology to cryptocurrencies such as Bitcoin and Ethereum.
Think of it as a document that many people around the world can simultaneously read and write to. This content becomes the transactions being logged on the current “page,” or block, of a blockchain — more on that later.
One interesting property of blockchain is that it is immutable, meaning it’s not removable or revisable. Using the document analogy, while people can read and write new entries, they cannot delete anything.
How Does Blockchain Work?
Once a transaction is initiated it’s put (temporarily) into a block and broadcast and replicated across a peer-to-peer (P2P) network made up of computers called “nodes.” Nodes support the network by maintaining copies of the blockchain and by running special software programs that verify each transaction. Once the transaction is verified, it is permanently written to the block and linked to the blockchain. This process of verifying and agreeing on transactions is called “consensus,” which we will explore in our Blockchain 201 lesson.
Here is an example of how a Bitcoin blockchain transaction would work:
When we get into cryptocurrency in our Blockchain 102 lesson, you will find this replication and verification process is called “mining.” Miners perform the calculations to verify the transactions and are rewarded for their work with tokens or coins. They are like the accountants of the cryptocurrency world.
Why Does This Matter?
Trust! It’s the major factor in every payment we make or receive, and more.
Amazon trusts they will receive money from your bank account when you make a purchase. If you have insufficient funds, your bank either rejects the transaction, covers the payment and applies a fee to your account, or deducts the funds from one of your other accounts. This process is expensive and inefficient, even when there are sufficient funds.
Blockchain is inherently designed to prevent fraudulent spending. By verifying every transaction prior to “approving” it and having it recorded by permanently by the nodes in the process, it is nearly impossible to “game the system.”
Because blockchain records are immutable and no one can erase data, everyone’s “account balance” is entirely accurate and up-to-date. And since there are many nodes running at the same time to verify transactions, you would need to tamper with all the nodes simultaneously to fraudulently change the data.
There are many additional benefits that blockchain technology provides. We’ll dive into those in our following lessons. If you’re interested in learning more about cryptocurrency, click here to read our Blockchain 102 lesson.