A Quick and Easy Explanation of Blockchain Technology

If you’re reading a lot about the tech space, you’re probably seeing the words blockchain thrown around a lot. But what exactly is a blockchain? Put very simply, a blockchain is a technology that organizes information in immutable blocks. While that doesn’t sound very special or complicated, this technology is revolutionizing many industries- everything from marketing to money. We’re here to help make the blockchain revolution a little easier to understand for everyone who wants to know what’s behind this amazing technology.

The Difference Between Bitcoin and Blockchain

First, a little history lesson. When Satoshi Nakamoto, the mysterious coder or coders behind Bitcoin, launched the new currency in 2008, they needed a new technology to host the coins securely. Enter the blockchain. A common misconception is that blockchain and Bitcoin are one in the same. They most certainly are not. The blockchain is the technology that allows Bitcoin to run securely and effectively, while Bitcoin is a digital currency.

Very simply, blockchain technology works by putting information into “blocks” and building bits of information on top of each other, ensuring a secure “chain” which cannot be tampered with. The chains are stored in every node within the system, ensuring that everyone has a record of what has happened.

Blockchain Architecture- A Digital Ledger for Everyone

The blockchain is best described as a distributed digital ledger. Distributed means that it is hosted by every individual participating, digital means it is hosted online, and ledger means that it keeps records of the actions completed on the chain. So let’s break it down a little-

Distributed-

The main security feature of the blockchain is that a copy of the chain is stored on every node in the network. This prevents a system that runs on the blockchain from relying on a third party to host its information. Cutting out a third party makes transactions and actions completed on a blockchain system more secure and cost-efficient. Third party ledgers need to be verified in a costly and timely process, just think about what happens when you try to execute a wire transfer between banks. Both your bank and the receiving bank have to compare their records, ensure that they can execute the transfer, and deal with all of the paperwork that gets your money from the US to China. With a blockchain system, like Bitcoin, your money leaves your account and is deposited almost instantly in the receiver’s account.

This is because every node on the network is capable of verifying the fact that your account has the money necessary to complete the transfer and the receiver’s account is valid. This is completed through a process called mining, in which the system verifies your digital signatures and produces cryptographic hashes.

Blockchain requires a system called consensus, which makes it more difficult to complete fraudulent transactions. Consensus means that every node in the system agrees on what the chain is supposed to look like. Since the system is distributed and updated every time there is an action completed in the blockchain, it is very very difficult to create a fraudulent action. A quick example of what happens when you remove a block of information from the blockchain-

Ledger-

A ledger typically is something that contains a record of transactions completed. It’s one of the oldest methods for keeping track of who owns what, dating almost as far back as writing itself. A blockchain ledger is very similar in function. As stated earlier, the blockchain stores all of it’s information on every node involved in the blockchain to ensure validity.

What’s unique about a distributed ledger is that it automatically creates trust between parties. This is really the key factor that makes blockchain such a revolutionary technology. In our current state of the internet, you have to trust that people you’ve never met are who they say they are, and have what they say they have.

For example, you go to Craigslist and you want to buy a used computer. You have to trust that the other person has that computer and that it’s in the condition they say it’s in. With a blockchain, you could easily find out when they bought it, that they were the actual owner, and what repairs had been done on it. This allows you to buy the computer confidently, without having to take a total stranger’s word for it.

Managing the Blockchain: Cryptography and Mining

Scary header right? Never fear, cryptography is very easy to understand on a basic level, and it’s the backbone of the blockchain. Also, I’ll only scratch the surface here. If you’re looking for some in depth information on how cryptographic keys, hashes, and ciphers work head over here.

To make things a little easier, we’re going to talk about cryptography in blockchain in terms of cryptocurrency, like Bitcoin. The first thing any bank will need (other than your money of course) is your signature. Your signature is a way to verify that it was in fact you who bought 50 gallons of chocolate ice cream (no judgement).

‘But maybe there’s an ice cream fiend out there who knows what your signature looks like and figured out how to forge it. Enter a digital signature. A digital signature is exactly what it sounds like, a digital way to ensure that you’re you.

In the blockchain, a digital signature is two fold. It includes a public key, which you can give to anyone you want to transact with, a bit like a routing number in traditional banking. If you are the sender, you begin the transaction with your public key and your wallet will attach your private key to verify that it is really you that initiated that transaction.

A public key typically looks something like this:

It’s a long alphanumeric string of digits that is the main way most people can identify your account. This number is also used to determine your private key, although the math to figure out your private key from your public one is so complicated that it would take even the world’s most powerful supercomputer a trillion years to crack. So you don’t have to worry about keeping it a secret, most people post theirs publicly on platforms like Facebook to allow transfers of new currency.

Some people also use wallet addresses as a quicker and easier way to identify their accounts. A public key is 256 bits long, so it can be a bit unwieldy, a wallet key is shorter at about 160 bits. It is still unique to your blockchain wallet, so for most users, the numbers are interchangeable.

Here’s what a wallet address looks like:

So who verifies your keys?

That’s up to some people called miners. Miners have incredibly powerful computers that solve complex math problems created by the blockchain. When they solve this problem, they are rewarded with Bitcoin, which is automatically created to reward the miners. Bitcoin has it’s own complex algorithm to ensure that it doesn’t create too many coins and that miners are regulated, which I won’t go into here. The problem typically involves both you and the receivers public keys being combined into a very specific number called proof of work. This number is very difficult for the miner to acquire, but easy to check in the future. These numbers are built into every single block. Even a small change in the data creates a complete change in the number you get as your proof of work. The most commonly used proof of work system is SHA-256. If you’re more of a visual person, here’s a quick and easy example of how changing the data can completely change your hash value.

Again, this is a very simplistic explanation of how this process works, but it’s more than enough information for anyone who just wants to use the blockchain.

Smart Contracts: Blockchain Makes Deals

The blockchain creates an environment without middlemen, which allows everyone involved to save time, money, and sometimes sanity. Smart contracts take the idea of a decentralized system and uses it to allow people to set terms that they agree to and enter contracts with others without consulting lawyers, bankers, or anyone else.

Here’s a quick example of how a smart contract works-

Say I have a beach house that I rent out during the summer. If you want to rent that beach house, you can enter into a smart contract with me. That contract would contain my terms and yours and manage our interaction with each other. I set a price for a month at the house, and once you agree to the price and my terms, you can activate the contract. This does not require any action from me, as I have already set the terms. If you don’t pay me, the smart contract automatically holds your key. If I never give you the key, the smart contract automatically issues you a refund. If either of us violates our terms at any time the smart contract automatically executes a predetermined action. This keeps both of us safe from fraud without any middlemen, and without either of us having to trust each other to make good on the contract.

The other useful thing about having smart contracts on the blockchain is that all of the contracts are public knowledge. The people or accounts involved are always kept secret, but having the actual agreements on the blockchain helps people who are watching a specific market to know what is happening. This helps people to keep their finger on the pulse of an industry without violating anyone’s privacy.

Having this system digitally and automatically execute protects users from potential fraud or loss of information that can often happen in traditional paper systems. This can also apply for systems that require many different people to sign off before a system is activated.

Smart contracts can be used for a variety of applications. The most prominent face of this is probably Barclay’s, a British bank that is developing a program for smart contracts within their banking system. This paves the way for the future of smart contracts in the real world, though currently the technology is too new to have many reliable real world applications. Many blockchains, like Bitcoin, Ethereum, and NXT allow you to execute smart contracts already. This is a growing part of the future of the blockchain as a whole.

Blockchain Applications: More than Bitcoin

The blockchain’s role in our digital ecosystem is just getting started. Because it’s main function is to create an immutable ledger, there are tons of blockchain startups popping up across many different verticals.

Here at Chillproject, we’re working on bringing the blockchain to marketing. We use the blockchain to manage our digital token, the Chill Coin. The Chill Project makes it easier for marketers to promote their own blockchain companies through our easy to use Facebook marketing tool, Adchill.

The creators of Storj are using the blockchain to create more accessible cloud storage for everyone. It works by letting users rent the extra space in their hard drives and parsing out data across its network, keeping your data safe and easy to access. Storj is definitely a market leader in using the blockchain for distributed P2P cloud storage.

Ripple is tackling the banking world by creating a system that allows banks and payment providers to connect on their blockchain system to execute faster, more frictionless payments globally. This could mark a huge shift in the way we bank by removing long wait times or barriers between global trade among consumers.

Steem has created a social media network in which users are rewarded for creating content. They use the blockchain to manage their crytpocurrency, which is used as a reward for creating content that is upvoted by other users.

These examples only scratch the surface of what blockchain can do, and we’re excited to be a part of it! Be sure to check out our whitepaper to learn more about how we’re using the blockchain to bring you the best Facebook ads automation tool out there.