Blockchain — simply explained
Most of us have heard the terms blockchain, smart contracts and oracles before, but do we understand the concept behind it? In our blog series simply explained, we will try to describe the idea behind the terms in a simple way. Let’s get started with the term blockchain.
Blockchain is basically just a big data file. Think of it as an Excel file, where you can add new data, but not delete any of the existing data. In the case of Bitcoin for example, we would have three columns: user A, user B and the amount x transferred. This Excel file with all of your transactions is not only saved on your computer, the ledger, but also on the computer of many users, the so called miners. In our example here, the users will be comparable to accountants. Let’s say you want to transfer 1,000 Swiss francs to your friend Peter. Before this transaction can be executed, the accountants have to verify it. You send out a request to all accountants. They then need to check whether you have enough funds to execute this transaction or not. Their job is to calculate your balance as fast as possible. The first person to give a correct answer will receive a reward in Bitcoin or some other kind of crypto currency. The first one to have a solution sends his proposition to all the other accountants, a proof of work. If a majority of the accountants agree with his proposition, he receives his reward. If they came to the conclusion that you have enough money left for the transaction, the 1,000 Swiss francs are being transferred to Peter. All the accountants then update their Excel file with the new data line that You (user A) sent Peter (user B) a 1,000 Swiss francs (amount transferred).
The accountants always have the newest version of the Excel file saved on their computer. It is their task to make sure that at all times they have the same file saved. This leads to a decentralization where the exact same file is not just saved on one server, but on many different ones. As a result, the Excel file with your transactions doesn’t belong to you or anyone in particular. Everyone has the same rights for it and anyone can have a look at it. The decentralization makes it very hard for criminals to hack the Excel file and change something in it. The only way to sabotage the Excel file would be if the accountants unite and plan to change some of the data in the file. But the more accountants there are, the harder it gets to coordinate and convince all of them. This means that the more accountants we have the better and safer our system gets. It is important to keep in mind that blockchain is not equal Bitcoin, but Bitcoin works on the basis of blockchain technology.
The blockchain technology entails many advantages. One advantage is the decentralization and cryptography. It makes the data very secure and hard for criminals to hack or change. Values can be sent directly via the secure infrastructure which represents another advantage. One key benefit is that the data is unchangeable. As you can’t change or delete any of the existing data, the data chain is extremely reliable and accurate. This makes the data on the blockchain true. A further advantage of the blockchain is the transparency. Every transaction, every person who sent a proof of work and more is publicly visible. And the last benefit of the blockchain is the consensus mechanism. A majority of the accountants have to agree on the proof of work.
Hopefully this blog post helped you to get a better understanding of the term blockchain and if you want to find out more about the concept behind the term smart contract, make sure to read our next blog post!
