What is Blockchain?
Whenever I try to explain what cryptocurrencies are, I find myself answering the same questions and setting the record straight on preconceived notions. “How does Bitcoin* work?” “What is Blockchain?” “How can you trust this?” Understanding blockchain, the technology behind bitcoin and other digital currencies is critical in understanding it’s application in the real world. This article was written for everyone who is new to blockchain and is trying to understand the basics of this very complex topic.
A quick Wikipedia search comes up with this description for blockchain. . .
“A blockchain is a decentralized, distributed and public digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the consensus of the network.”
If you’re anything like I am, you’re left scratching your head after reading this.
This very wordy definition merely scratches the surface of blockchain, but it’s a good starting point for those among us who are new to this subject. Let’s break this description down into a few parts.
First off, what is a ledger?
A ledger is simply a collection of transactions. In the blockchain’s case, the ledger is online and, in most cases, public.
What does decentralized mean?
Decentralized means absent of a central authority, such as a government, financial institution, organization, etc. In other words, nobody touches your money besides you. You hold your currencies without needing to go through a middleman when you choose to spend your money. The currency holder is also 100% responsible for the safekeeping of his/her money as well.
Now that we’ve established that a blockchain is an online ledger that is free of centralization, we can tackle the rest of the description. Reading further, you see “is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the consensus of the network.”
What is the significance of recording across many computers? Every blockchain has its own ecosystem. These computers, referred to as “miners*,” are typically high-end computers which work around the clock to either validate transactions in a Proof of Work* (PoW) system OR a Proof of Stake* (PoS) system. For Proof of Stake explanation, see this article’s footnotes.
Let’s use Bitcoin (BTC) as the example for this article. Bitcoin uses a Proof of Work (PoW) system. These miners, also called “nodes,” can be anywhere in the world that has access to the internet. In a PoW system, nodes work to mine blocks on the chain and solve the complex algorithms needed to verify the legitimacy of the transaction. Since mining blocks and validating transactions takes a large amount of computing power, nodes compete against each other to solve these mathematical problems known as “Proof of Work Puzzles.” This also establishes a checks and balances system of sorts on the blockchain, ensuring that only legitimate transactions are validated.
You’re probably wondering why someone would use their high-end computing power to find new blocks and validate transactions. The answer is exactly what you’d expect. Nodes are incentivized for their work. Every time a transaction is validated, the transaction fees are paid to its miner. In other words, those who use their computers to validate transactions on the blockchain are paid to do so by the transactor. Once these transactions have been validated, they are added to the chain and cannot be altered. Whenever a new block is discovered, as of 2018, 12.5 bitcoins are rewarded to the miner responsible.
Now to address the last question of trusting this technology.
Can a blockchain be hacked?
The answer to this would be yes, however, it is extremely difficult and unlikely that a hack could be organized.
Again, I’m going to use Bitcoin (BTC) as the example. In order to organize a successful hack on the Bitcoin blockchain, you need to have what is called a 51% attack on the blockchain. This means that 51% of the computing power among the nodes need to be attacker nodes. With close to 200,000 BTC transactions per day. These powerful computers (nodes) validating transactions are racking up quite the electricity bill. Any attacker nodes need to have the hardware resources to take over the majority of nodes on the system AND have access to a power supply capable of providing the insane amount of electricity this would require (as well as a means to pay for this electricity). This is simply not feasible on the BTC blockchain.
In conclusion, let’s redefine blockchain as it pertains to currency knowing what we’ve learned.
Blockchain is a technology that gives the currency holder full responsibility of his/her money. Made up of blocks, blockchain is a means of storing financial transactions that are validated by its community, rather than a central authority. All validated transactions that are recorded and stored on the blockchain can not be altered in any way.
If you made it through this article, great! I hope you enjoyed it and are on your way to making sense of this new amazing technology. For more introductory articles regarding cryptocurrency, blockchain, and much more, navigate to our Crypto 101 page.
– Patrick Newill
*For more information on Bitcoin, see Blockdelta.io//Bitcoin101
*For more information on cryptocurrency miners, see Blockdelta.io/Mining101
*For more information on Proof of Work, see Blockdelta.io/PoW101
* Proof of Stake varies from Proof of Work. In a Proof of Stake system, the block creator is determined by how much stake (wealth) miners have in the currency being transacted. For more information on Proof of Stake, see Blockdelta.io/PoS101