If you have been following banking, investing, or cryptocurrency over the last ten years, you may be familiar with “blockchain,” the record-keeping technology behind the Bitcoin network. And there’s a good chance that it only makes so much sense.
In trying to learn more about blockchain, you’ve probably encountered a definition like this: “blockchain is a distributed, decentralized, public ledger. The good news is that blockchain is actually easier to understand than that definition sounds.
History Of Blockchain
Blockchain is one of the biggest buzzwords in technology right now. But what is it? And why all are we talking about this? Let’s start from the beginning.
The first major application of blockchain technology was bitcoin which was released in 2009. Bitcoin is a cryptocurrency and the blockchain is the technology that underpins it. A cryptocurrency refers to a digital coin that runs on a blockchain. Understanding how the blockchain works with bitcoin will allow us to see how the technology can be transferred to many other real-world use cases. Bitcoin is the brainchild of a mysterious person or group of people known as Satoshi Nakamoto.
Nobody knows the identity of Nakamoto, but their vision was laid out in a 2009 whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System.”
What is Blockchain Technology?
Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.
A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.
A simple analogy for understanding blockchain technology is a Google Doc. When we create a document and share it with a group of people, the document is distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked out awaiting changes from another party, while all modifications to the doc are being recorded in real-time, making changes completely transparent.
Of course, blockchain is more complicated than a Google Doc, but the analogy is apt because it illustrates three critical ideas of the technology: Blockchain is an especially promising and revolutionary technology because it helps reduce risk, stamps out fraud and brings transparency in a scalable way for myriad uses.
How Does Blockchain Work?
Blockchain consists of three important concepts: blocks, nodes and miners.
Every chain consists of multiple blocks and each block has three basic elements:
- The datain the block.
- A 32-bit whole number called a The nonce is randomly generated when a block is created, which then generates a block header hash.
- The hashis a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).
When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.
One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.
Combining public information with a system of checks-and-balances helps the blockchain maintain integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.
Miners create new blocks on the chain through a process called mining. In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.
Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the “golden nonce” and their block is added to the chain.
Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely difficult to manipulate blockchain technology. Think of it is as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.
When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.
Blockchain – Focusing a new World
Today we all use a decentralized platform for information transfer – the Internet. But when it comes to the transmission of values (money), we have to resort to old-fashioned, centralized financial institutions such as banks. Even modern online payment methods usually require the user to integrate with a bank account or credit card. So, blockchain technology offers an intriguing opportunity to eliminate these intermediaries. It records transactions, identifies the parties, and enters into contracts. Traditionally, financial institutions and banks have been responsible for these transactions. It is of great importance as the financial services sector is the largest sector of the economy in terms of market capitalization worldwide. Replacing even a small part of it with a system of blockades will not only bring about major changes in financial services but will also significantly increase their effectiveness.
The third function – conclusion of contracts – brings the usefulness of the blockchain beyond the financial industry. The database can contain not only units of cost (like bitcoin), but also any type of digital information, including software code. The code is executed when the parties enter their keys, thus signing the contract. The program may use external data – stock quotes, weather forecasts, news headlines, and any other information that the computer can process – and create contracts that are automatically executed when certain conditions are met. This technology is known as “smart contracts”, and the possibilities of its application are almost limitless. For example, a smart thermostat can periodically contact the smart power grid and send out energy usage data. When a certain limit on the kilowatt consumed is reached, the blockchain will automatically transfer the cost from the consumer’s account to the electric company’s account, automating the accounting and billing process.
Blockchain is great for protecting intellectual property. The technology can track how many times a user has viewed, shared, or copied data. It can be used to develop fraud-resistant voting systems, ensure the distribution of information, and much more.
Blockchains can be set up to operate in a variety of ways, using different mechanisms to secure a consensus on transactions, seen only by authorized users, and denied to everyone else. Bitcoin is the most well-known example that shows how huge Blockchain Technology has become. Blockchain founders are also trying out numerous other applications to expand Blockchain’s level of technology and influence. Judging by its success and increased use, it seems that Blockchain is poised to rule the digital world of the near future.
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