What is Blockchain?

 

There’s been a lot of mention of Blockchain lately. Many people wonder if Blockchain and cryptocurrencies are the same thing. Since they are often mentioned together, it is easy to make this mistake.  Seeing as blockchain promises to revolutionize the way we store data and handle transactions, it would be ideal if we can wrap our minds around these concepts and see how these would be used in the practical world.

 

So, what is Blockchain?

Blockchain is a different way to store data to our traditional database system. The traditional database system is known as a centralized approach and stores data in one location for data retrieval. To give you a day to day example, if you go to a bank and open an account, the bank will store this information in a database and this database will be stored at a particular location.

This data may be (as often the case in banking environments) replicated to another stored location to safeguard against disaster recovery but the main idea of centralized databases is that the data is stored to one location. When the bank teller requires the client’s information, they will access this database and retrieve the data necessary.

Blockchain does not work in this way. A blockchain can be viewed as the software that runs a network and can be private, public or consortium (which we will explain in another article). A private blockchain is where a network of nodes is set up for only a specific set of people. A public blockchain is open to just about anyone. When it comes to storing data, a decentralized approach is taken. This is where things get interesting. Instead of storing the data in one specific ‘centralized’ database, the data is stored in blocks and stored on each blockchain member’s device.

 

How does it work?

A blockchain is a distributed ledger (DLT) which basically means that it replicates the version of the data across each member of the blockchain. Every block in the blockchain has access to this data as each block contains the entirety of data. Distributed ledgers are also known as shared ledgers or distributed ledger technology. It is important to note that for DLTs to work, consensus algorithms are set up which ensure that each node in the blockchain has all the data at its latest version and that this data has not been tampered with. Each block in the blockchain would have a previous hash and another hash to ensure that no tampering has taken place. The previous hash is the hash of the prior block in the chain.

To use Blockchain, the owner of the blockchain would decide whether they would like to have a private blockchain or a public blockchain. Let’s assume that the Blockchain was set up to be private and is used to allow members within a blockchain to perform transactions which involve paying and receiving Bitcoins to and from each other. When person A pays 10 Bitcoins to person B, this transaction is sent to all nodes in the Blockchain to calculate whether or not person A has enough coins in order to pay person B 10 Bitcoins. The calculation happens on each separate node. When the transaction is confirmed, the values are updated across all nodes.

 

Why use Blockchain at all?

Many of you might be wondering about the benefits of blockchain; why someone would even choose to opt for this decentralized approach rather than the traditional centralized approach many of us have become accustomed to. The key benefit of blockchain is trust. How much do you trust that democratic voting is not rigged? How can you trust a company when it says that 20% of its profits will be going to a charitable organization and not into their own pocket?

Blockchain’s original purpose was to be the software for Bitcoin to work on. Bitcoin is a type of cryptocurrency. Blockchain was designed by Satoshi Nakamoto in his 2008 paper. I would encourage you all to read the original (Nakamoto, 2008). Cryptocurrency is a digital coin which may be used to buy services and goods. Nowadays, many people around the world have seen the potential for Blockchain to be much larger than just for cryptocurrencies.

The benefits of Blockchain stem from it being a decentralization of data. The decentralized approach means that nobody is the owner or in charge of this data. To go back to the example of a bank, a bank is in control of the client data. In a decentralized system, everyone in the blockchain has access to the data and nobody is in control of it. This adds a level of transparency to transactions and other data. If person A pays person B then this is visible to all members of the blockchain.

Another benefit of Blockchain is integrity. If a block in a distributed ledger, such as blockchain, is tampered with, the hash is recalculated. When the next node checks for the previous node’s hash, it realizes that the values do not match and deems as invalid. There is the risk that all the hashes are recalculated for all blocks in the blockchain. Thus, to reduce the chances of tampering, all nodes will receive a complete replicated version of all the nodes and a consensus algorithm will ensure that they all match. This makes tampering very difficult.

Although every person in the blockchain will have access to all blocks of data, cryptography is used to ensure that the identification of the data remains private. Cryptography is the software which ensures that the data is encrypted and protects the data against tampering. A calculated identifier is granted to each user, thus hiding true identity to the user. Users will know that user 100, for instance, has 10 Bitcoins in his or her account but would not know who user 100 is. This adds a level of confidentiality.

 

These are just some of the benefits of blockchain. I will be going into more detail in other articles. From this article, you should now have an idea of what blockchain is, how it works and the benefits of blockchain. Feel free to share with me any thoughts or feedback regarding this article, as well as suggestions for future topics.

 

References

Nakamoto, S. (2008, October 31). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from Bitcoin.org: https://bitcoin.org/bitcoin.pdf