Over the past few years, you have consistently heard the term ‘blockchain technology,’ probably regarding cryptocurrencies, like Bitcoin. In fact, you may be asking yourself, “what is blockchain technology?” It seems like blockchain is a platitude but in a hypothetical sense, as there is no real meaning that the layman can understand easily.
As blockchain continues to grow and become more user-friendly, the onus is on you to learn this evolving technology to prepare for the future. In this article, we will break down the meaning behind “what is blockchain technology and how does it work?” for your understanding.
History of Blockchain
Satoshi Nakamoto, whose real identity still remains unknown to date, first introduced the concept of blockchains in 2008. The design continued to improve and evolve, with Nakamoto using a Hashcash-like mETHod. It eventually became a primary component of bitcoin, a popular form of cryptocurrency, where it serves as a public ledger for all network transactions.
What Is Blockchain Technology?
Blockchain technology can be defined as a system of decentralized digital public ledgers that store transactions. Every transaction in this ledger is authorized by the digital signature of the owner, which authenticates the transaction and safeguards it from tampering. This transactional information is then stored in chains of blocks — hence the name “blockchain.” Thus, the information that the blockchain contains is highly secure.
In layman terms, think of the blockchain as a Google spreadsheet shared among numerous computers in a network, in which the transactional records are stored based on actual purchases. The fascinating angle is that anybody can see the data, but it is highly likely that they can’t corrupt it.
How Does Blockchain Work?
All information on a blockchain is stored in digital files called blocks. These blocks aren’t owned by any central entity; hence, they are decentralized. Several elements make up the workings of the technology behind blockchain.
Decentralized Authority
The whole premise of blockchain is focused on its decentralized nature. It is this idea that gave birth to Bitcoin in 2009. Preceding this, on October 31, 2008, was the publication of the Bitcoin white paper, entitled Bitcoin: A Peer-to-Peer Electronic Cash System, by its pseudonymous creator, Satoshi Nakamoto. This document lays out how Nakamoto envisaged blockchain technology would work and his vision for a monetary system away from the reaches of banks: a system for the people.
Nakamoto proposed a “purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” On January 3, 2009, the genesis block on the Bitcoin blockchain was created. This was the first step in revolutionizing traditional, centralized bank-focused financial systems as we know them.
What Are Nodes?
Nodes are computers that connect to each other to share information through the public ledger that is a blockchain network. Each node stores a copy of the blockchain and verifies every transaction made on it. Information tampering is a rare occurrence, as the information and records for every node on the blockchain would need to be altered.
These nodes play an important part in the Bitcoin mining process because, in the absence of any central entity, it is the job of these nodes to align in agreement to confirm the validity of a transaction on the network. Only when this verification happens can a block be added to the blockchain, and miners get their rewards. These nodes “agree” to validate transactions through consensus mechanisms, generally Proof of Work (PoW) and Proof of Stake (PoS). PoW consensus is used by Bitcoin and many other cryptocurrencies, such as Litecoin, which is a “fork” or spin-off of Bitcoin.
Consensus Mechanisms
While PoW and PoS are the main two consensus mechanisms in crypto, others exist as well.
PoW: Miners compete against one another in order to solve a complex mathematical problem, known as a hash. By doing so, a miner validates a new block on the blockchain and receives a reward in the form of new crypto coins.
PoS: As opposed to PoW, the “winning” miner in PoS is chosen at random. However, the higher the stake a miner has, the more chance that miner has of being chosen. PoS will be implemented on the ETHereum 2.0 upgrade.
Delegated Proof of Stake (DPoS): This is different from POS in that delegates are effectively elected to mine new blocks and ensure consensus rules are maintained. If they fail to do their job properly, they can be voted out, the same way politicians can be. Cryptocurrencies such as EOS use this consensus mechanism.
Cryptographic Hashing
The process of cryptographic hashing is fundamental to ensuring the security of a blockchain. It involves one-way encryption of data to a unique piece of text and is a process that cannot be reversed. On the Bitcoin blockchain, the result of the hashing process is a 64-character piece of text called a hash.
Key Features of Blockchain Technology
Blockchain is an emerging technology with many advantages in an increasingly digital world:
- Highly Secure – It uses a digital signature feature to conduct fraud-free transactions making it impossible to corrupt or change the data of an individual by the other users without a specific digital signature.
- Decentralized System – Conventionally, you need the approval of regulatory authorities like a government or bank for transactions; however, with Blockchain, transactions are done with the mutual consensus of users resulting in smoother, safer, and faster transactions.
- Automation Capability – It is programmable and can generate systematic actions, events, and payments automatically when the criteria of the trigger are met.
Closing Thoughts
Blockchain is a revolutionary technology that is only just getting started. It is changing the traditional ways we’re living our lives and has already revolutionized the way we think about money as a digital asset – just look at the number of queries for wanting to learn “what is blockchain technology and how does it work”.
Not only does blockchain anonymity offer an extra level of protection for information, but it also offers convenience for accessing information as never before. Blockchain gives access to information, freely available to everyone. In the years to come, it will change the way we think and act in many other areas of our lives.
