A blockchain is a distributed ledger of transactional data that’s secured by cryptography. Transactions are grouped together in blocks and linked together in a chain to create an immutable ledger that’s (nearly) impervious to fraud.
How is blockchain technology unique?
Current financial systems commonly use intermediaries to help facilitate trust between transacting parties. Credit card companies, banks, and payment processors are just a few of the middlemen in these roles. Although helpful, middlemen often bloat the system which lengthens the process and unnecessarily creates costs.
Blockchain technology removes the need for these intermediaries and creates a system of digital trust. It uses a network of computers called nodes to validate transactions and keep an accurate record of their history. This leads to quicker transactions times, improved data accuracy, and minimal costs.
How does blockchain technology work?
There are a few different components in a blockchain that you should know about.
As mentioned earlier, nodes are the computers that run and maintain the blockchain network. Each node has a copy of the ledger of transactions and they redundantly check the validity of new transactions that they add.
Because the transaction history is distributed across a network of nodes, it’s nearly impossible to maliciously manipulate it. The ledger is kept with majority agreement, so you would need to control at least 51% of the nodes on the network to make a change.
Transactional data are the building blocks of a blockchain (no pun intended). This data includes the source of a transaction, the recipient, and the amount being sent. A timestamp may also be included.
Sets of transactional data are grouped together in blocks and picked up by the network nodes. Once confirmed, a block is attached to the chain of already confirmed blocks. This is the blockchain.
Each block on the blockchain is run through a hashing algorithm like SHA-256. This produces a unique identifier, hash, for each transaction that’s a fixed length of characters. Now, instead of having to keep track of all the transaction data, you just need to know the hash to prove accuracy.
Hash pointers secure the blockchain. Each block has a hash made from the transactions in that block plus the hash of the block before it, the hash pointer. Because blocks are linked together with hash pointers, nodes only have to agree on the hash of the most recent block.
If you were to change the data in any previous blocks, it would cause a chain reaction of different hashes and hash pointers ultimately revealing that there was a change. Even a change to the genesis (first) block, would reveal itself. That’s the beauty of hashes and blockchain’s immutability.
Digital signatures are necessary to send and receive data on the blockchain.
A digital signature is comprised of a public address and a private key. These two things are connected through a mathematical relationship and form a key pair.
The public address is used to receive data and funds from other people on the network. You can share this freely.
You should never share your private key. This is what you use to sign your transactions when you’re the sender.
When sending a transaction, the nodes confirm that you are who you say you are through the connection of your key pair. They validate that the private key you used to sign the transaction matches the public address that’s listed as the source.
Who uses blockchain technology?
Blockchain technology began as a financial tool but has rapidly begun expanding into other areas as well.
On the financial side, banks have begun partnering with blockchain companies such as Ripple to make their global payment systems more efficient. Several stores and online retailers have also begun accepting cryptocurrency as a quicker, lower cost way to receive payments.
Other blockchain companies are working to make cryptocurrencies more spendable. They’re creating gateways in which you can spend whichever coin you hold regardless of whether or not the store you’re shopping at accepts it.
Another popular use-case for blockchain is the storage and transfer of data. Industries in which data accuracy and trust are crucial (medical records, land grants, and supply chain to name a few) have started incorporating this technology into their systems.
Other companies are using blockchain to create decentralized file storage. Think Google Drive or Dropbox, but you can loan out the spare space on your computer to other people.
The creation of Ethereum and implementation of smart contracts opened up the world of blockchain to more than just transactional data. Simply put, smart contracts use computer programming to execute the terms of a contract.
There’s really no limit to what smart contracts can be used for. They’re now found in gambling, loans, solar energy, decentralized exchanges, video games, and the list goes on and on.
Blockchain is decentralized technology that eliminates the need for a trusted intermediary in all types of transactions. Acting as a distributed ledger validated by a network of computers, blockchains are more secure, quicker, and cheaper to use than the current systems in place.
From payments to supply chains, nearly all industries are beginning to use blockchain, and it looks like the technology is here to stay.