In 100 years there is a possibility that some experts will declare that the blockchain was one of the major technological breakthroughs of the previous century. The applications that a blockchain can support are growing by the day it seems, yet most people have no idea about what the blockchain is or how it works.
Cryptoswede has prepared a beginner’s guide to answer the question, “What is the blockchain?” We’ll try not to bog things down with too much technical information. By the end of this article you might not be a blockchain expert, but you will have a much better grasp of the technology.
Bitcoin and Blockchain – The Beginning
In 2009 a whitepaper published under the pseudonym Satoshi Nakamoto began to make ripples in cryptography forums. The paper was entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” and it described a type of virtual currency that could be exchanged for good and services. Those with an interest in such matters took notice, but few people paid much attention to the technology that underpinned this thing called Bitcoin. The paper’s sections on something called the blockchain left people somewhat confused.
One of the first mistakes made by those who read the paper was making the assumption that Bitcoin and the blockchain were one and the same. This is incorrect. Therefore, in defining what the blockchain is we need to establish this point:
- A blockchain is the technology that supports Bitcoin and other cryptocurrency platforms, not the tokens themselves.
With that being said, the best way to explain what the blockchain is and how it works is to use Bitcoin as an example. There are other blockchains. Some digital tokens have their own blockchains. Others are a fork of the Bitcoin blockchain. We’re going to stick with Bitcoin as our example because it is the one with which most people are familiar.
The Bitcoin Blockchain
The Bitcoin blockchain is essentially a digital ledger or record of every Bitcoin transaction that has ever taken place. Ledgers have been used for centuries to record financial transactions. The Chinese kept them on paper or clay tablets long before the evolution of modern society. And the evolution of society is why we have a blockchain today. It only made sense that a digital ledger would be created for the digital age.
An advantage of the blockchain is that it is a ledger that cannot be tampered with due to its structure. This makes it a more secure method of recording transactions. Each “block” of data on the blockchain is linked to the one before and the one after, providing the “chain” that is referenced in the name. In other words, trying to alter a single block becomes impossible.
A hallmark of the Bitcoin blockchain is a decentralized nature. This means that there is no governing body or central authority that oversees the ledger. Let’s contrast that with traditional fiat currencies like the USD or the EUR. Those currencies are issued by a network of central banks. In the United States you have a vast financial network that includes central banks and the Treasury Department. These institutions serve as governing bodies who have authority over how much money is printed, how it moves, and even the price it will cost you to borrow it from a lending institution.
In a blockchain there is no such authority. Instead, the accuracy of the ledger is maintained by miners. Miners are individuals on the network who use sophisticated computer equipment to verify transactions and the accuracy of the blockchain. As a reward for their work the miners, also referred to as nodes, are given Bitcoin. Mining is a complex process that is beyond the capability of the crypto hobbyist. Today it is reserved for those who can afford the expensive equipment, or for those who join a mining pool like the one offered by Genesis Mining.
The verification process is ongoing, 24 hours each day. As the transactions are verified, more blocks are added to the blockchain and more Bitcoin is created.
Advantages of a Blockchain
We have mentioned that blockchains are possessed of an almost impregnable security mechanism. This means that the record of transactions, and therefore the Bitcoin belonging to those who make the transactions, is far more secure. It is harder for someone to steal what belongs to someone else.
There is also a sense of security in the sense that it would be much harder for a blockchain to fail than it would be a bank. Think back to the events in Cyprus that happened not so long ago. People literally went to bed one night with money in their bank accounts and woke up the next morning to be told their money could not be accessed. The banks had failed. Those with deposits over 100,000 EUR were given shares of a failing bank in exchange for the money they lost, then watched in horror as the value of the stock plummeted. Others were only permitted to withdraw 100 EUR per day from an ATM machine. The entire banking system collapsed in a very short period of time.
It is unlikely that a blockchain could fail so spectacularly. A large part of the reason for this is the decentralized nature it possesses. Blockchains know no geographical boundaries. They do not depend upon the solvency of a currency to exist. Yes, the value of Bitcoin can go up and down, but there is no real risk of a blockchain failing in the sense that a bank could.
This is a very basic introduction to the blockchain. You now know what it is, how it works, and what purpose it is intended to serve. For more information on other aspects of the blockchain, please check out some of our other articles on Cryptoswede.