What is blockchain technology?
Before even talking about cryptocurrency, it’s important to first understand what a blockchain is, how it works on a basic level, and its application. Many people mistakenly assume that blockchain and cryptocurrency are the same. But this is not necessarily the case. Blockchain has far more use cases than just cryptocurrency. A blockchain doesn’t necessarily have cryptocurrency built on it, but a cryptocurrency is built on a blockchain.
Blockchain technology is where transactions and data are stored chronologically. Each block on the chain has unique data and the blocks combine to complete a chain.
These are the key features of a blockchain
1. A blockchain is decentralized: No one can modify or manipulate the way a blockchain should act. Blockchains use a peer to peer network and everyone is allowed to join.
2. A blockchain acts as a distributed ledger. A distributed ledger is a digital database that runs on a distributed network in diverse locations rather than having one record of data in a centralized location that a person or body can control or manipulate.
A node is a computer in the blockchain network that can execute certain functions like sending and receiving information, creating more transparency. Each node gets a full copy of the blockchain and the information can be used to verify that everything is in order and make sure it hasn’t been tampered with. If everything looks good, each node adds this to their own blockchain. Everyone in the network creates consensus where they agree which blocks are valid and which aren’t. Tampered blocks will be rejected by nodes in the network.
How does a blockchain work?
Each block on a chain contains information and the blocks can’t be tempered with or backdated. This makes the information stay secure. Unlike other forms of record keeping, it’s easy to change and manipulate information without anyone knowing. Once data is recorded on a blockchain, it’s hard to change it.
Every block has:
- Data
- Hash
- Hash of the previous block
The kind of data that is stored inside a blockchain depends on the blockchain type. A Bitcoin blockchain for example, stores details about a transaction such as the sender, receiver and the amount of coins.
A block always has a unique hash, which can be compared to a fingerprint. It identifies a block and all of its contents. Once a block is made, its hash is being calculated. Changing something inside the block will cause the hash to change, meaning it’s no longer the same block. Each block has a hash of the previous block, which creates the chain, making this technology so secure.
Security of a blockchain
Distributed ledger technology makes it hard for hackers to attack the database. Because the data is transparent, it’s easy to trace back to the hacker. The hacker also needs a lot of computational power that might not be possible for the majority of them out there.
In this example, each block has a hash of the previous block. Block 6, points to block 5, and block 5 points to block 4. If you tamper with block 5, it causes the hash of the block to change. This makes block 6 and everything after invalid because they don’t store a valid hash of the previous block. Changing a single block makes all of the following blocks invalid. [make an image like this]:
But hashes alone aren’t enough to provide more security. Computers and a hacker could tamper with a block and effectively recalculate the hashes of all the other blocks to make the blockchain valid again.
To mitigate this risk, blockchains add another layer of security with proof of work or proof of stake systems. We’ll get into these details between these two systems in another video. Basically, with proof of work, a cryptographic puzzle is solved by miners to slow down the creation of blocks. It takes about 10 minutes to create new blocks. Miners do this to receive a block reward. To effectively tamper with a blockchain, you would need to tamper with all of the blocks in the chain, redo the proof of work for each block, and take control of more than 50% of the peer to peer network. Only then will the tampered block become accepted by everyone, which is almost impossible to do.
Instead of proof of work, which requires a lot of electricity and energy, many blockchains use proof of stake where validators add a stake (like a security deposit) and validate all of the transactions in a block. If everything checks out, it’s added to the blockchain.
Why use blockchain technology rather than a regular centralized database?
Imagine a central body like a university, bank, or company where information is managed by a single person or exclusive group of people. So if someone manipulated information, how would anyone know? That’s why people often get away with fraud or false records. People often take the person or organization’s word for it with no objective way of verifying the information.
But when you put the data on a blockchain, the way the technology is set up, the blockchain verifies whether data is true or false and you don’t need to trust someone’s word. Everyone in the network has a copy of the blockchain data and if someone were to try to manipulate information, everyone in the network would be alerted.
Examples of blockchain applications
There are a growing number of use cases for blockchain technology. Here are just a few examples.
- In health care, people can securely transfer confidential medical information depending on the patient’s health plans.
- In real estate, a decentralized title registry system can be used to make title issuance instantaneous and more accurate. There are many defects with title reports with the current data management systems.
- For artists, when they put their music rights on the blockchain, they can be recognized for their work and paid correctly.
- In the food supply chain, there is no transparency regarding the journey of food and this can result in the increased contamination of food. Blockchain technology allows for quick and easy verification of the history, location and status of a food product. Farm origin details, expiry dates, and processing data can be recorded on a blockchain.
- For government elections, with blockchain technology, people could vote on a mobile device anywhere in the world without worrying about hacking or data corruption.
- Blockchain also has personal identity use cases. By keeping social security numbers, birth certificates, birth dates and other sensitive information on a decentralized blockchain ledger, the government could see a drastic drop in identity theft claims.