So, what is blockchain?
It’s one of the most puzzling questions we find ourselves trying to answer when first discovering cryptocurrencies. So getting blockchain explained is essential.
The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.
Don & Alex Tapscott, authors Blockchain Revolution (2016)
Now, as we’re all newbies here. Here’s the blockchain explained for dummies:
- Imagine the blockchain as a digital database, just like an Excel spreadsheet.
- This database is typically shared across a large network containing many computers (known as “nodes”) and it is completely public. I say “typically” because it can technically be formed by any number of nodes. The more nodes, though, the more secure it is — that’s why it’s good to have a large number of nodes running the blockchain!
- Every time the network makes an update to the database, it is automatically updated and downloaded to every computer on the network.
- Blockchain technology is secured with cryptographic techniques, making it near impossible for hackers to make changes to it. The only way to make changes would be to hack more than half of the nodes in the blockchain, which again, is why it is more secure to have more nodes/computers running the blockchain.
That’s your blockchain explained in simple words. So, now when someone asks you “what is blockchain?”, you have two strong answers to choose from. You can thank us later…
How does blockchain work in the case of Bitcoin?
Bitcoin was the first cryptocurrency to use blockchain technology. It was invented by the person, or group of people, that go by the name of Satoshi Nakamoto. (Strangely enough, nobody knows who Satoshi Nakamoto is.) The sole purpose of Bitcoin is to act as a store of value. It allows for peer-to-peer transactions that do not need a third party, such as PayPal or a bank.
Once the nodes agree that the transaction is real, it is then added to a “block” (which is why it is called a blockchain) and is placed below the previous block of transactions in the ledger. For a transaction to be valid, the computers on the network must confirm that: (1) The account holds the amount of bitcoin that the user wants to send.
(2) The amount hasn’t already been sent to someone else.
For example, let’s imagine that Tom tries to send $10 of Bitcoin to Ben. Tom only has $5 worth of Bitcoin in his wallet. Because Tom doesn’t have the funds to send $10 to Ben, this transaction would not be valid. The transaction will not be added to the ledger. This means that nobody can ever spend the same money twice! This can often be a big problem for standard banks and payment systems.
Let’s compare how data is stored and shared in standard (non-blockchain) systems to how it is stored and shared in a blockchain system. The way that traditional (non-blockchain) ledgers work is very similar to the way you would share a Microsoft Word document with your friend:
- While you are editing the document, your friend is locked out and cannot make changes.
- Once you have finished making your changes, you send it to your friend to edit it further.
- Now while your friend is editing the document, you are locked out and cannot make changes until they are finished and send it back to you.
In a blockchain system, however, all users can view the changes while they are being made. The data is accessible in a secure and shared environment, instead of being locked to one company or person at a time (at the risk of losing the data). For example, if it the data was stored on one computer and that computer was hacked or shut down, the newest version of the data would be lost. Now to get blockchain explained: with the blockchain, the data is stored on all the computers/nodes that run it. This means the data would not be at risk if one of the computers/nodes was hacked or broken
As you can see, blockchain technology does not just benefit cryptocurrencies. It benefits many different industries. Imagine the amounts of legal, health, accounts and customer data etc. that should be used this way. This is just one of the many advantages of blockchain technology! Now, let’s look at some of the others.
Blockchain explained: Key Advantages
Most businesses use different systems, so it is hard
for them to share a database with another business.
|Trust & Transparency
Trust is an essential part of getting the difficult
world of blockchain explained.
As the blockchain is a trusted peer-to-peer network,
it removes the need for a central third party.
Once a transaction is confirmed, it is stored on the
ledger and protected using cryptography.
Blockchain is a decentralized peer-to-peer network
and there is no central point of failure.
Decentralization is one of the core — and most
important — advantages of blockchain technology.
Most businesses use different systems, so it is hard for them to share a database with another business. That’s why, it can make it very difficult for them. So, the answer is blockchain technology! As a blockchain can act as a single shared database for both businesses to work from, sharing data is much easier for them on a blockchain system.
Blockchain explained: Blockchain in real-world industries
In order to help you understand some of the other advantages that blockchain offers to businesses, here are some examples of industries that are currently using blockchain technology. This will surely get blockchain explained:
So, how can personal data hacking be stopped using the blockchain? Well, your data is currently held in a centralized database (just like at Equifax). A centralized database is much easier to hack into because it uses one main server. In this case, all the hacker must do to steal the data, is hack the main server. In a blockchain, there is no main server — there is no central point for a hacker to attack! Here’s a great advantage of blockchain explained.
Before blockchain technology, people could only sell their leftover energy to retailers (the third party). The prices they sold the energy at to retailers were very low because the retailers would then sell the energy back to other people and make a large profit. As blockchain technology removes the third party, people can agree on a price that is fair for them both — cutting out the cost that was previously taken by the retailers.
The examples above are only a small part of what is possible using the blockchain. Blockchain is being applied to many more industries than the ones listed above. Here are some of the other industries that are currently using blockchain to improve the way they operate:
- Education (like BitDegree!)
- Marketing & advertising
- Supply-chain management
- Government systems
- Music & video sharing
With so many advantages to using blockchain, the possibilities really are endless! Blockchain gives us all something to look forward to.
Blockchain explained: Conclusion
Let’s think about what we’ve learned in this blockchain explained guide and highlight some of the most important features of the blockchain to remember:
What is blockchain?
- A peer-to-peer network that removes the need for trusting third parties
- Transactions are processed quicker and cheaper than standard (non-blockchain) systems
- It is a public database and all transactions are visible on the network, preventing cyber attacks
- The database cannot be changed without more than half of the network agreeing, making it much more secure
- It is not controlled by one single company and it has no single point of failure
- Blockchain can be used in many different industries — not just digital currencies
How does blockchain work?
- It works as a large database that is shared across a network of nodes (computers)
- The nodes on the network work together to verify transactions and are rewarded with the blockchain’s currency — a process known as mining
- Once a transaction is verified by the network, the transaction is placed in a block
- New transaction blocks are placed — in order — below the previous block of transactions
- All transactions are stored in a distributed database (ledger)
- It is extremely difficult for a hacker to change the transactions because they need control of more than half of the computers on the network
How will this benefit large industries?
- It removes the cost of third parties
- Payments and data are processed much quicker
- Database management between businesses is much easier
- Data protection/security is improved on a large scale
Final words to getting blockchain explained