WHAT IS BLOCKCHAIN ?
A sophisticated new technology
Before plunging into the open waters of Bitcoin, you might want to pause at the shoreline for a second and ask yourself the following question: what’s hiding below the surface, down there in the deep blue digital sea? Don’t worry, it’s not a sophisticated white shark with a thirst for human flesh. But the answer is equally as sophisticated; it’s the Blockchain.
Now, you’ve probably heard about the Blockchain, but maybe you’re not sure how it relates to the digital currency that’s taken the world by storm. And a bit of confusion is in order. Because Bitcoin and Blockchain are closely linked.
Bitcoin: the first Blockchain application
Let’s start at the beginning. Back in 2009, when Bitcoin was released as open source code by the anonymous collective Satoshi Nakamoto, Blockchain was a huge part of the solution. As stated in the collective’s white paper abstract announcing the era of both Bitcoin and Blockchain, Bitcoin is a “purely peer-to-peer version of electronic cash allowing online payments to be sent directly from one party to another without having to go through any financial institution.”.
Accordingly, Bitcoin was launched with the intend to bypass government currency regulations and to avoid the use of a third-party intermediary when making transactions. But to do this, you’d need a way to prevent double-spending, meaning a way to prevent the same user of spending the same token more than once. Enter blockchain. To solve the double-spending issue Satoshi Nakamoto proposed a “peer-to-peer network using proof-of-work to record of public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power.”.
And so it happened that Bitcoin became the first application of Blockchain, hence the confusion between the two.
Read the whitepaper here
Why Blockchain is such a big deal
Blockchain is the underpinning technology that maintains the Bitcoin transaction ledger. Basically, it’s a continuously growing list of records, called blocks, that’s duplicated and stored across a network of computers (called ‘nodes’). This open peer-to-peer network of computers adheres to a protocol for validation new blocks which makes it very difficult to change what has already been recorded. Which, in turn, makes it very hard to tamper with. And here’s why:
The Blockchain picked apart
A single block is made of three components: some data, hash of the block and hash of the previous block. The data stored in the block various according to the type of blockchain. In the example of Bitcoin, the block stores details about a transaction, i.e. the sender, receiver and amount of bitcoins. A hash is sort of a fingerprint in the sense that it’s always unique. It helps to identify a block and its content. Once a block is created, its hash is being calculated. If something is changed inside a block, the hash changes as a result. This makes hashes quintessential for detecting block changes. The hash of a block points back to the previous block, chaining them together in a… you guessed it: blockchain.
Now, if someone changes (i.e. tampers with) data in a block, it immediately alters the hash of the block itself and makes all the following blocks invalid because they no longer store a valid hash of the previous block. But in principle you could tamper with a block and then make a powerful computer recalculate all the other hashes to make the blockchain valid again.
Proof-of-work and trustless consensus
To avoid this, Blockchain employs a method called proof-of-work. It’s a mechanism designed to slow down the process of generating new blocks. For a block to be validated by the network, miners must complete a proof-of-work which covers all the data in the block. In the case of Bitcoin, it takes about 10 minutes to calculate the required proof-of-work to create a new block. So, to tamper with a block in the Blockchain you’d need to not only recalculate all the hashes, you would also need to redo all the proof-of-work that came after it.
But wait, there’s more. In addition, the Blockchain is also distributed amongst its peers. This means that when a new block is created, it’s copied and send to everyone on the network for them to validate. If everything checks out and the block hasn’t been tampered with, everyone adds that block to their own chain of blocks. This is called trustless consensus.
In the end, this chain system of proof-of-work and trustless consensus makes Blockchain a very secure technology and hence a valuable problem-solving tool for many industries.