What is blockchain technology and how does it work?

It’s probably safe to say that the terms ‘cryptocurrency’ and ‘blockchain’ are two buzzwords that have exploded into the common lexicon over the past few years.

Regardless of how clued-in you are to the FinTech sector, it’s unlikely that you haven’t come in contact with at least these two words at some point, whether it be tangentially through Bitcoin and other cryptocurrencies, or even Estonia’s practical use of the blockchain, or any other thousands of cryptocurrencies out there.

While cryptocurrency is a big topic in and of itself, the more important term here is blockchain. Cryptocurrency while being high-profile, is only one of the ways to implement blockchain technology—it is one way to use the blockchain, and just so happens to be one of the best uses so far—but blockchain has far more other uses than just that.

But, what exactly is “a blockchain”, and what’s all the fuss about? Why are a large majority of companies actively taking an interest in the blockchain? And how can the idea of blockchain technology be implemented outside of cryptocurrencies?

This are some of the questions were going to answer over the next few months’ posts, starting with this one: what is blockchain?

A thousand spreadsheets

Introduction to blockchain technology

You might have already come across phrase ‘decentralized public ledger’, but, let’s be honest, raise your hand if you actually know what that means—no judgement.

Essentially, a blockchain is a digital spreadsheet, or ledger, that contains within it pages of information—the records of transactions, for example.

Each page of the spreadsheet contains entries, and each entry of the spreadsheet stores three things:

  1. When the transaction occurred and what the transaction consisted of,
  2. Who the transaction was between, and
  3. A name that distinguishes this entry from all other entries before it.

Each page in this spreadsheet can only hold a certain amount of information, so each time space on that page runs out it is given its own unique identifying name and is added to the spreadsheet. Then, a new page can be opened and begin to be filled with entries—thus, pages can consist of information about thousands of transactions and there can be thousands of pages.

Instead of storing this spreadsheet in one central place and having one master spreadsheet, it is instead duplicated thousands of times and is distributed to just as many different locations—each copy being independently and equally the “master” spreadsheet.

The caveat is that each time another page is added to any copy of the spreadsheet, and its contents has been verified as true and having indeed occurred, all the other copies are automatically updated to reflect the addition.

This, in a nutshell, is what it means to to have a decentralized public ledger.

Now, if you’re still with me, it’s time to bring it all back to blockchain jargon:

  • The entire shared spreadsheet itself, made up of hundreds of thousands of pages, is the ‘blockchain’;
  • The pages, each filled with digital data, are called ‘blocks’;
  • The unique names given to pages/blocks are called ‘hashes’;
  • Each copy or instance of the spreadsheet exists on a computer which is called a ‘node’ (each node being an ‘administrator’, and has the same level of privileges as all the others);
  • Each and every node is connected directly to every other node over a ‘peer-to-peer’ (p2p) network (as opposed to meeting in a central location/server),
  • And the p2p network runs on something called ‘the internet’.

But, you may be asking, why is it then called a blockchain; what does a chain have to do with anything?

Linking blocks together

Introduction to blockchain technology

Once a transaction has occurred, has been verified by thousands of computers (a process we will talk about in a later article), and the block has been filled with information of other validated transactions, the block is then added to the blockchain.

But, in order for the block to be added, it first needs to be given a unique name that identifies the block and distinguishes it from all the other blocks in the blockchain. The block is also given another piece of identifying information: the name of the block before it.

These two pieces of information are what is called the block’s ‘hash’. This hash is determined by a cryptographic algorithm that ensures that each hash is unique to all other hashes. Because each block’s hash has a name in addition to the name of the block preceding it, they are essentially linked.

In other words, the page is connected to the page before it—or, a block is linked to the block preceding it, and that previous block is likewise linked the block that precedes it, which is also linked to the block before that, and so on—making a chain of blocks, i.e. a blockchain.

Too many blocks in the box

Why blockchain technology's structure makes it so innovative

With all this said and done, here comes the reason why blockchain technology, as we’ve looked at it so far, is so useful.

Firstly, the blockchain is durable and robust: the distributed, decentralized public ledger architecture—or Distributed Ledger Technology (DLT)—means that there is no single point of failure.

Storing data in one place makes whatever is storing that data a particularly vulnerable target—take a look at any of the high-profile hacks in the recent years. However, if a node with the blockchain is “hacked” or corrupted, there are thousands of other nodes that will remain unchanged, as there is no one “definitive” copy.

Additionally, DLT means that the likelihood of one single entity controlling the entire blockchain—or even the majority of the nodes—is unlikely and would take an absurd amount of computing power just to do so, as it would mean hacking into thousands of computers.

Secondly, blockchain technology is transparent and immutable: a block is public and almost impossible to manipulate.

Remember that before a block is added to the chain it is given a hash, which is the name for everything that the block contains. If something were to be changed in a block, that hash would no longer relate to the block’s contents. As each block’s hash includes the hash of the block before it, editing one block would mean changing its hash, which would mean that the next block in the chain would not match.

Thus, editing one block’s hash would mean having to change the hash of the block following it, and the one after that, and the one after that—hundreds of thousands of times. This would also have to be done for each and every instance of the blockchain—or the majority of instances, to be more accurate.

Ultimately, this means that once the data has been added to the blockchain it is almost impossible to manipulate. Once ‘hashed’, a block is unchangeable, and is available to be viewed by anyone—for example, you could look at Bitcoin’s blockchain right now.

Blockchain technology is a testament to transparency and longevity and goes a long way to ensuring that the data, systems and processes that might use blockchain remain accurate, traceable and secure.

Digital Cabinet is always keeping our eyes on the future, trying to see how we can use future innovations today, and how to bring your business into the future with us. While we aren’t on the blockchain yet, it is certainly something we see ourselves doing in the future, as our CEO spoke about.

Blockchain is an innovative technology as it is poised to revolutionize the way information and services are delivered on the internet in almost every vertical and sector—from mobile technology and its future,  to healthcare and insurance, to business, and even has the potential to make the far-future technology of quantum computers accessible to all.

Thank you for joining us in the first part of our little series about Blockchain—we hope you enjoyed it. Join us next time when we’ll go into a little more detail about how blockchain works and what makes this innovative technology so secure.

Until then, maybe we should all consider reverting back to our childlike wonder, back to a time when playing with blocks was something we all enjoyed and was foundational to our development.

Update: This article now has a sibling! Following the link to read Understanding Blockchain: Building the Future, Block by Block (Part 2).


You can find out more about Digital Cabinet at www.digitalcabinet.co.za

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