Blockchain is the latest technology, the interest in which has grown along with the popularity of cryptocurrencies. Today it is widely discussed not only in the world of finance. They are already trying to use blockchain for storing and processing personal data and identification, in marketing and computer games. But what is blockchain?
Ultimate Guide: Explaining the Blockchain in 6 Steps
Blockchain is the technology that underpins cryptocurrencies like Bitcoin and Ethereum. It’s essentially an ingenious way of storing information online that allows new types of applications on the internet.
Traditionally, data is stored in tables that can be accessed and edited easily. It is how data on your computer is stored, and how most data is stored in the world. The problem with this way of storing information is that it’s difficult to know when information has been changed or copied. Think about digital currency. If you own one digital coin, what is stopping you from simply using copy-paste to make more copies of this coin and increasing your wealth for free?
The traditional solution to this is to have one central authority that keeps track of how many coins everyone has. It is essentially what banks do for you. The downside is that the bank holds all of the power in this relationship.
Blockchain takes a different approach. When you make a transaction, it gets added to a public “blockchain.” It’s done in a way that everyone can see what transactions have been made, and who owns what currency. However, nobody has central control over transactions. This lack of a central controller is what makes blockchain unique.
Blockchain was developed to allow decentralized currencies like Bitcoin. But now it’s attracting interest from fields such as finance, identity management, travel and mobility, aerospace, defense, healthcare, law enforcement, voting, the Internet of Things (IoT), and many more. Here’s how it works in six steps.
Step 1 — Transaction Data
The Bitcoin blockchain is essentially a long list of transactions. In fact, it’s all of the bitcoin transactions that have ever happened. The list is broken up into “blocks” containing around 3,000 transactions each.
When you want to make a transaction with someone on the blockchain, you can look back at the whole history of transactions to see if the account you’re transacting with really has accumulated enough funds to transact with you. If they do, you can safely go ahead with the transaction.
Note that the account may have unique addresses; in this case, you will not know for certain how much money it contains.
Step 2 — Attaching Blocks to the Сhain
New blocks containing transactions are continuously added to the end of a blockchain. On the Bitcoin blockchain, they are added every 10 minutes or so. Each of these blocks is linked to the previous block, forming a “chain” of blocks. This chain links continuously from the most recent block all the way back to the first block ever created.
Special users are tasked with creating new blocks on a blockchain. These are called miners. Miners perform computations that make sure each new block is valid. They do this by checking if each new transaction is valid using a digital signature.
Step 3 — How to Create a Digital Signature
Anyone using a blockchain network can attempt to add new transactions to the blockchain. So, there needs to be a mechanism to make sure only valid transactions can be added. It is done with something called a digital signature.
Creating a digital signature uses complex cryptography beyond the scope of this article. The basic principle is that each account on a blockchain is associated with a public key and a private key. Transactions encrypted with a public key can only be decrypted with the right private key. As you have the private key to your unique blockchain account, you can prove your identity by decrypting a message with your private key.
Step 4 — When Does the Signature Meet the Requirements?
A valid digital signature proves your identity on a blockchain. It proves that you really are the owner of a certain account on a blockchain. When you make a transaction, your signature is verified by the miners that add your transaction to the next block on the blockchain.
The blockchain miners group all valid transactions into a block. This block is then put through a process called a hash function. It means the data in the block is encrypted and converted into a series of numbers and letters. Once the hashing is complete, the block is added to the blockchain.
Step 5 — How Does This Contribute to the Integrity of the Blockchain?
Solving the hash function described above is an essential step. This process is designed to be extremely difficult to do, taking an immense amount of computer processing power. It makes it almost impossible to add falsified blocks to the blockchain, as you would need to recalculate the hash functions on the blockchain. Thus, hashing contributes to maintaining the integrity of the blockchain.
Step 6 — How Is Blockchain Regulated?
Through the processes described above, blockchains allow anyone to transact with anyone else online with essentially no oversight. There are also platforms that allow people to transact with many other types of assets, too. A blockchain-based platform example is Ethereum. It is proving a problem for regulators all over the world.
A blockchain is run by a decentralized network of people, so there is no company or individual to target. Countries have taken many different approaches to regulate blockchain. Some have opted for relaxed measures, while some have cracked down hard. Regulation is still constantly changing all the time. If you’re planning on using blockchain networks like Bitcoin or Ethereum, you should keep up with how they are regulated.
Blockchain is a unique technology that’s starting to impact many different industries. Having a good understanding of how blockchain works, and why it matters, is becoming essential for many people. Luckily, you don’t need to understand all of the technical details to know how it works. If you can intuitively understand transaction data, transaction blocks linked together in a chain, and digital signatures, you’re well on your way to understanding blockchain technology.