What is the Blockchain?
By Paul McCoy, CIMA®
If you are new to the world of cryptocurrencies, you have probably heard or seen the word blockchain somewhere. It is one of those common jargons in the cryptocurrency space that many people don’t quite understand. Whether you are looking to invest in Bitcoin, trade some Ethereum or Ripple, or are intrigued by the cryptocurrency world and want to learn more about it, here is a guide to blockchain: the ingenious technology enabling the existence of cryptocurrencies and much more!
The blockchain technology was developed by a person or group of people know by the pseudonym Satoshi Nakamoto.1 The blockchain is described as an incorruptible digital ledger of economic transactions, and it can be programmed in such a way that it not only records financial transactions, but virtually anything with value. It is basically a decentralized digital ledger that keeps a record of all transactions taking place across a peer-to-peer network in real time.
The blockchain was developed to enable the recording of Bitcoin transactions, but its abilities to expand to areas other than cryptocurrencies are enormous. It can be used in the healthcare industry, automotive industry, financial services, and even in voting.2
How the Blockchain Works
You can imagine the blockchain as a book of records with a countless number of pages. Each page in this book is referred to as a block that can be programmed to record virtually anything. The pages (blocks) are then created one after the other and chained together simultaneously, creating a chain of blocks referred to as the blockchain.
The various blockchain records are then maintained simultaneously on a large network of networks, meaning that no single person or entity has control over the records' history. During processing, every time new information is accessed and updated, the changes made are verified and recorded before being encrypted and sealed off completely, unable to be edited again. The changes made are then saved and added to the general record.
When the next transaction happens, the process starts all over again, saving the new information in a new block that is encrypted and added to the previous block. This repeat process connects the very first version of record with the latest one, ensuring that everyone in the system can see the changes made throughout but can only edit the latest version.
An Example of Blockchain
As a good real-life example of how a blockchain works, imagine a group of about five people assembling a LEGO set together. In the process, each person can only add one piece to the creation at a time, and they can’t remove any pieces at all. Additionally, each person in the group has to agree where the next piece of LEGO goes. This way, everyone in the group can see all the pieces in the creation at any time, right from the very first LEGO, but they can only make changes on the latest piece.
Another example would be a group working on a collaborative document such as Google Docs. All members can access the document, view all previous changes in the document's history, and make changes to the latest version, but no one can edit anything in previously saved documents.
Salient Features of the Blockchain Technology
It is a distributed database (decentralized technology)
A blockchain is like a spreadsheet that is duplicated and distributed thousands of times across a wide network of computers. It relies on a large number of people to validate its operations, rather than relying on a single entity, such as a bank or a government. This is highly beneficial, as it ensures all records are kept public and remain easily verifiable. It also ensures that no centralized version of this information exists so hackers can’t corrupt it.
It is transparent and incorruptible
The blockchain network exists in such a way that it is able to check itself within a set period of time. This self-auditing ecosystem allows it to reconcile all the transactions happening within it in certain time intervals, say after every ten minutes or even every 20 seconds. This maintains transparency throughout the system, and corruption of information on the blockchain becomes virtually impossible.
It is durable and robust
Just like the Internet, blockchain technology has built-in robustness. To date, the Bitcoin blockchain has not had significant disruption since it began operations back in 2009. Rather, the problems associated with Bitcoin have only been as a result of hacking or mismanagement within organizations, but not as a result of the underlying blockchain concept.
All in all, the blockchain technology is too important an idea to get stuck with cryptocurrencies. As a highly secure system that can be constantly updated, verified by a decentralized network, and accessed by everyone, it would only make sense to see the technology penetrate into other key industries soon. In fact, some large institutions such as the Australian Stock Exchange are already creating blockchain systems to distribute and secure their financial data.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.