Blockchain Technology Explained
At the heart of bitcoin, ethereum, and most major cryptocurrencies is a digital technology called the blockchain. In this post we’ll try to explain blockchain technology and show how it powers cryptos like bitcoin.
While blockchain technology has yet to find a strong foothold outside of the crypto space, its potential applications could revolutionize society the way the internet did in the 1990s. Even if you’re skeptical of bitcoin’s staying power, the underlying technology that powers it has some exciting features and possibilities.
What Is Blockchain?
We’ll start by strictly defining blockchain, and then breaking down what it actually means. The dictionary definition for blockchain is “a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network.”
Some of the more technical applications of blockchain technology are incredibly complex, but in general, the tech is somewhat self-explanatory. Blockchain is basically a “chain” of “blocks,” where the chain represents a massive, secure database and each block stores data. Whenever a cryptocurrency transaction is processed, a block is added to the chain to represent it.
Blocks store information about the transaction, the parties involved, and unique hashes (for an explanation of hashes, see below) that distinguish them from other blocks. Blocks can store enough data for hundreds or thousands of transactions, but thinking about them in this one-to-one fashion can help add context to the process.
Everyone has access to the blockchain, and no single entity controls it. This means it’s distributed and decentralized, two common words associated with blockchain. For instance, you can view bitcoin’s blockchain here.
How Does Blockchain Technology Work?
Transactions are stored within each block, and after a block is full, a new block is added. Think about pages on a ledger – when one page is full, you flip to the next one. The difference is on a blockchain, the next “page” isn’t there yet. To generate the next block, miners compete to solve a complex mathematical equation in a process called “proof of work.”
When a miner solves a computation, they form a new block and confirm the transactions in it. Along the bitcoin blockchain, miners are rewarded with bitcoin (BTC) for completing an equation. Creating new blocks gets more difficult every time as the correct value of the equation – called a hash – must be less than the previous hash. This way each additional block makes the entire chain harder to manipulate since a small edit to one block would render it incompatible with previous blocks.
After a block is formed and transactions are added to it, they must be further verified. While standard transactions would be approved or denied by your bank, transactions along the blockchain are validated by consensus of the blockchain network.
In the case of bitcoin, more than 5 million computers make up the network, so millions of computers will quickly verify the details of your transaction. Since the transaction data is public, every other computer has access to it, and once the information is confirmed by consensus, it’s added to the blockchain.
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How Safe Is Blockchain Technology?
The amount and time of the transaction are recorded, as well as the public keys of the users involved. Each block has a unique hash number that’s part of the record as well, which helps keep the chain consistent across the network. Each hash points back to the hash of the previous block, so if someone attempted to maliciously edit a block they would need to change every subsequent block in the chain as well.
Since every computer in the blockchain network has a copy of the blockchain, any manipulation of it becomes incredibly difficult. Imagine that someone attempted to edit the dictionary to change the definition of a word. While they may succeed in editing one copy, millions of copies of the dictionary will still have the correct definition. The only way to actually effect change would be to edit a majority of all the dictionaries in the world. The same logic applies to the blockchain.
While data about transactions is made available on the blockchain, none of your personal data is shared with the network. Transactions are not private, but you’re not at risk of exposing any private data on the blockchain.
Blockchain Hacks
As detailed above, blockchains are very resistant to hackers and outside malware attacks as well. There are only two ways for hackers to attack a blockchain, and both require time and energy. The first is a 51% attack, where hackers coordinate to control a majority of the network and manipulate it.
This happened to the cryptocurrency bitcoin gold in 2018 when malicious attackers stole approximately $18 million through their attack. Until the success of the bitcoin gold heist, crypto enthusiasts assumed mining networks, especially the biggest ones like bitcoin, were too large for a successful 51% attack, but the rise of mining conglomerates like Bitmain, with custom-made mining hardware, has brought this assumption into question.
And even if a blockchain itself is secure from attack, few people who hold cryptocurrency are nodes in the blockchain. They keep their crypto-cash on an exchange, and exchanges are notoriously insecure and likely to be hacked.
What Is Blockchain Used For?
Bitcoin was the first-ever practical application of a blockchain, but the technology has expanded since its launch. It’s also become the basis for most altcoins, including ethereum and litecoin.
Beyond cryptocurrency, we’ve yet to scratch the surface of the potential applications of blockchain technology. Since blockchain is transparent, tamper-proof, and decentralized, it can be used as a near-perfect bookkeeping system for almost anything.
For instance, Follow My Vote is a startup that aims to utilize this technology to eliminate voter fraud. By leveraging blockchain in the same way that it creates a public ledger of crypto transactions, it could create an immutable record of votes that is immune to fraud and ensures everyone is counted. It’s a radical idea, but one of many ways blockchain may impact our lives in the future.
