Digital Solutions & Data Responsibility
Wonder What Blockchain Is? You’re Not Alone. Blockchain Explained Simply
The topic of blockchain technology has been bandied about as an era-defining innovation since the first digital currency transaction was processed in 2009.
Its applications are being touted everywhere: financial services, supply chains, digital assets, smart contracts, and beyond.
But for your average person, the concept is not readily understood, and it’s easy to see why. Many explanations are technical and loaded with jargon, and indeed, it seems convoluted. Just what is it? Here is an explanation of blockchain explained simply.
What is a blockchain?
Just think of a blockchain as an extremely secure and transparent digital record of transactions. It is often referred to as a distributed ledger technology that allows information to be recorded and distributed, but not edited.
“It guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party,” Investopedia notes.
Due to the unchangeable nature of the data in a blockchain, this technology has a wide variety of applications through digital record keeping. Besides its already well-known application in cryptocurrency, it can be utilized for tracking packages and cargo, ensuring proof of origin of products (to prevent counterfeiting), tracking carbon and energy certifications, and more.
While applications are plentiful, understanding how blockchain works requires a deeper dive.
How blockchain works
Here is a typical scenario.
- Two parties engage in a currency transaction, which is recorded digitally into an “information block”.
- The block is then transmitted to a decentralized network where it is validated.
- Upon validation, the block is added to a chain of other blocks. This establishes the transaction’s record.
- Once the transaction is fully recorded, the currency can then change hands.
How this works is the crux of blockchain technology.
Each block in a chain contains three types of information: important data, a hash, and the hash of the previous block in the chain. Let’s take a closer look at each.
A) Blockchain data: A block contains key data relevant to the purpose of the blockchain. For instance, in a bitcoin transaction, the data will contain details of the Sender, Receiver and the Amount Transferred.
B) Blockchain hash: Based on the data, an encrypted output is generated. This is a hash. It serves as a unique digital fingerprint identifying the block and its contents.
Changing any of the block’s data will result in a change in the hash. This makes it possible to identify tampering.
C) Hash of Previous Block: What’s more, each block contains the hash of the previous block. This chains the blocks together, hence the name.
Since changing something in one block changes the hash, all of the subsequent blocks will be voided, as the hashes are misaligned, thereby nullifying a transaction. This is the first stage of security in a blockchain.
Proof-of-work to prevent tampering
In theory, if someone wanted to tamper with a data block, they would need to cover their tracks by recalculating all the blocks in the chain. To prevent this, there is another security feature of blockchain called proof of work (pow) that mitigates malicious tampering, notes Simply Explained in a YouTube tutorial.
Proof of work is a mechanism that slows the creation of new blocks. For instance, generating a new hash through a bitcoin transaction takes about 10 minutes of computing power before the new block is added to the chain.
“This [sic] makes it very difficult to tamper with the blocks because if you tamper with one block, you’ll need to recalculate the proof-of-work for all of the following blocks,” the tutorial explains. Recalculating them would be extremely time-consuming. Based on a 10-minute proof-of-work delay, it would take 362 years to recalculate the 19M bitcoins in existence today.
Validating blockchains through consensus
The final measure of security in blockchain-based technology comes through the mass distribution of the chain. Blockchains are not managed in a central database, but rather via a peer-to-peer network. So, if someone joins the network they receive a copy of the network’s blockchain. This is stored in something called a “node.”
A node is simply the device that stores the blockchain, like a user’s desktop or mobile device. A network of nodes evaluates each new block to assure its validity. Once confirmed the nodes add the new block to their individual blockchain. They serve as a consensus mechanism.
“In this way, nodes in the network create a consensus,” Simply Explained notes. Blocks are only valid if the consensus agrees, and the network will reject blocks that have been tampered with. It will validate blocks that are authentic.
“To successfully tamper with a blockchain, you’ll need to tamper with all of the blocks on the chain, redo the proof of work and take control of more than 50% of the peer-to-peer network.”
Public blockchain vs private blockchain. What’s the difference?
The more you dig into blockchain and blockchain platforms, the more the vocabulary and topics branch out. Part of this involves restricted level of transactions and participants. One point of confusion is the difference between public and private blockchains.
A public blockchain is open and anyone can access it and add blocks to the chain. There are key advantages to this. They are more secure and transparent, and have greater anonymity.
Bitcoin and Ethereum are examples of public blockchains.
Private blockchains, on the other hand, are run by a network of administrators, and participants need permissions to join. The nature of the centralized network reduces the transaction time and makes them highly scalable.
However, the lack of public consensus raises trust issues as the transactions are wholly dependent on the administrators.
Key advantages of private blockchains include speed, privacy and scalability.
Blockchain applications are plentiful and multiplying.
However, challenges remain. Blockchain technology consumes significant amounts of electricity and faces issues in consumer privacy because of its public nature. However, as the technology marches forward, the potential is vast across a variety of sectors.
In a follow-up article, we’ll explore issues of sustainability and applications in the mobility sector and innovations that may very well steer the future of the industry.