Blockchain is a widely discussed topic nowadays. Oftentimes, it is a top trend across popular social media platforms. But what exactly is blockchain technology and why is it a buzzword?
Euromoney describes blockchain as “a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain”.
The central idea behind blockchain technology is to record information across multiple ledgers in a way that makes it impossible to change, hack, or cheat the system. With multiple records, accepted data becomes extremely difficult to alter.
This form of decentralized database system by multiple participants is called Distributed Ledger Technology (DLT).
A DLT has six main qualities namely;
- It is distributed: Every participant has a copy of the ledger for transparency.
- It is secure: All records are individually encrypted.
- It is anonymous: The identity of all users is unknown as participants are identified by pseudonyms.
- It is unanimous: All participants in a network must agree to the validity of individual records from each user.
- It is immutable: All validated records are not reversible or changeable.
- It is timestamped: All transactions recorded on a block are timestamped.
What is a Block?
Simply put, blocks are what store data on the blockchain. Think of it as a compartment where users determine the kind of data they store. For example, you could create a blockchain where each block stores the entire student information of every faculty in your university.
A block is a subdivision of a blockchain that contains several transactions. When a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.
What is a Chain?
Let’s assume you just created a new block. The first block would be there as a standalone. When a second block is created, it links up with the first block. And when a third block is created, it links with both the first and second blocks, etc. creating a chain (of blocks).
What is Blockchain Technology?
Blockchain is a type of DLT in which transactions are recorded with an unalterable ‘secure code’ called a hash.
A hash allows anyone using the blockchain to check that the data has not been altered. A change in any part of the data will result in a completely different hash, affecting every iteration of hashes on the entire chain. This chain of hash processes is known as a Merkle Tree.
In the diagram above, each transaction (block) is securely converted into a hash with each of the hashes combined to create a chain agreed upon by both users. The same process is repeated to create a chain of multiple users, and so on.
Is Blockchain the same as Bitcoin and Cryptocurrency?
Not really. Cryptocurrencies are built using blockchain technology and are the most widely-known usage of the technology today.
All through the years, there have been numerous attempts to create digital money that is unregulated and unmonopolized. Bitcoin was designed to solve this problem by leveraging blockchain technology. Other forms of cryptocurrencies such as Ethereum, Dogecoin, Ripple, and Litecoin all run on their own blockchains.
Bitcoin blocks contain the records of valid transactions that have taken place on the network. If I send you a 0.2 Bitcoin, for example, it is in a block. If you later send me 0.35 Bitcoin in return, that’s in the block too. And the two transactions form a chain.
So, the hype regarding the crypto aspect of blockchain is simply due to wealth creation. There are loads of other blockchain uses that will become popular over time.
To cap, blockchains let you agree about data with random users on the internet.
It provides a place to put information that anyone can add to (albeit unanimously), unchangeable, and lastly not controlled by any single person or entity.
Have questions or suggestions? Let’s hear from you in the comments section.