A Simple Guide to Blockchain Technology
When the conversation turns to blockchain technology, do the words you hear resemble "Blah, blah, blah," like when an adult speaks in the Peanuts comic strip? Trust us; the momentary panic is not necessary. We're not here to say you need to understand all the ins and outs of how blockchain technology works, but if you ever want to buy, sell, or invest in cryptocurrency or grasp how the future internet might work, pull up a chair and listen for a spell.
We'll keep it understandable and with a minimum of technobabble. But before we talk about the technology that might be the most astounding advancement since the internet itself, let's examine the old way of doing things.
Databases: Distributed vs Centralized
Database. It's another of those words that make non-techies curl into the fetal position on the floor. The reality is that we're surrounded by databases. Let's define a database as a collection of information that has been organised for ease of access, management, and updating. An Excel spreadsheet and Access file are both databases. Your checking account down at the local bank sits in a database. In fact, it's hard to go far online without running into a website powered by a database of some sort.
Where blockchain turns technology on its head is by changing the nature of databases as we have known them.
Let's take your checking account as an example. The database that contains all the bank's customers sits on a server and network that is housed in a central location. In other words, backups notwithstanding, there is a single working copy of the database that bank employees access throughout the day. If you do online banking, you're accessing the database directly through your computer or mobile device
In simple terms, blockchain technology operates by instantaneously creating hundreds, thousands, or even millions of copies of a single database and pushing that copy out to nodes (computers) on a network. Thus we have a distributed database rather than a centralised one. Got it?
If you understand this single idea, you're on your way to grasping why a distributed model is so much better. In a word, security.
It's a Hackers' World, and We Just Live in It
Every week it seems, millions of personal records are compromised by various means of cyber intrusion. Before you know it, your personal data including Social Security number, credit card accounts, and maybe even banking logins are for sale to the highest bidder on the Dark Web.
You might not realise it, but only about 4 percent of the internet is indexed by search engines for public consumption. The rest of it is the breeding ground for all kinds of illicit commerce from weapons sales to child pornography to, you guessed it, your personal information.
The Birth of the Blockchain
When Satoshi Nakamoto (a pseudonym for either an individual or group of people) created Bitcoin, the first cryptocurrency, it was built it on top of the idea of a distributed database called the blockchain. If you want a straightforward blockchain definition, here's one:
A decentralised, distributed digital ledger that records transactions across many computers. The blockchain's nature prevents it from being retroactively altered without changing all the blocks in the chain, which would require the collusion of the entire network.
When considering the advantages of blockchain technology, here are two important factors to note:
#1. The blockchain cannot be controlled by any single entity. To return to our traditional bank example, if a hacker manages to penetrate the database, he or she has access to every customer's information. Not so with the blockchain. You can't simply hack one copy of the ledger in a distributed database because it self-corrects every ten minutes. Instead, you would have to be able to hack all of them simultaneously.
#2. The blockchain has no single point of failure. Even if one node were to fail or be compromised, the ledger in question is still replicated in its entirety, perhaps on thousands of other computers. In traditional systems, unless you have backups, a corrupted database is a big problem.
How the Blockchain Works
Since blockchain technology is most closely associated with cryptocurrencies, let's create a scenario that follows the creation of a network node and how it contributes to the process. A node is simply a computer that has downloaded and installed the Bitcoin (or any other cryptocurrency) software. During this installation process, an updated copy of the entire blockchain is transferred to the computer.
So...what does this node do now?
A great question! Now the computer can get to work verifying transactions and adding them to the blockchain ledger through a process called mining. Apparently, just to make things interesting, this Satoshi Nakamoto character - remember, "he" invented Bitcoin - decided to create a system by which new transactions are processed by putting them online as math algorithms to be solved by whichever network node can locate and do it the fastest. Why would the owner of a node want to bother solving these transactions? Because you get rewarded with Bitcoin!
Nakamoto built in a self-limiting mechanism into the cryptocurrency by which early miners received 50 bitcoins for each algorithm (transaction) solved. After the first 210,000 bitcoins entered circulation, the reward is halved. This halfing will continue until a total of 21 million bitcoins are in circulation, at which point the reward system will go away, and Bitcoin should exit the realm of speculation and enter the more robust phase of an established currency.
The Bottom Line
For simplicity, we've confined the discussion in this article to Bitcoin, since it was the first blockchain-based cryptocurrency, but there are more than 700 different cryptocurrencies in existence at present, with most operating on blockchain technology in much the same way as the original. In the years since Bitcoin arrived on the scene in 2009, however, the idea of how to use the blockchain has grown exponentially. As might be expected, banks, stock markets, and other financial services have been attracted by the security and transparency of a decentralised network. We might even be looking at the birth of an entirely new internet. Stay tuned. The coming evolution of blockchain technology should be amazing to watch.