Since 2008, many have confused blockchain technology with Bitcoin and other cryptocurrencies. With further exploration and increasing applications, it has only been in recent times that the world is waking up to blockchain technology being much more than cryptocurrency. Over 40 banks across the globe are investing their resources to incorporate this technology into their systems. Mastercard, Visa and American Express have already started using blockchain technology in their payment systems. IBM and Microsoft are providing Blockchain as a Business (BaaS). Governments and public agencies have started utilising their resources to use Blockchain in various sectors of services. Estonia provides all government services on a blockchain-based platform. The US Department of Homeland Security has started using blockchain to protect the data collected by the Border Patrol cameras and sensors.
So, what actually is a blockchain? Here’s blockchain technology explained in a simple way.
What is Blockchain?
Blockchain is a distributed database or a shared digital ledger. It uses public private key cryptography, which is a way of locking data so that only those with the right key can access it. Anyone can see the data but can’t unlock and update it without the key. These records/transactions are incorruptible or can’t be edited once validated by the nodes and are digitally signed to ensure their authenticity.
Blockchain provides a decentralised database to store data, which means that information is not stored in any specific single location. This decentralised database is hard to infiltrate, since it requires access to every computer on the network simultaneously to succeed.
How Blockchain Works
Blockchain is decentralised, which means that it is not controlled by a single authority. It is made up of nodes. Nodes are computers that are connected on a blockchain network. Every node is an administrator and performs the task of verifying and transferring information or transactions.
When an already existing transaction is to be edited or a new transaction is to be created on the blockchain, the transaction needs to be generally examined and the history of the proposed block has to be verified by a majority of the nodes on the network. This is done by executing various algorithms on the nodes.
If a consensus is reached about the history and validity of the signature among the nodes, the new block is added to the ledger and a chain of blocks is created. If consensus is not reached among the majority regarding the history and validity of the signature, then the transaction is denied entry into the ledger and the blockchain.
This consensus protocol allows blockchain to work as a distributed ledger, without any central authority. New blocks in the ledger not only contain the approved transactions but they also contain the history and a cryptographic signature, called a hash, of the previous blocks in the chain.
Each page in the ledger forms a block, which impacts the next page or block using cryptographic hashing. On completion, a block forms a secure code, which gets linked to the next block, creating a chain of blocks or blockchain.
Blockchains can be restructured for various applications that use different protocols to achieve consensus for verification of the transactions. The most common and earliest application of blockchain technology is Bitcoin, which uses an anonymous public ledger that is open to everyone to participate in.
Many organisations have developed permissioned blockchains to keep a check on the participants of the network. Some organisations are adding executable programming code to blockchains in the form of smart contracts. When triggered, this executable code will carry out the agreed transaction, allowing automation of transactions.
Benefits of Using Blockchain
- Blockchain is a distributed ledger and all nodes share the same information which increases the transparency of transaction. To change a single transaction, all participants are required to agree.
- The decentralised database eliminates the risk of single point failure, since all systems on the network need to be breached at the same time to access data.
- Use of blockchain to carry out transactions will eliminate intermediaries, reducing the cost of processing and overall transactions.
- Use of smart contracts can speed up the process of validating and enforcing contracts.
Once blockchain technology is explained, we realise the potential it has to offer across various sectors. This technology will only improve as its scale increases. Essentially, the more widely blockchain is adopted, the better it will become.