Blockchain Basics: Key Features of the Technology
With the advent of Bitcoin in 2009, the world was introduced to blockchain technology. This step was the first of many steps in the development of innovative blockchain technology, and on the way to digital currencies.
Blockchain Technology in Simple Words
At first glance, both Blockchain and Bitcoin may seem intimidating and incomprehensible. Having clearly defined them and understood the processes behind them, you will surely start your journey in the world of cryptocurrencies. Let’s take a quick look at how the blockchain works: what it is, how it is protected, what it is for, and how transactions are processed for writing to the blockchain.
What is blockchain?
A blockchain is a digital ledger that is maintained and distributed among several interconnected computers called “nodes”. The blockchain consists of consecutive “blocks” that store relevant information, such as the time of the transaction, the amount, and the addresses involved in the transactions. Each data set is linked to the previous one using a cryptographic algorithm to validate and create a time-stamped hash of the data. Copies of the blockchain are then distributed to users on the network with access to view the stored information.
Thanks to this technology, Bitcoin and other digital currencies maintain privacy and security by having a public, decentralized registry.
Blockchain Privacy and Security
The security of a block chain depends on two aspects: the block structure and the peer-to-peer network that supports it.
On the blockchain, each new block is added to the chain in linear and chronological order. Since each block is linked to the previous one, any attackers wishing to tamper with the data will have to decrypt the previous blocks before reaching their target data and rewriting the chain, convincing all other nodes to do the same. This becomes increasingly unattainable at cost with each block of data added to the block chain, so the security of the block chain is twofold: interfering with the data is technologically difficult and economically impractical.
In addition, copies of the blockchain are stored by many other users in the blockchain network. To successfully change the data in a single block, you also need to change hundreds and thousands of copies of that block, which adds a third component of disruptive human collaboration and planning, with the goal of undermining the entire network. Thus, malicious changes to the ledger are almost impossible.
Thanks to blockchain technology, digital trust is established by securely recording information in the public space. This allows the data in the block chain to exist in a decentralized state with constant consistency.
A key feature of the blockchain to ensure confidentiality is the use of a digital signature. Although a global peer-to-peer network can view the contents of a public ledger, there is no access to any information that can identify users in their transactions unless they identify themselves in advance, and associate their identity with their keys. Due to the fact that the blockchain network does not require permission, the user can create keys, never associate them with an identity, and conduct business privately.
These digital keys are generated by the network’s hashing algorithm, and are used to authorize transactions. The technical and economic security of the network makes it difficult for attackers to create fraudulent transactions by cracking keys. Combined with the fact that each block is marked with a unique code to distinguish them from other blocks in the chain, the risk of hackers compromising user data or the public registry is reduced to levels approaching zero.
Differences between Blockchain and Bitcoin
Any useful Bitcoin beginner’s guide will tell you that blockchain and Bitcoin are not the same thing.
Blockchain is a generic term for the technology that Bitcoin and other digital currencies use to secure and record their transactions. The data of each transaction is organized into a block, marked with a timestamp, and then hashed using an encryption algorithm.
The resulting blocks are then chained together and arranged in chronological order, with each new block containing a list of confirmed data from the previous block. Each working member of the blockchain network maintains a constantly updated copy of the data for the clients – users of the network. They create a balance of incentives on the network to maintain security and bandwidth for business and personal use of the network. Thanks to this interconnection of economic balance, digital currencies can remain sufficiently decentralized and independent of the control of an individual institution, while maintaining transaction speed and low costs for business and personal use of the network.
The decentralized nature of the blockchain network also supports the operation of the network in adverse conditions. For example, even if one of its parts is attacked or there are technical problems, the registry can remain registered. This fulfills the sole purpose of blockchain technology: the data that should be recorded and distributed remains unchanged.
Bitcoin is a special digital currency that uses blockchain technology. It is only available electronically and does not depend on banks and other institutions for regulation or distribution. Using blockchain technology, Bitcoin can provide peer-to-peer transactions without intermediaries or governing bodies, while maintaining the security of users and almost eliminating the risk of fraud or theft.
Using the blockchain
In addition to its use in digital currency, blockchain technology has found other useful applications in other industries.
Given the way blockchain security works, it can be used as a time-stamped notary tool for regulatory compliance and auditing. Using a global public registry reduces the risk of human error and allows organizations to improve the integrity of their records, because once the data is entered into the block chain, it is much more difficult to change it than if it is stored in a centralized private storage – in a database.
In the insurance industry or other industries where value and data integrity are critical, blockchain can deploy smart contracts to automatically fulfill agreed terms between two parties. This reduces the likelihood of technical and human errors when managing financial transactions that require specific triggers.
Smart contracts increase efficiency, as well as eliminate the risk of incorrect allocation of funds according to the rules of the contract.
Blockchain also has many applications in supply chain management and other event-driven business operations. Setting timestamps, and broadcasting the status of many moving parts at regular intervals reduces the cost of centralized network management, and also provides greater transparency of the process. This allows for more in-depth checks, which are always available, and can even increase the intrinsic value of goods, due to the provable timeliness of their production or transportation. An example of this would be the difference in the economic value of fresh food that can be proven, and food whose history is unknown.
This technology also creates opportunities for safer, more efficient, private and useful accounting, for example, for work in healthcare and government. The data is easily accessible on the blockchain network, which reduces the need for paper documents. In addition, sensitive personal data can be accessed in a shared database without putting your privacy at risk due to the use of public-key cryptography. Certain institutions that need a public financial audit can use public wallet addresses so that records can always be kept. Media companies are taking advantage of blockchain technology to distribute content at reduced prices, eliminating the need for traditional delivery networks. In addition, the blockchain is used to distribute content such as music and videos, to better protect the intellectual property rights behind them, or simply to monetize their content in a new, fast and cheap way by eliminating intermediaries.
- Analyzing the blockchain process
The basics of the blockchain are relatively simple. A vital part of this process is the peer-to-peer network that facilitates the creation and maintenance of the blockchain.
- The deal is done
This can be any transaction: paying off a debt, buying, donating, or even fulfilling a contract. The wallet generates a transaction and sends it to the target wallet address.
- Transaction data is recorded and collected in a block
Data such as the date, time, and amount of the transaction are written to the block along with data from other transactions. Unless otherwise specified, names and additional identifying information are not recorded. Instead, for most transactions, only a unique digital signature is used, which will be displayed in the ledger.
- The finished block is distributed to each user in the blockchain network
Centralized systems usually have a person or group responsible for processing and verifying transactions. Bitcoin and other digital currencies use a decentralized system that requires distributed network operators (miners) to verify the data stored in the block. The valid blocks are then distributed to the nodes in the network.
- All nodes in the network are working on block validation
Once a block is passed to the nodes, their devices compete to solve the complex computational problems required to validate the block. Once a node, often referred to as a miner, can do this, the other nodes work on solving the next block in the chain. This way you can avoid duplicate blocks.
- After verification, the block is added to the chain
The completed block receives a unique timestamp and an identification code called a “hash”. It is also given the hash of the previous block added to the chain. This relationship gives the blockchain a consistent quality.
- The transaction is completed, and is part of the digital ledger
After a successful node adds the newest block to the block chain, the resulting update is shared with all users on the network. Attempts to modify earlier blocks will result in a mismatch of the hash encoded in the later blocks. If the hashes match, all parties can confirm the accuracy of the registry.
Once a concept that existed only on paper, it was a crucial step towards innovation in digital currencies and beyond. By including a publicly available digital ledger that is controlled by a distributed group rather than an individual party or entity, Bitcoin and other digital currencies have begun to offer new, more secure ways of transacting at a lower cost.
Blockchain is a fantastic technology of the already arrived future.