Blockchain is a "distributed ledger". It stores digital data. Each participant receives a copy of the data and the opportunity to confirm the new data. If someone wants to manipulate this data for nefarious purposes, they will have to coerce every participant, which is unlikely to happen. Each member works to keep everyone else honest.
Let's illustrate this by comparing blockchain with a bank.
Your bank maintains a central database (“ledger”) of all of its customer data. It can store account numbers, balances, transactions and more. Whenever you interact with your account (for example, by withdrawing money or making a transfer), your bank updates its records.
Only the bank has access to the ledger, therefore, if they decide to make a change (even if it is incorrect), you are unlikely to be able to change it, except to file a complaint.
Now imagine hackers gaining access to this database. They can change balance, delete transactions and much more. Your bank can restore data from backups, and there may be many databases serving this data, but it is still controlled by one central facility.
Distributed books are much smarter. Instead of having one person or company sole responsibility for the data, many people have copies of a distributed ledger, and often there are some restrictions on who can join.
Each user (known as a "node") stores a copy of the data - from the beginning of the register to the present. The whole set of records. For every transaction, multiple nodes check this and then all nodes update their records so everything stays up to date and in sync.
Each new transaction is combined with many other transactions in a “block”. These blocks provide some serious benefits. There is no centralized authority that can manage the recording. If a hacker or a malicious node starts modifying entries in one ledger, all other nodes will reject it, because the new entries will not match the data stored by everyone else.
The only way to manipulate data is to merge each node, which is unlikely. At the time of this writing, Bitcoin has approximately 10 different Bitcoin nodes.
This is why blockchains are so interesting. Almost anyone can join, although at times restrictions exist, for example, with a private chain of blocks. No one can manipulate records, and it is very difficult for governments to stop. Your bank may not manage your funds efficiently, go bankrupt or close. If any of this happens, you are unlikely to see your money again.
Blockchains like Bitcoin are very difficult to block or stop. Many users without a central owner? No one can steal your funds.
Bitcoin is launched with the following text embedded in the first block:
Chancellor on the verge of a second salvation for banks
This quote is taken from a headline published in the Times on January 3, 2009. It refers to the decision of the UK government to support banks (again) after the 2008 financial crash. This emphasizes that Bitcoin may have been designed to fix a broken currency system, which is a fiat currency.
Finally, it is worth discussing data versus money. The vast majority of blockchains store their own currency as data. Like numbers in a spreadsheet indicating how many bitcoins you have, me and every other bitcoin user. Blockchains should not store monetary details. They can store anything. Land register entries, shoe sizes, voting details. There is no limit to what can be stored.
Blockchain validation: public and private keys
As you saw above, blockchain is a decentralized data store and the most common type of stored data is financial records - transactions and account balances.
If I send one BTC to a friend, I will tell each node what I do, and they all record the transaction, if allowed. By checking the ledgers, the nodes may reject the transaction if I do not have enough bitcoins to send or if I do not own an account.
Each transaction must be validated, and here the blockchain technology becomes a little more complicated. Each blockchain wallet (perceived as a blockchain bank account) has a public key and a private key.
Only the true account owner should have access to the private key (and if someone gets it, your account can be hacked). If you want your coins to be extremely safe, then you should check out our offers on top cryptocurrency wallets .
When I send one BTC, mentioned above, to my friend, my wallet presents the public key along with a digital signature. This digital signature is unique and is generated only using the private key. Using the signature and public key, other nodes can verify that this is a legitimate transaction, all without revealing a secret key.
This is a simplified example - the cryptography behind the public/private key system is much more complex. Public and private keys are not numbers like bank accounts. Instead, they use Secure Hash Algorithm 256 (SHA-256) and Digest 160 RACE Integrity Primitive Evaluation Messages (RIPEMD-160).
Ever heard of these algorithms? No worries. You do not need to understand them deeply in order to use cryptocurrencies. Be aware that these algorithms run the Internet the way we know it, encrypting web pages over SSL and TLS, and more. In the future, newer or better encryption algorithms may exist.
All this encryption and verification are paid. Each node needs a lot of computing power to verify all the transactions that ever occur and update its register.
This is where Mining: Users can earn small transaction fees as payment for verification.
By filling out this book, miners working with nodes receive payment, and each transaction is verified. This is an elegant system.
But this is not all perfect.
In periods of high demand, transaction fees may increase. If there are not enough nodes to circumvent, users can pay more to process their transactions earlier than others, and miners prefer higher-paying transactions. Those who pay lower fees will still be processed, but much slower, unless the fee is too low, in which case no one will bother to verify the transaction.
Besides transaction feesminers can also receive money in new bitcoins. By paying the miners a portion of the BTC on top of the transaction fee, the new bitcoins enter the market. These undeveloped bitcoins become more and more difficult to mine over time, until one day there are no undeveloped coins left and miners will only be paid transaction fees.
When is blockchain not blockchain?
Although many blockchains only store transaction details, all types of data can be stored on the blockchain: medical records, secure messages, smart contracts, and much more.
It is also possible to create your own blockchain, even a private one, provided that you have enough nodes to run it. You can remove encryption, change the rules, or centralize it.
Many argue that these changes mean the system is no longer a blockchain, but therein lies the problem: without a formal specification or definition of "blockchain", there is no governance of the word. Some blockchain projects exist to scam people. Other blockchain projects use the word “blockchain” to increase their bottom line without any real innovation.
There is no agreement on these issues. We would argue that the traditional Bitcoin model is the best way forward: a public blockchain that is open to all and not centralized. How do you think?