Blockchain is, in simple words, a type of database, meaning a way of storing information electronically in a digital format.
It all started back in 2008 when a person or a group of people (it is unknown till today) called Satoshi Nakamoto created the Bitcoin protocol in a publication called the Bitcoin White Paper, which outlined a set of computational rules that determined a new type of distributed database: the blockchain. In the years that followed, the use of blockchains exploded via the creation of different cryptocurrencies, non-fungible tokens (NFTs), decentralized finance (DeFi), and smart contracts.
The role of Blockchains in the world of cryptocurrency is to maintain a decentralized and secure record of transactions. The innovation is that it guarantees such security without needing a trusted third party.
The main difference between a traditional database and blockchain is storing information. Blockchain stores data in blocks that are linked together via cryptography. Every time new data comes in, it enters a fresh new block. When the block is filled with data, it becomes chained onto the previous block, making the data chained together and organized chronologically.
The most common use of blockchain is as a ledger for transactions. However, different types of information can be stored on it. Blockchain is decentralized, meaning that a single person or group controls it. The data is immutable, meaning that when a piece of data enters a block, it cannot be changed or undone.
How Does it Work?
Since the objective of blockchain is to make it possible for digital information to be recorded, distributed, but not edited, it is the foundation for transaction records that cannot be deleted or destroyed in any way. This makes blockchain a distributed ledger technology or DLT, peer-to-peer networks that enable multiple members to keep their own identical copy of a shared ledger.
The process of blockchain is as follows:
- A new transaction is entered.
- The new transaction is transmitted to a network of peer-to-peer computers located anywhere in the world.
- The network solves equations to confirm the validity of the new transaction.
- The transaction is completed.
- The new transaction is entered into a block chained to other existing blocks (old transactions). The latter creates a history of every transaction, which is, as we’ve said, immutable and which has its own timestamp.
- Once the transactions are confirmed as legitimate, they get clustered together into blocks.
Decentralization: Blockchain’s Biggest Feat
You have a database spread out among different nodes in different locations when you have blockchain technology. Based on DLT’s what this does is that it creates redundancy and also keeps the fidelity of the data because if someone tries to alter it, it would be impossible because the other nodes cannot be changed. The latter means that blockchain relies on a decentralized network to validate a new entry to a block; every node has to agree to it.
Also, blockchains are secure with proof of work (PoW), a decentralized consensus mechanism, meaning every network member has to agree on the data to finalize a transaction.
Blockchain is Secure
Many users, especially new ones, have a question about blockchain: is it secure? The answer is yes, absolutely.
The technology blockchain is based on achieving security in many ways. The first one is that every new block is stored linearly and chronologically. The latter means that every new block is added to the end of the chain and, once this happens, it is almost impossible to alter. To do so, nearly 99.9% of the network nodes would have to agree to do it.
An important factor within this process is understanding what hash is. Each block has its own hash, which is a function that turns an input or data of arbitrary length into an encrypted output with a fixed size and the hash of the block before it with its timestamps. This guarantees that every owner of the shared network owns the exact copy of the chain. So if someone tries to steal it by making a copy or altering it, every node of the network will know because the copy would be different from the one they have. Therefore, for a hacker to successfully hack the blockchain, they would need to hack 51% of the chain simultaneously so that their copy would become the majority’s copy, which is impossible.
The security of blockchain, then, is guaranteed because every single node owner is constantly cross-referencing its copy of the chain against the other member’s copies to see if something has been altered. If there is an alteration, it would be cast away as illegitimate.
Blockchain is not a Bank; it’s Better
Although it handles transactions, blockchain is definitely not a bank because it works. Blockchain runs 24/7, every day of the year, and relies 100 percent on decentralized technology. Also, the hash technology allows high levels of transparency since every transaction is recorded, irreversible and unalterable.
Also, blockchain transaction fees are different from the ones banks implement. Every different transaction or product used has an additional cost in a bank; in blockchain, fees are determined by miners and users. This enables an open marketplace in which how high or low users set the fee determines if their transaction is processed.
Speed is another up hand of blockchain. Banks can take up to 72 hours to process a payment, while blockchain transactions can take as little as 10 or 15 minutes. Also, while bank account information is stored on the bank’s servers, a crypto account is 100 percent private since it has a unique character-number code that only the owner knows.
As we’ve covered, blockchain is a way of storing data about monetary transactions. However, there are more than 12,000 cryptocurrency systems that rely on blockchain technology and way of work as of today. It is also used by some companies to, for example, trace the journey of their food products to their final locations. Companies like Walmart, IBM, Pfizer, AIG, Unilever, and Siemens use blockchain for their processes. The latter tells us that blockchain is more than a currency database system; it is an innovative way of processing, securing, and showing information digitally.
With blockchain basics covered, we can say that it is a great disruptor of traditional finances and the banking industry since it has created a tamper-proof, decentralized set-in-stone chain that reduces costs, is fully transparent, and empowers users to feel in charge and safe.