This article explains the concept of Blockchain technology in a practical way. After reading it, you will understand the basics of this powerful innovation concept.
What is Blockchain Technology?
A blockchain is a form of data management that can be used to realise digital transfer of property. It is a chain of data elements called ‘blocks‘. The sequential blocks are related to each other. Blocks can branch off, but two or more branches can never come together. Most people are familiar with blockchain technology from the digital cryptocurrency Bitcoin.
Blockchain technology was invented in 2008 by Satoshi Nakamoto to become the core component of this digital currency. Nowadays, blockchains also have other applications, such as for matters requiring copyright protection. For example, with blockchain technology it’s possible to create valuable copies of data. In addition, blockchain can manage the transfer and ownership transactions of certain data. This allows the data holder – of, for instance, the cryptocurrency – to prove that he’s the rightful owner.
A blockchain could be compared to an excel sheet or other type of spreadsheet: a list of data that is shared with everyone. Each participant receives an exact copy of the list, which constitutes the blockchain. With blockchain technology, it’s not possible to simply copy the digital data. For each application of the blockchain technology, there are rules about how certain data is processed in blocks. A blockchain has a built-in safety net that insures that digital money is transferred to another person in a reliable way.
Taking the example above, when someone edits the spreadsheet, that change is applied to all copies to ensure that all participants have up-to-date lists that are always identical to each other. In a blockchain, new lines can only be added to the bottom of the list. This is what makes a blockchain unique. A new added line is automatically shared everywhere. Cryptographic software ensures that no changes can be made to older, previously added lines.
A blockchain is more or less publicly accessible. The lists keep track of data changes, including financial transaction. There’s no central authority in control. Nobody is the exclusive owner and everyone connected with a blockchain can check if the blockchain complies with all the rules. All participants co-own the blockchain. Taking part in this open blockchain network, makes someone a free participant. This means that any participant can implement an application without requiring permission.
A block consists of the date and time on which the block was found. The ‘hash‘ connects blocks and acts as the link. This hash also adds a level of security; if a change is made to a previous block, the hash will be incorrect. This makes it impossible for hackers to crack a blockchain; after all, all participants are openly linked. This means that data can be safely distributed over multiple databases using blockchains.
The Bitcoin blockchain only offers the possibility to conduct transactions and transfer money from one participant to another. When a new transaction is added, there has to be a new line at the bottom of the list. However, Bitcoins can only be transferred if they come from an existing line in the list. Since older lines in the list are always connected to newer lines through a hash, this means additional Bitcoins or other new data cannot be simply created. All the copies indicate that the transferred money is in fact owned by one of the participants, since this can be demonstrated by earlier lines in the list. In other words,it’s impossible to falsify information, making blockchains highly reliable and safe.
Blockchain technology is often considered the number one alternative to traditional banking. Internet is the gateway for blockchains and makes it possible to freely distribute data online. Blockchains do this with cryptocurrency, making it easy to distribute it worldwide without traditional intermediaries like banks. In order to create a competing currency, a blockchain can be ‘forked’. Sometimes, participation in a blockchain leads to a temporary branching of the chain. The participants then decide which branch to continue with. It’s also possible for two branches to continue on separately, creating a ‘fork’. This usually occurs when the rules for a certain branch change or if there’s disagreement about undoing dubious blocks.
In a blockchain that is open to everyone, there’s competition to finding a new block. It can take a while to find a block that meets the requirements. The first person to find such a block is rewarded with cryptocurrency. These participants are called miners and their search is referred to as mining. In addition to the cryptocurrency rewards, miners also receive a transaction fee. To stimulate the processing of a transaction, the payer makes a voluntary contribution in the form of this fee.
Miners check transactions and carry out digital operations, which may occasionally be required by ‘smart contracts’. Different miners can select different transactions. Miners look for hashes for potentially valid blocks. If they find a block, they first check it before continuing. This requires the found block to be suitable and free of errors. Other miners will check this. If the block is bad, they’ll replace it with a good one.
It’s Your Turn
What do you think? What are your thoughts about blockchain technology? Do you recognize the practical explanation or do you have more suggestions? What are the effects of Blockchain technology in your business or daily life?
Share your experience and knowledge in the comments box below.
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- Crosby, M., Pattanayak, P., Verma, S., & Kalyanaraman, V. (2016). Blockchain technology: Beyond bitcoin. Applied Innovation, 2, 6-10.
- Nakamoto, S. (2009). “Bitcoin: A Peer-to-Peer Electronic Cash System“. Retrieved 16 February 2018.
- Mettler, M. (2016). Blockchain technology in healthcare: The revolution starts here. In e-Health Networking, Applications and Services (Healthcom), 2016 IEEE 18th International Conference on (pp. 1-3). IEEE.
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