Blockchain, the technology powering the stuff on the tip of so many people’s tongues at the moment. But what is it? Well, this Blockchain 101 will take you through the basics that you should understand before you progress any further into crypto.
First made famous through Bitcoin. Let start out with the fundamentals of Blockchain, then we’ll get into more of it’s practicality and it’s surprisingly numerous usages.
What is Blockchain?
Blockchain is a type of data-storage, like a database, but with progressively distributed blocks (containing data) that are hashed and chained to one another.
Blockchain is a data structure — in it’s simplest form.
Somewhere that you can store data; transactions, addresses, birthdays, files, literally any type of data that can be stored on a computer can be stored on a blockchain.
The data is stored in ‘blocks’ that are ‘chained’ together.
What is a block?
Blocks are actually pretty simple. There are 4 things you should know about blocks:
- They have a unique ID — Every block has it’s own identifier, so it can be referenced/found by its name.
- They store data — Blocks are the ‘storage boxes’ where data is stored on the blockchain; on the Bitcoin blockchain, transactions are stored in blocks — records of a user Bitcoin from one user to another.
- They’re a fixed size — Blocks are usually a set size; for example the blocks on the Bitcoin blockchain started out at as 1mb.
- They point to the previous block — every block points to the previous block’s unique ID.
What is a chain?
Chains are also pretty simple.
It’s the effect you get when many blocks point to the previous block. Like a chain. Every link previous to the foremost link points to the previous link!
How does Blockchain work?
Building on the previous section, let’s explore how Blockchain works on a deeper level.
How blockchain works
We covered a simple version of this previously in Blockchain Simplified. Lets drill a little deeper though.
Data — As we covered in Blockchain simplified, blockchain stores data. This data is generated by users on the network. Generally, the data will be generated by an application that some one uses. For example: I might use a Bitcoin wallet (a software application that communicates with the Bitcoin network), to recieve some Bitcoin from a friend. This data is then submitted, and a miner (or validator), will then pick up the transaction, and put it into a block.
Nonce — We know that every block has a unique ID; the unique ID is actually called a ‘nonce’. The ‘nonce’ is randomly generated whenever a unique block is created.
Hash — The ‘hash’ is a ‘digital signature’ taken from a block. The block, containing the transaction data, is pushed through a cryptographic hashing algorithm — some code that jumbles up and compresses the data, and out comes a seemingly random string of characters — the hash. This hash can only be created from the exact data being put through the hashing algorithm. The hash is also extremely difficult to reverse. Imagine pushing a box through a shredder with loads of paper in it, and taking a photo. Unless you put the exact same box through again, it will never look the same in the resulting photograph.
Compounded hashing — We already know that every block points to the previous block. But, every block also contains the hash of the previous block. Every block after, contains a hashed version, that is hashed, that is hashed, that is hashed — you get the point. We can verify that a blockchain has not been tampered with by checking the previous blocks hash is correct, because the resulting final hash will be different from what is expected.
Multiple sources of truth — It’s all good and well repeatedly hashing blocks, but how do we know that a blockchain is correct? Well, blockchain tends to be distributed to multiple people. That way, we can check across multiple people whether or not the blockchain has been tampered with. The more people involved, the better. Distributed–or ‘decentralized’–blockchains use ‘consensus algorithms’ that help decide which blockchain is correct.
Keeping the blockchain secure — There are multiple consensus algorithms. As we discussed in Distribution, they’re used to keep the blockchain safe. Anyone can interact with distributed blockchain, and chain it. But, it can only be made the truth if all other blockchain participants agree.
Proof of work — Some blockchains require users to do ‘work’. Like the ‘work’ that goes into mining Gold, Gold is proof that work was done. Similarly with Bitcoin, ‘miners’ process transactions and blocks. Bitcoin, the incentive, like Gold is, is rewarded to miners that process the transactions. The mining process is costly, and the Bitcoin that is rewarded is the proof that work was done.
Bitcoin incentivises people to run it’s blockchain, in turn, keeping it safe.
There a multiple nodes in the network, all working on the blockchain, storing copies and synchronising amongst one another. The main goal is it ensure that the blockchain is accurate, hasn’t been tampered with, and operates effectively.
Proof of stake — Many blockchains also use proof of stake consensus algorithms. The work required to process transactions is much lower. Instead, miners are incentivised to hold higher quantities of a blockchains ‘currency’ as it will give the more mining power. More coins held means more rewards are issued to the people processing the transactions.
What is blockchain used for?
There are numerous usages for blockchain. Here are some of the most common use-cases:
- Cryptocurrencies — cryptographic currencies, like Bitcoin, which store transactions on a blockchain.
- File storage — there are many file storage blockchains, such as Sia, Storj, NEO FS, many of which are decentralized.
- Decentralised computation — through smart contracts, blockchains like Ethereum, Binance Chain, Avalanche–and many more–make decentralised computation a possibility.
- Anti money-laundering systems — many blockchains are completely transparent and trackable, Bitcoin included.
Who invented blockchain?
Satoshi Nakamoto (one of the Bitcoin founders) is widely accepted as the first person to actually build a blockchain system.
But the idea wasn’t totally original.
Did blockchain exist before Bitcoin?
Is blockchain the future?
Whether blockchain is ‘the future’ is a very broad question. Without a doubt, there are many applications being built on the concept of blockchain. But wide adoption of any new tech takes time and an awful lot of money.
There many ways that blockchain is overkill. While yes, it will change a lot of things, it’s not a staunch requirement for a lot of things. Let’s look at the positives though.
How blockchain will change your life
- Money as we know it — many governments and central banks are looking at incorporating blockchain into the money system. There are so many issues with money as it is in it’s current form. You can’t track cash that’s withdrawn from an ATM, but you can track anything on the blockchain.
- Decentralized finance — this is a complex, young area of blockchain-enabled tech. But, so far it’s proving far more lucrative for investors and savers than centralized options like savings accounts, pensions and ISAs are.
- Anti-counterfeiting — the nature of blockchain tech means that any counterfeiting is near impossible.
- Ownership rights — when you own things, especially in the digital space, it’s hard to prove — without, for example, a receipt or trusted log of ownership change. Blockchain enables verifiable transfer of ownership rights, because blockchains are immutable.
How to make a blockchain
Building a basic blockchain from scratch is much easier than you think. The complexities come from distribution, decentralization, and the consensus algorithms.
Here are some useful resources you could use if you’re keen to go down the blockchain building rabbit-hole.