Blockchain technology - what is it? Blockchain technology explained

Blockchain is a revolutionary technology working wonders in our lives for years. However, most of us don't even know what it is. The truth is, we can find it everywhere: in the bank, at the hospital, the airport, or at the elections. You have no idea what blockchain is? You're in the right place! You'll find everything you need to know about blockchain technology on our Tokeneo News website.

What is a blockchain?

According to specialists, blockchain is a distributed and invincible transaction book (or Distributed Ledger Technology - DLT). As complicated as it sounds, we will try to explain it in simpler words. Blockchain is just a virtual chain of blocks - those "blocks" are carrying digital data of transactions made on the network this blockchain operates on.

We can divide those blocks into 3 types. The first one carries information about transactions: date, time, the amount of money transferred. The second type has information about the users conducting this transaction. And last, but certainly not least, has info distinguishing it from others. Every block has a unique code, called "hash". This hash allows us to differentiate transactions which look identical (they are not, even if you can't tell the difference). Each block can store even 1MB of data, which means thousands of transactions.

How does it work?

When the block stores new data, it's added to the chain. Blockchain, as the name suggests, consists of many connected blocks. However, in order for the block to be added to the blockchain, four things must happen. First, the transaction must occur. Then this transaction must be verified. In the blockchain, transaction verification is the task of computers connected to the network. These networks often consist of thousands (or in Bitcoin's case about 5 million) computers distributed around the world. Next, the transaction must be stored in a block. This block must have a hash. Once all transactions in the block have been verified, it must be given a unique, identifying code - previously mentioned hash. After those requirements are met, the block can be added to the blockchain.

Information stored in a blockchain is public. You can always look up the data you need - time and info about new users.

What is blockchain technology in simple words?

Blockchain is called a chain of blocks. This term should not be taken seriously. It was created, to somehow visualize what blockchain technology is. Blockchain technology is hard to understand for a new members in cryptocurrency industry. 

So we know that there is a chain which contains blocks - but what’s next? Blocks are made to capture data connected with transactions such as value, time and so on. Users are identified by special sign. Each block stores individual data. Moreover, they have unique code so-called hash, which allows to distinguish different blocks. Every block can store up to 1 MB of data. It means, that it can store a thousands of transactions, depending on the transaction data size.

Is blockchain private?

Blockchain is public, which means that everyone is able to access the data. Users can decide to allow their devices connect to blockchain. By that, devices receive blockchain copies, which are automatically updated after block being added to chain. 

When it comes to Bitcoin, there are a million of copies of the same chain. Such wide distribution of blockchain between many devices prevents data to be manipulated. Although transactions on blockchain are not fully anonymous, personal data of users is limited to a digital signature or just name.

Is blockchain safe - can blockchain be hacked?

When it comes to safety and trustworthiness of network, the technology includes them for few different ways. Newly added blocks are stored linear and chronological. It means, that they are added always on the end of chain - not at the beginning, nor in the middle.

If we look on the Bitcoin’s blockchain, we can see that every block has its own position. After adding another block, reversing the process is very difficult to make, because of the hash code we talked before. Each block contains a part of numbers in its hash from the following block. Practically, if some person would like to edit transaction in block, all of the blocks would need a change too. That requires a lot of computing power and in great amount of blocks gets almost impossible. To sum up, when blocks get added to a chain, it remains impossible to be removed.

To solve the problem of trust, block networks implemented tests for computers that want to join Blockchain and add blocks, they were called consensus models. One of the most common examples of these tests used by Bitcoin are so-called Proof of Work. In this system, it is the responsibility of computers to prove that they have done the work - it consists in solving complex mathematical problems. If a given computer solves one of these puzzles, it becomes entitled to add a new block to Blockchain. This process is so-called mining. It is not easy - it requires special mining hardware and software. The devices are expensive.

It is worth mentioning, that Proof of Work does not prevent hacker attacks, but it makes such actions more difficult. If hacker would like to coordinate attack, he would have to solve very difficult mathematical equations. The cost of organizing such an attack would certainly outweigh its benefits.

Blockchain vs Bitcoin

The main goal of blockchain is to allow recording and distributing digital data. Blockchain was first described in 1991 by Stuart Haber and W. Scott Stornetta. These researchers implemented a system in which document time stamps could not be affected. However, only in 2009 with the premiere of Bitcoin, Blockchain was used for the first time. The creator of Bitcoin, codenamed Satoshi Nakamoto, described it as a new electronic cash register system that works fully peer-to-peer. It is not controlled by anyone, unlike traditional currencies. Transactions made in the Bitcoin network are verified only by the network of computers. Suppose a certain person pays for goods in BTC, computers in the Bitcoin network then compete to verify the transaction. The one who does this is the first to be rewarded.

The basics of public and private key

To make transaction happen Bitcoin network users need a cryptocurrency wallet. Every wallet contains public and private key. Public key allows transactions to be deposited and paid. It is contained in block of chains as a user digital sign. Private key is a unique key, that is not seen anywhere, and only user should know the combination of numbers. 

Blockchain pros and cons

There are many things to be considered ad pros and cons in blockchain technology. Block of chains contains both strong and weak parts.

Blockchain pros:

  • Good accuracy - transactions carried out in blockchain are approved by a network of thousands of computers. Human interference is eliminated, so the sign does not contain any failures. Even if computer made an error, it would be only in one copy of the blockchain. To spread the rest of blockchain users, it would have to be committed by at least 51% of computers in network, which is almost impossible.

  • Costs reduction - by using blockchain, we eliminate third parties that need to be hired to control the transactions and veryfiy them.

  • Decentralization - one of the most important things in blockchain technology. It does not store its data just in one place. Chains are copied and divided on every users device, which allows data to remain safe.

  • greater transparency - storing data in open Blockchain source code also hinders manipulation. It is unlikely that anyone will notice a change in Blockchain for millions of computers on the network.

Blockchain cons:

  • susceptibility to hacker attacks - although they are difficult to perform, due to the computing power that is required to get over a Blockchain network, their probability cannot be 100% excluded.

  • Costs connected with cryptocurrency mining - even though, the blockchain reduces the costs of transactions verifying, mining requires expensive hardware and a lot of electricity.

  • Transaction amount cap - Bitcoin is perfect example of that, because every Proof of Work requires 10 minutes, so it takes 10 minutes for block to be added to chain. 

Why do we need blockchain?

There are many market sectors that use blockchain technology. It is considered as great way to exclude human encounter and potential failure. 

  • Banking sector - as we all know, banks work 5 days a week, in specified hours. Sending money on weekends with blockchain use would definitely bring many advantages. Moreover, blockchain can be used to start verifying customers identity. 

  • Healthcare - technology can be used to store patient’s medical documentation. Company called Patientory developed a blockchain-based system to allow identifying patient’s identity to improve the process and make it faster.