If you don’t know what the blockchain is, you’re definitely not alone. Many people have problems understanding cryptocurrencies and their value because they don’t truly understand the blockchain technology and how game-changing it is. But the good news is that you’re in the right place to start learning some basics. So here’s blockchain explained…
What Is Blockchain?
If you find this short description a bit confusing, you’re not the only one. And that’s why I’m gonna explain it word by word:
-What’s a Ledger?
Ledger is something like a notebook that’s used to keep track of all expenses, income and accounts. If you were to make a personal ledger, it would probably look something like this:
If this was on paper in an actual book, it would be a traditional ledger. If it was on a computer and in a digital format (like in a spreadsheet), it would be a digital ledger. So, considering the current technology, for most intents and purposes, blockchain is a list of transactions and some other data in a digital format.
-What’s a Peer to Peer (P2P) Network of Computers?
You’ve probably heard of connecting two or more computers so that they can share some files or share access to a device (like a printer). This is usually done by using cables or WiFi (if the computers are in close proximity) or by using the internet. By doing this, you would build a simple network.
Now if in this network, no member had extra permissions or extra responsibilities compared to the others, you can say that it’s a P2P network. In this method of configuration, there is no main server and the workload (all the computing tasks done by the network) is distributed among the members which are sometimes called nodes.
So all peers share some of their own resources (like a portion of their hard drives, bandwidth, processing power of their cpu or gpu, etc.) and get access to the pool of all resources which is made available to every member of the network.
This means that the blockchain is a series of nodes (or computers) that are connected to each other but none of them has control over the whole network.
-What Do These Computer Nodes Actually Do?
The main role of these computers running the blockchain is to make the whole network more secure by building upon the encryption and to validate the data (list of transactions, etc.) in each new block. This all happens through consensus which is achieved by different methods in different blockchains. And the people running the nodes, usually get some kind of reward for their participation.
For example If I want to send you some money using a blockchain, the nodes would check if I have enough money for the amount I want to send plus the transaction fee and if a majority of them agreed that everything was alright, they would put my transaction with the others that are happening around the same time and record all of them in a new block. They would also seal and secure this block and attach it to the previous one. Then, the copy of the whole chain would be updated in each and every node.
So what do we have ’til here?
A digital ledger, distributed among many computers. All of these computers (nodes) help in the task of processing this ledger and none of them can control the whole ledger by itself. They do everything by consensus. Each node also has a complete copy of the ledger so that it can’t be lost or corrupted if something happens to one of the nodes participating in the network.
Now, let’s move on to the next part.
-What Is Cryptography?
When you were a child, did you have a secret language that no one understood but you and your friends? What you were trying to say was in your regular language but you would change it into something else. Then your friend would read or hear that something else and decode it in their brain or maybe on a piece of paper to get the original message.
You can say that these kinds of “secret” languages, encrypt the message so that no one can understand it without knowing the language or how to decrypt the message. This is a very simple example of cryptography!
There are many methods and algorithms (ciphers) used for encryption, some of them safer and harder to crack than the others. And all of them are used for making information more secure. This is not a new thing though. Encryption has been around for many years. If you’ve ever watched a spy thriller set in the second world war era for example, you definitely know what I’m talking about.
Blockchain uses encryption so that people can send information or money to each other safely. This kind of encryption means that no one other than the intended receiver can see or use the original information because only he/she has the key to decrypt the received message. Each user of the blockchain has his/her own set of keys to make use of this feature.
If I were to use a blockchain, I would have two keys: one public key for encryption and one private key for decryption. Anyone who wanted to send me something, would use my public key to encrypt it. After receiving, I would use my private key to decrypt the information. So my two keys would function together to make sure that no one could decrypt a message intended for me without my consent.
Additionally, my public key would double as my identity on the blockchain (like a username). So I could remain anonymous if I wanted to. Everyone would be able to see my public address and verify how much money I have on that address but no one would know who I really am. This is how blockchain can provide anonymity and transparency at the same time.
There is also another kind of cryptographic security called the hash function. The main difference between hashing and regular encryption is that you can decrypt the data after it’s encrypted if you have a key but the hash function is a one-sided operation and once you hash any information, the only way to produce the original information would be guessing. Which is near impossible with the complex algorithms used today.
The other difference is that you can put any kind of information or even file through a hashing algorithm and you would always get a string of letters and numbers as the result. This reduces the final size of your data and the time needed for encrypting it, dramatically. And it’s the reason why you can record a lot of transactions in one relatively small block.
To understand hashing better, you can try it yourself. One of the oldest encryption algorithms used for securing information, is the “sha1” (secure hashing algorithm 1). And if you were to encrypt the world “hello” with sha1, you would get this result: aaf4c61ddcc5e8a2dabede0f3b482cd9aea9434d. So “aaf4c61ddcc5e8a2dabede0f3b482cd9aea9434d” is the hashed version of the word “hello”.
Note that if you were to change the message even slightly, for example if you wrote “Hello” instead of “hello” the final result would be completely different. (Try sha1 for yourself here.)
This is why no one can change the information recorded on the blockchain. If you were to change even one character, the hash would be different. And the hash of each block is also connected to the hash of the next block. Because each new block that gets added to the blockchain, has the hash of the previous one recorded in it.
So if someone wanted to hack the blockchain to change some information in a block, they would also have to change every block that has come after it on every node simultaneously, which is near impossible.
Let’s say that I received some money on the blockchain and now I want to make it seem like I received double the actual amount. Let’s assume that this transaction was recorded on block number 1000 and now the blockchain is at block number 1500. If I wanted to change the data, I would have to change block 1000 and every block that has come after it. Because changing block 1000 would change its hash. Then I would have to put in the new hash in block 1001 which would change its hash and so on.
Hashing functions have a lot of other uses too. For example, every website that has a https:// at the beginning of its url or address uses a type of hashing to keep your data secure.
You probably get the gist now. Blockchain uses different types of cryptography (encryption with keys and hashing) to make everything safer.
These cryptographic functions are exactly how you get security and both anonymity and transparency at the same time. It is a remarkable thing and precisely why some institutions and people hate this technology and everything that comes with it, like cryptocurrencies.
Blockchain is a digital ledger or database, a new way of keeping records. The content of this ledger is encrypted by using a hashing algorithm. And every user has a public key for encrypting and a private key for decrypting messages and transaction.
There is also a P2P network of computers consisting of several nodes that runs the blockchain. Each node has a copy of the ledger and it participates in all the tasks needed to keep the blockchain going. None of the participants or anyone else can change the data written in the ledger because of the way it’s encrypted. This means hacking it is much harder than any other server or centralized system.
Our blockchain definition is getting more understandable, right?
Why Is It Called Blockchain and Not Something Else?
With the ledger, we had pages of information and with the blockchain, we have blocks. Each block has a certain amount of data (usually about transactions) in it and once it’s full, it is linked to the previous block. So we have blocks that are linked together in a chronological order. This is why it’s called the blockchain.
An Example to Make Things More Clear
Let’s say that I want to send you some money (in the form of a cryptocurrency) using a blockchain. I use your public key to determine the destination of my funds and my private key to show the network that I have control of said funds.
After the transaction is confirmed by the network of computers that run this blockchain, it gets recorded on a block. Once the new block is at full capacity, it gets linked to the previous block. And now, you and I and everyone else can see this transaction forever.
But only you and I know our encrypted identities on this blockchain. So everyone else just sees our address (public key) and the transaction, without knowing our identities. And after you receive the money, you can use your private key to spend it. And the cycle continues.
In other words, my money (or its representation on the blockchain) is encrypted at first and I use my private key to decrypt it. Then I use your public key to encrypt it again in a way that only you can decrypt and use it.
An important note:
There are blockchains that are not distributed. These are centralized blockchains running on a main server. There are also blockchains that do a lot more than just allowing people to send money in different currencies to each other. But what we’ve talked about here, is a basic definition of the blockchain which was popularized by the rise of bitcoin. Bitcoin runs on a blockchain like the one we’ve described here.
So I hope that this was a nice first step in understanding this technology. But you should be aware that it’s not limited to what we’ve talked about here and there are other variations.Want to learn more about blockchain? Read this: a simple introduction to the blockchain technology Click To Tweet
Now that we know the meaning of blockchain and understand the technology better, let’s see why it’s so useful and important. I’m gonna talk about these in future posts. But here’s a brief description:
Why the Blockchain Technology Matters: Real-Life Uses
1. Speed, Security and Cost of Transactions
Find the oldest person around and ask him/her about banking in the past. You would be surprised how the banking industry has changed so little over the past few decades. Even paying the bills has been and still is a hassle.
Sending money to someone has gotten a bit easier with the use of internet. But if you want to send someone in another country some money or if you don’t have a bank account with one of the big institutions, you would probably have to wait a few days or maybe even weeks for the transaction to actually go through.
And then there is the cost of that transaction. Sometimes it seems not even worth it, especially if the amount of money you want to send is not that much. Blockchain technology can take care of all these problems. Because it’s faster, more secure and it reduces the transaction costs dramatically.
2. A New Way of Keeping Records, With Privacy in Mind
As we said earlier, the information stored on the blockchain doesn’t necessarily have to be a list of transactions. A blockchain can work like a registry or database, a faster, more secure and more accurate database with practically no down-time.
And because of its use of different cryptographic functions, blockchain can also provide absolute privacy. This is a very important feature, considering the trajectory of big companies and how they use our data.
There are countries, like Estonia, that have started using this technology to store the medical records of all citizens. There are also companies that use the blockchain technology for better supply chain management, especially for more sensitive products like food and medicine. And this is just the start.
We’re going to talk about cryptocurrencies a lot on this blog. But something you should know right off the bat is that most of them run on a blockchain.
To start things up, you can read our introduction to cryptocurrencies.
4. Web 3.0
The idea of a decentralized and uncensorable web 3.0 has been around for years. But the growing adaptation of the blockchain technology has actually made it a real and not too distant possibility. Imagine an internet that no one person or company or even government can control.
It may seem a bit scary, but it also has a lot of promise for the people who don’t have access to unrestricted internet or are tired of big tech companies controlling everything. After achieving a decentralized internet, you’ll see what this technology can really do and how it can change your life for the better.
NFTs or non-fungible tokens are digital assets that have their ownership recorded on a blockchain. So you can buy some digital art and have it as a NFT and no one can dispute that you own it. Right now, this technology is mostly used for buying and selling digital arts but the possibilities here are endless.
If you want to know more, here are 10 things you need to know about NFTs.
6. DeFi or Decentralized Finance
DeFi removes the institutions from finance and uses a blockchain instead. For example if you want to buy a cryptocurrency you don’t have to use a centralized exchange and put all your trust in them, you can instead rely on a trustless decentralized system running on a blockchain.
This is a fairly new use case. But if DeFi really catches on, it has the potential to put an end to the greed of financial institutions. Because it’ll get people alternatives and if these alternatives can work better, then the banks, brokerages, etc. have to do better to keep their customers. And this is one of the reasons that banks and wall-street guys don’t like the truly decentralized blockchains or cryptocurrencies or anything related to them that much.
7. Smart Contracts
You can automate any type of contract on the blockchain and you can make the whole process trustless and reduce the chance of fraud. Smart contracts can be used in many ways, from buying and selling any kind of asset to voting. There are many possibilities!
If you want to know more, here’s an introductory post about smart contracts.Learn about some benefits of the blockchain technology here Click To Tweet
As you see, the blockchain is a life-altering technology with a lot of uses that is here to stay. So why not learn about it and join the fun? Reading this blog post was a good start but don’t stop here. Subscribe to our newsletter and together we’ll learn about everything related to the blockchain little by little.
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***Last Updated on 19 May 2022 by Guy with a Wallet