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BLOCKCHAIN TECHNOLOGY

WHAT IS BLOCKCHAIN AND HOW DOES IT WORK?

WHAT IS BLOCKCHAIN?

 

If you are new to blockchain technology, don’t worry, it is fairly easy to understand. To break it down simply for you, it’s really a block that stores digital information in a public database that anyone can see and is hosted by computer networks around the world, which makes it a completely decentralized system. This means it is not controlled by a central entity, such as a bank or the government. 

 

Let me break it down even further.  

A blockchain is literally a chain of digital blocks that holds and stores information about transactions such as date, time, dollar amount, and the most recent transactions. It further stores the parties who are participating in the transactions but not by their actual names; the information is recorded by using a unique “digital signature.”

 

This unique digital signature is in an encrypted code called a hash, which is used to tell each block (transaction) apart from another block (transaction). Hashes are cryptography codes created by a special algorithm. 

 

Below is an example of a Hash. It shows how you can tell each block apart from another by its current and previous hash (encrypted transaction) to create the Blockchain. 

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A single block, in this case, on the Bitcoin blockchain can actually store around 1 MB of data. This means a single block can store up to thousands of transactions.

 

It is basically a distributed ledger that can hardly be manipulated by anyone.  The “block” is the digital information, and the “Chain” is the public database (the public information that anyone can see).

 

HOW DOEST IT WORK?

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A block is added to the blockchain when it stores new information. A Blockchain is multiple blocks strung together when the block is approved by the network. For a block to be added to the blockchain, a transaction must be carried out and verified by the network of computers. Once the computers approve of the transaction, the information is stored in a block and is given a unique hash code to identify the transaction. Once the block is given a hash code, it is then added to the most recent block to the blockchain.

 

The network approves or verifies a new block by going through what is called a mining process. Mining is the process of adding a new block to the blockchain. It is basically a network-wide competition where any node or computer on the network can work to add the next block to the chain and get rewarded. 

 

Each newly-mined block is broadcast across the network, where each node independently verifies it before adding it to their blockchain. As a miner of the bitcoin network, you get rewarded with bitcoin for each verified block. It takes high electric power to mine a block, though. 

 

WHAT IS A NODE?

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Any user can connect their computer to the blockchain network as a node. A node is a link between data units. In other words, a node is a computer that is running, in this case, the Bitcoin program, and is connected to other computers to run the same program to create a Network. In doing so, their computer would receive a copy of the blockchain that is updated automatically whenever a new block is added. A node has the job to follow rules, share information, and keep a copy of confirmed transactions.

 

There are two types of nodes, in the case of bitcoin, Full nodes and Partial nodes or Lightweight nodes.

 

A Full node is basically a computer that can store a full copy of the current size of the bitcoin blockchain, which is currently over 285 GB. During the process of coping with the blockchain, it verifies and validates the entire data of the blockchain to guarantee security.

 

Partial or a lightweight node is an example of a phone that cannot store the full blockchain but is connect to the full node in order to synchronize and participate in the network. 

 

IS BLOCKCHAIN SECURE?

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A new block is always added at the end of the blockchain. If you take a look at the bitcoin blockchain, you’ll notice that each block is given a height number, which is the block position in the network. Once that is set, it is impossible to alter the content of the block because each block has its own hash code, and to change a hash code on a block, you must change all the other block codes on the network. This is impossible, so yes, the system is very secure.

 

Further, to increase trust in the system, a test is required for computers that want to join and add blocks to the chain. This test is called the consensus models, for users to prove themselves before they can participate in the network. In the bitcoin case, computers must prove that they have done work by solving a difficult computational math problem to be eligible.

 

 It takes a great amount of power and energy to solve a problem, so the odds of solving a math problem are very low unless you run a powerful mining program on the computer.

 

This mining program is very costly, but the advantage is that you are rewarded with bitcoin whenever a math problem is solved or verified by the mining system. 

 

BITCOIN vs. BLOCKCHAIN

Bitcoin is what gave birth to all digital currencies or cryptocurrencies. It was the first cryptocurrency that was launched in January 2009 by anonymous Satoshi Nakamoto, using blockchain technology to transact peer-to-peer electronic payment without the authority of a third party (banks or government). The technology grew in popularity worldwide, and then many other digital currencies like Ethereum and Litecoin were created. 

 

Bitcoin is a decentralized digital currency that allows users to transact directly (peer to peer) without a middle man to oversee the exchange of funds. It is an asset used as a medium of exchange or in exchange for goods and services. Unlike traditional or fiat currency, Bitcoin is faster, has a lower financial service cost and it gives users more freedom.  

Bitcoin is powered by blockchain technology; there is no bitcoin without the blockchain network. Even though Bitcoin uses the technology as a ledger to transparently record and exchange payments, blockchain actually has a much wider used case beyond digital currency. The network can be used to execute smart contracts, to store property information, to store health records, to record the production of inventory, for voting identification, and much more. 

 

The goal of Blockchain is to distribute and record digital information without been edited. This can revolutionize the way we do business worldwide by providing effectiveness through authentication. 

CENTRALIZED vs. DECENTRALIZED

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The implementation of Blockchain has created a decentralized marketplace for digital currencies. Decentralized cryptocurrency like Bitcoin has strong advantages over the centralized Banking system, especially in its efficiency. 

 

The centralized system as we know it operates with a middle man executing and recording all our transactions. However, the decentralized system removed the middle man and give people the freedom to transact business peer to peer effectively in minutes with transparent records and proves more trustworthy. 

 

Here’s a breakdown of a centralized banking system and a decentralized blockchain system. 

FEATURE
CENTRALIZED SYSTEM (BANKS)
DECENTRALIZED SYSTEM (BITCOIN)

USER IDENTITY

Identification is not anonymous 

Identification is anonymous 

TRANSFER SPEED

It takes an average of 24-48hrs for a bank transfer. However, Internation Wire transfers take up to 3-5 days. 

Bitcoin transactions can take up to 20 minutes to 1 hour for an effective transfer. 

SECURITY

The bank server is more open to malicious attacks. 

The lesser chances of malicious attacks because users can store currency offline (cold storage).

TRANSACTION FEES

The transaction fee to make a bank transfer can be higher. 

A peer to peer transaction with Bitcoin can be very low. 



THE FUTURE OF BLOCKCHAIN TECHNOLOGY

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Blockchain Technology is rising as it is revolutionizing business processes across the industry. Its adoption is becoming widely accepted, and many people are gaining more knowledge of its use case. The future of this technology is very bright because it provides so many benefits to people worldwide and the financial industry. Blockchain is faster, cheaper, secure, and transparent. It is the technology that will continue providing efficiency in this digital era.  

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2 Responses

  1. Hi and thanks. This has to be the most accessible and easiest-to-understand explanation I have read on how blockchain technology works. Though I am sure that there is much more to this than explained here. I am guessing that the complicated math problem which seems integral to the mining process is a whole other subject to get your head around. Personally, I think blockchain technology is one of those revolutionary technologies that is going to radically transform the global economy and we are barely seeing the start of this. Best regards, Andy

    Reply

  2. This has been an interesting read. I have heard about the blockchain a lot. I guess we all have. But being able to read a simple explanation as this is a game changer. I see how robust this technology is. And how this technology can replace central banks and all these institutions that have historically robbed the population using devaluation.

    Reply

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