How Does Blockchain Work?
Blockchain is a decentralized record-keeping system for transactions that use linked “blocks” as secure records of information. Blockchain is distributed and maintained across a variety of network nodes, making it decentralized and not subject to a central authority (like a government entity). A node can be just about any device on the network, as long as it can contribute power to maintaining the network.
This definition may sound straightforward enough that you wonder, “what exactly is significant about blockchain?” In this article, we’ll answer that question and more by focusing on the technical side of this piece of technology along with its key characteristics and uses.
In application, blockchain can potentially impact just about every part of your life via the corporations and institutions that most of us interact with on a regular basis. From banks to tech companies and much more, organizations that administer a large stream of payments, transactions, or contracts stand to benefit from blockchain.
The big picture: blockchain offers security and transparency
The potential and the promise of blockchain is that it’s a more secure platform for exchange. With emerging improvements to how the tech is maintained, there are new and better ways to secure information, contracts, and vital data about people or services using blockchain.
With a public blockchain like Bitcoin, it’s also possible to look up and research individual blocks. This adds another layer of scrutiny that prevents abuse. In the case of Bitcoin, blockchain is critical to how it operates. Without blockchain as a secure public record of transactions, there wouldn’t be such a high bar for security.
But there’s a lot more to blockchain than Bitcoin and other cryptocurrencies. Let’s now look at how it works in practice, its strengths and weaknesses, and some forecasts for the future.
What is blockchain technology?
Its linked chain construction is fundamental to how blockchain systems secure themselves, with each block preserving information about itself and its preceding block.
Individual blocks are used to store information, including data about transactions, its own creation, and a cryptographic hash. These hashes are algorithms that convert data into an easily recorded form that has the benefit of being extremely difficult to read or revert. They also provide authentication by including a record of preceding blocks. This system guarantees security and makes tampering not only more difficult, but far easier to identify and trace.
In this way, it becomes impossible to illicitly alter an older block in the chain without disrupting all the subsequent blocks. Even if this does occur, it requires a consensus within the network maintaining the blockchain. It’s this network consensus that ultimately designs protocols and decides how their blockchain will function, such as how it encodes data, who has access, and other factors.
This robust authentication process is what makes blockchain so uniquely useful. Blockchains don’t monitor individual repositories of cryptocurrency because they record your transactions. Individual blocks record your gains and your losses, your expenses and your payments, and these records can’t be altered without disrupting each new block.
The history of blockchain explained
How blockchain came to be such a common headline is actually very closely tied to one of the earliest, most visible, and arguably most successful users of the technology to date: Bitcoin. Before we take a closer look at the strengths and weaknesses associated with blockchain, theoretically and as it exists today, let’s discuss its creation.
Early applications for cryptocurrency
Their actual identity is widely disputed in some circles, but Satoshi Nakamoto is credited with inventing blockchain. Similar ideas were expressed before, but they were either concepts or not refined enough to be truly efficient. To date Nakamoto has never been seen or identified, leaving some room for conspiracies and debate.
Whoever is behind its original development, blockchain was essentially invented to facilitate a secure public repository of transactions for Bitcoin. After this, Nakamoto disappeared from the web, just two years after they proposed the idea and only a year after implementing it, fueling speculation about their identity.
Public blockchain is open-source
Because Bitcoin is open-source, the network is left to develop autonomously through the consensus of participants. If a majority of Bitcoin users decide to radically alter the way the platform operates, they could alter the system however they want.
This is what makes Bitcoin an open-sourced, decentralized system. The same applies to other cryptocurrencies that use a public blockchain. It’s also the conceptual basis for the 51% attack [1], in which an oversized attacker seizes control of a blockchain by controlling a majority of the nodes that power its functions. Energy and material costs make this type of tactics impractical.
Blockchain for individuals and business
Part of the reason for blockchain’s hype is just how deeply its potential applications are woven into the fabric of public life. You aren’t likely to see supercomputers at a friend’s house used to power blockchain applications, but individuals don’t need to maintain their own blockchain network to benefit.
Individual users can participate in blockchain by mining or investing in Bitcoin or their preferred cryptocurrency. Do your research first, since there are many options out there to consider. If a public cryptocurrency sparks a new flood of interest, the influx of participants bolsters the system’s capacity and trustworthiness, paying potential dividends and increasing the likelihood of a stable market.
The advantages for large institutions and businesses are just as pragmatic, and they center on cutting costs and centralizing less efficient processes. The financial and medical sectors both stand to save a lot when it comes to secure record-keeping, with banks and other financial institutions among the first to explore the technology. Because blockchain has the potential to dramatically streamline verification, so it could also have a broad impact on items like medical and employment records, resumes, and more.
A few things to keep in mind
There are still some lingering issues that the emerging blockchain industry hopes to address and a few fundamental risks that you should be aware of. The spread of blockchain is ongoing, so most of these issues revolve around how blockchain is maintained and how it develops.
The size of a blockchain network and its history are two major factors. For example, some cryptocurrencies have been famously compromised or left inaccessible essentially due to human error. However, as the scale of blockchain applications grows and produces more trustworthy networks, the chances of developing more robust protocols improve.
The risks of private blockchain and small networks
A big part of the security advantage conferred by blockchain technology comes from its public nature. Small networks or private blockchain systems are more vulnerable because they require fewer resources to disrupt. Distributed control is a big security advantage at larger scales, but without it you face your own unique set of opportunities and risks.
Security on a distributed network: the more nodes the better
Smaller scale networks like newer cryptocurrencies and private blockchains can’t match the scale of Bitcoin or bigger competitors, which means they can’t offer quite the same appearance of security. When a blockchain network has more nodes and more capacity, tampering becomes more difficult.
Difficult to modify blockchain info once it’s stored
If you’re trying to protect your data, there’s a big security advantage with blockchain. The level of difficulty it takes to modify blockchain makes it secure against illicit tampering. That said, this also makes it very challenging to change protocols or information once it’s encoded. As a result, there’s still a risk of human error here. There’s also more pressure, because you want to make sure everything is encoded properly the first time so you can avoid potentially disruptive changes.
What does the future hold for blockchain?
A widespread use of blockchain isn’t here just yet, but there are signs of bigger intentions for the technology. The tech-industry-focused Blockchain For Good initiative is one such example. It has a clear focus on expanding development in a thoughtful way; what they call “humanising the blockchain [2].” In many ways, groups like these are a response to the structural need for scale as a measure of trust and authenticity with the system.
What is so special about cryptocurrency?
The popularity of cryptocurrency is an outlier in terms of blockchain technology because it’s so accessible to individual users with a little know-how. For Bitcoin, that’s meant slow but continuous growth as the first and biggest cryptocurrency, which also means it’s most broadly secure.
Older cryptos have a big head start in that department, particularly when it comes to resources and recognition. Most can’t compete by the numbers. For example, at the time of writing, the value of a single Bitcoin is nearly $10,000.00. According to statistics, the value of the network is worth billions of dollars [3].
By comparison, Ethereum is one of their closest competitors and a single unit has only a little more than 2% of 1 bitcoin’s value. Smaller cryptocurrencies have their own advantages, including a lowered cost of access. The flipside of success is that it becomes harder to compete. Obtaining and mining bitcoin used to be much more simple, but as the scarcity and value of bitcoins have risen, so too have the associated costs.
Nonetheless, cryptocurrency is one of the easiest ways that individual users can (with the right hardware) participate in the still very early history of blockchain. The world of cryptocurrency mining and investment is growing and already accounts for its own large sub-culture and history of high-impact users.
The best may be yet to come
Most industries are still just beginning to explore the potential applications of blockchain, which means there’s a long way to go. That’s because the policy and practice behind blockchain, as well as the supporting technology, are still mostly in their infancy. Even widespread, near-universal adoption won’t change that overnight. Success stories like Bitcoin are the exception and not the rule, and even its nearest competition operates at a much smaller scale.
Your takeaway
For casual readers, there’s still not much pressure to know everything about blockchain just yet. Unless you have a stake in digital security or cryptocurrency, this tech may not appear on your radar for a while. Still, if you made it this far, you should definitely feel more comfortable answering the next time someone asks, “How does blockchain technology work?”
[1] Investopedia; 51% attack
[2] Blockchain for Good; Homepage
[3] Bitcoin.org; FAQs
