Blockchain technology is the technology behind cryptocurrency, allowing it to exist as a secure method of moving and validating transactions and information. In this sense, you might think of blockchain as Microsoft Windows – a software platform – on which a variety of other software (such as cryptocurrency) is developed.
Here’s what blockchain technology is, how it works, and why it’s so popular.
How the blockchain works
Blockchain is a software application that tracks data by storing it in blocks which are then chained chronologically. Think of a blockchain as an in-process receipt of transactions or data that is validated and stored and can be viewed later. Blockchain technology can underpin many different applications, such as cryptocurrency, smart contracts, tracking information, and almost any other digital process that might require observation.
In the case of cryptocurrency, computers validate the movement of money from person to person over time, leaving a permanent record that can be accessed later, such as a long receipt of every transaction ever made. . Bitcoin brought blockchain technology to popular consciousness.
Blockchain technology is often decentralized, which means that the ability to write to the database is given to a network of computers, as is the case with cryptocurrencies. This distributed ledger, as it’s often called, tracks data using redundant power from networked computers to validate the data. Every computer has access to this public record, and as new transactions are added to the receipt or general ledger, they are verified by the networked computers.
Due to this validation process and the cryptography it uses, the blockchain is very secure, creating an almost irreversible record.
How is a blockchain different from a normal database?
A blockchain database stores data in blocks, and when a block is filled with data, it is connected or “chained” to the previous block. The chain continues indefinitely, with successive blocks of information added to previous blocks, as long as the computers managing the database continue to use it. And because the blockchain gathers data over time, it is a history of that data in the order in which it was irreversibly recorded on the blockchain.
In contrast, a typical database can simply be a table, although it can be very large, that organizes data based on specific attributes. A typical database does not need to have a timeline, and previously saved data can be edited in the database. But like a blockchain, a typical database can limit who can access, store, and retrieve information.
How transparent is the blockchain?
Blockchain is all about tracking the flow of information and by its very design it is meant to be very transparent, at least if you can access the blockchain database that stores the information. To establish transparency, however, you need a secure database that is hack resistant. Blockchain technology stores information in a secure manner which must also record all changes made to a given blockchain, so that there is a record of the changes.
The blockchain allows an “unauthorized” public ledger to be accessed by computers (or “nodes”) on the network. By joining the network, you (or anyone) will be able to see what information has been saved, although the data may offer anonymity (or semi-anonymity). Thus, users can view all transactions in a given blockchain over time.
For example, Bitcoin’s distributed ledger is publicly verifiable, although you can’t directly see who is making a transaction. You can trace transactions in the cryptocurrency over time and see where the money has been moved and to which accounts.
However, other blockchains may remain “authorized”, which means that users must be allowed to enter data or perform transactions through the blockchain. In these blockchains, users can remain completely anonymous and transparency is limited by those who control the database.
So while blockchain may allow transparency in its design, there is also the question of who has the ability to see a blockchain, who or what is being observed and who is observing. The answers to these questions – and the transparency of blockchain – depend on politics and power.
Why is blockchain technology so popular?
Blockchain has become popular because it can be used in various applications, including cryptocurrencies, and it can provide various benefits:
- Decentralization. A blockchain database can be decentralized and validated by networked computers authorized to access it. This decentralization allows computers to correct the database if conflicting information enters the blockchain.
- Irreversibility. A decentralized blockchain validates information and produces an almost irreversible record of transactions, for example in Bitcoin. Once the bitcoins have been moved and the transaction validated, it is saved permanently.
- Security. Blockchain offers security in various ways. For example, its irreversibility leads to the security of transactions. Network redundancy means that transactions are committed multiple times. And if any information is altered, the blockchain identifies that it has been altered.
- Transparency. The blockchain makes it possible, for example, to display transactions in a cryptocurrency in a public ledger, even if the accounts with a given currency remain anonymous or semi-anonymous.
- Without trust. Because of the way it validates information, a blockchain can be operated without either side of a transaction knowing each other or validating the transaction.
- Robustness. Blockchain can activate many different processes and technologies.
The blockchain can also be used for smart contracts, contracts that are automatically validated and executed when the terms of the contract are met, which is one of the key characteristics of Ethereum cryptocurrency.
At the end of the line
Blockchain enables the creation and development of cryptocurrencies, but it has the potential to offer much more in terms of the ability to track and verify a whole range of data. It could therefore become an essential part of new applications that track, manage and control data, physical objects, legal agreements, payments, royalties and much more.