You may have heard the term "blockchain" used in various articles and videos on the internet. You can usually find it being mentioned whenever Bitcoin is discussed. But what exactly is a "blockchain" and why do some people think it may be the next great technology? Let's see if we can answer those questions.
What is Blockchain Technology? A blockchain is a distributed digital ledger that facilitates secure online transactions between two parties by recording those transactions efficiently and in a verifiable and permanent way. Transactions, which are grouped into blocks, are continually added to the end of the blockchain and each block is tied to the previous block. Hence the name blockchain.
The immutable nature of blockchains allows participants to inexpensively audit and verify transactions. The blockchain concept was introduced in 2008 by Satoshi Nakamoto, and then implemented the following year as part of the digital bitcoin currency. A blockchain database is managed autonomously using a peer-to-peer network and a distributed timestamping server. Due to the use of a blockchain bitcoin was the first digital currency to solve the issue of double spending without the use of a central authority. Now you may be asking yourself, "Okay, so that's a nice description but I don't see anything revolutionary there. What's so special about putting transactions into these blocks and chaining them?" To answer that question let's dive more into how transactions are added to the blockchain.
How Does Blockchain Work? There are two key characteristics of a blockchain:
The ledger/database is distributed
Each node on the network that participates with the blockchain operates and communicates in a peer-to-peer fashion.
Each node on the network has a copy of the entire blockchain so every transaction is known (transaction privacy is still enforced through pseudonymity). When a transaction between two parties occurs the node that creates the transaction broadcasts the details of the transaction in a cryptographically secure fashion.
Other nodes on the network receive the details of the transaction as well as other broadcasted transactions. The nodes take all the received unrecorded transactions, verify them, and compile them into a single block that is linked to the last block in the current blockchain. The block is broadcast to other nodes on the network to be verified.
If the block is accepted by the other nodes it is officially attached to the end of the current blockchain and the next block created will be linked to this block.
Finally, the 2nd party in the original transaction is notified that the transaction is complete.
Conclusion This was a simple overview of blockchain technology and how it works. Many analysts are predicting that blockchain technology has a large potential to transform business operating models in the long term. It is not considered a disruptive technology but more of a foundational technology that has the potential to create new foundations for global economic and social systems. More recent blockchain applications have gone beyond just recording transactions by allowing "smart contracts" that allow computational logic to trigger inside the blockchain under certain situations. Other examples of blockchain technology being used outside of digital currency include automated voting systems, royalty collection, management of copyrights, real estate transactions, and medical records.
In future articles, we’ll discuss the Bitcoin implementation of blockchain technology and how the characteristics of blockchain technology keep Bitcoin transactions secure.
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