What is Blockchain Technology?
A blockchain, also referred to as distributed ledger technology (DLT), is a digital ledger of transactions that is duplicated and distributed across the entire network of the blockchain. This makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing. Once information is recorded onto the blockchain, it is very difficult to alter without agreement from all parties involved. An asset on the blockchain can represent something tangible such as a house, car, cash, or land, as well as something intangible such as intellectual property, patents, copyrights, etc. A blockchain can be public (permissionless), meaning that anyone can access the network and it can also be private (permissioned), meaning only permissioned members can access the network.
Why is Blockchain Technology Important?
Blockchain technology helps in the verification and traceability of multistep transactions. It can provide secure transactions, reduce costs, and speed up data transfer processing. Business runs on information. Blockchain is ideal for delivering that information as it provides immediate The main benefits derived from blockchain technology are the following:
- It is an immutable public digital ledger - when a transaction is recorded, it cannot be altered.
- Blockchain technology has encryption features which means the blockchain is always secure from malicious third parties that do not have granted access to the network.
- Transactions are processed instantly and transparently, as the ledger is updated automatically.
- Due to the decentralized nature of the blockchain, no intermediary fee to a third party is required.
- The authenticity of a transaction is verified and confirmed by participants of the network..
How Does Blockchain Technology Work?
A single block in a blockchain contains some data (e.g transaction data), the hash of the block, and the hash of the previous block. The data stored in the block is dependent on the type of blockchain. For example, the Bitcoin blockchain stores details about a transaction such as sender, receiver, and amount of coins. Each block also contains a hash - which can be compared to a fingerprint. It identifies a block and all of its contents, and is always unique - like a fingerprint. Once a block is created, its hash is being calculated and changing something inside the block will cause the hash to change. Therefore, hashes are useful when looking for changes to blocks. If a hash of a block is changed, it is no longer the same block. The third element of a block is the hash of the previous block. All these elements are what creates a chain of blocks or a “blockchain” and these elements are precisely what makes the blockchain so secure.
For example, consider a chain of 3 blocks. Each block has a hash and the hash of the previous block. So block number 3 points to block number 2, and number 2 points to number 1. Block number one is special as it is the first block and therefore does not have a hash to the previous block. The first block in a blockchain is referred to as the genesis block.
Now, let’s say that someone tampers with the second block. This causes the hash of the block to change as well, and in turn, this makes block 3 and all of the following blocks invalid because they no longer store a valid hash of the previous block. Changing a singular block will cause all following blocks to become invalid.
Using hashes is not enough to prevent tampering as computers these days are very fast and can calculate hundreds of thousands of hashes per second. One could effectively tamper with a block and recalculate all the hashes of the other block to make the blockchain valid again.
To mitigate this, blockchains have a consensus algorithm called proof-of-work. This mechanism slows down the creation of new blocks. In Bitcoin’s case, it takes about 10 minutes to calculate the required proof-of-work and add a new block to the chain. This mechanism prevents tampering with a block because if someone were to tamper with a single block, they would need to recalculate the proof-of-work for all the following blocks.
Instead of using a central entity to manage the chain, blockchain uses a peer-to-peer network where anyone can join. When someone joins a blockchain they are given a full copy of the blockchain. The person running the node can use this to verify everything is still in order. When a new block is created, it is sent to everyone on the network where each node will verify that the new block has not been tampered with. If everything checks out, each node adds this block to its own blockchain. When all nodes agree about which blocks are valid and invalid- they create consensus.
In order to successfully tamper with a blockchain, one needs to tamper with all blocks on the blockchain, redo the proof-of-work for each block, and take control of more than 50% of the peer-to-peer network. Theoretically, only then will a tampered block be accepted by everyone else and added to the blockchain - this is almost impossible to do!