The Blockchain can be a difficult concept to comprehend. This post will at least tell you enough info to sound intelligent at your next dinner party.
Don’t get discouraged and angrily click away! It’s going to take some time for the ideas to stick in your mind, and the details can get a little blah rather quickly.
It’s something that is new to the greater majority of people, and there are going to be tons of new terms and concepts that will take a minute to stick in your brain.
Hopefully, after reading this blog post you will leave with a very basic understanding of what Blockchain technology is. If you can pass the grandparent test, then we’ll consider it a success.
The Blockchain summed up in one sentence:
A giant Excel Spreadsheet that anyone can access and is continually updated and checked by multiple users for accuracy.
So what is it already?
The blockchain is an incorruptible digital ledger that can be used to accurately record financial transactions, as well as other applications of value. It’s a completely open source digital ledger, which means that anyone can have access to it that wants access. Since anyone can gain access and participate in the process of verifying blocks, also known as block mining, it is completely decentralized. This means that there is no single person, or organization responsible for verifying transactions. By distributing the power to verify transactions, this allows for much more accurate record keeping.
It is not possible for one entity to control the blockchain, and therefore it has no single point of failure.
Example of how a transaction works on the blockchain
- Someone requests a transaction.
- This request is sent out to a P2P (peer-to-peer) network that consists of computers that are referred to as nodes.
- Each node is given a master copy of the digital ledger to validate
- The network of computers (nodes) validates the transaction using known computational algorithms. (Each node creates it’s own updated series of events on the blockchain.)
- Every node in the network comes to the same conclusion, and each node updates the transaction independently. The most popular record continuously becoming the effective master copy.
- Once the transaction is verified, it is combined together with other transactions to form a new block of data.
- The new data block is added to the existing chain of blocks. The updated blockchain is permanent and can not be altered.
- The transaction is now complete.
Blockchain technology is the combination of three different previously known technologies that work together as one.
1. Private key cryptography
Each user is assigned two separate keys which are essentially large, randomly generated strings of characters. The two keys are paired together but are not identical to each other.
The first key is a public key. The public key can be shared with anyone and is accessible to anyone.
The second key is a private key. This key should not be shared with anyone else. The private key is used to both encrypt and decrypt the data.
If I were to send you 1 Bitcoin the private key is what encrypts the Bitcoin transaction. When you receive the Bitcoin in your account,your private key then decrypts the message for you allowing you to access it. This renders the message unreadable to everyone that does not have the private key associated with the public key that I sent the Bitcoin to.
It’s why Bitcoin transactions are very secure and difficult to hack.
2. P2P (peer-to-peer) network
A distributed network with a shared ledger is how transactions are verified on the blockchain. The shared ledger is available to anyone and can be monitored and verified by anyone. There is no single entity responsible for the validation of transactions. The larger the network of users that participate in the validation of transactions, the more secure the network becomes.
3. Program & Incentives (the blockchain protocol)
So why would a network of millions of users use their time, effort, and computing power to verify transactions?
They are incentivized to do so.
A blockchain is verified willingly by numerous people who have their own self-interest in mind. By accurately and quickly verifying transactions on the blockchain, users are rewarded for their efforts. It’s an interesting spin of the economic theory, the tragedy of the commons. This is where each individual tries to obtain the biggest reward possible from a given resource. The resource is one that is typically open to anyone in society. The tragedy arises when the individuals neglect the well-being of society in the pursuit of personal gains.
With blockchains, the users’ personal gains and self-interest are used to help service the public need.
With Bitcoin, for example, the incentive for verifying transactions in a block is a small percentage of Bitcoin for themselves in return.