What is blockchain?

Learn the basics of blockchain technology and why it can enhance trust in both record keeping and financial transactions.

Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.

A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. The decentralized database managed by multiple participants is known as Distributed Ledger Technology (DLT).

Blockchain is a type of DLT in which transactions are recorded with an immutable cryptographic signature called a hash.

This means if one block in one chain was changed, it would be immediately apparent it had been tampered with. If hackers wanted to corrupt a blockchain system, they would have to change every block in the chain, across all of the distributed versions of the chain.

Blockchains such as Bitcoin and Ethereum are constantly and continually growing as blocks are being added to the chain, which significantly adds to the security of the ledger.

Why is there so much hype around blockchain technology?

There have been many attempts to create digital money in the past, but they have always failed.

The prevailing issue is trust. If someone creates a new currency called the X dollar, how can we trust that they won’t give themselves a million X dollars, or steal your X dollars for themselves?

Bitcoin was designed to solve this problem by using a specific type of database called a blockchain. Most normal databases, such as an SQL database, have someone in charge who can change the entries (e.g. giving themselves a million X dollars). Blockchain is different because nobody is in charge; it’s run by the people who use it. What’s more, bitcoins can’t be faked, hacked, or double-spent – so people that own this money can trust that it has some value.

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How does a transaction get into the blockchain?

Before a transaction is added to the blockchain it must be authenticated and authorized.

There are several key steps a transaction must go through before it is added to the blockchain. Today, we’re going to focus on authentication using cryptographic keys, authorization via proof of work, the role of mining, and the more recent adoption of proof of stake protocols in later blockchain networks.

Authentication

The original blockchain was designed to operate without a central authority (i.e. with no bank or regulator controlling who transacts), but transactions still have to be authenticated.

This is done using cryptographic keys, a string of data (like a password) that identifies a user and gives access to their “account” or “wallet” of value on the system.

Each user has their own private key and a public key that everyone can see. Using them both creates a secure digital identity to authenticate the user via digital signatures and to ‘unlock’ the transaction they want to perform.

Authorization

Once the transaction is agreed upon between the users, it needs to be approved, or authorized, before it is added to a block in the chain.

For a public blockchain, the decision to add a transaction to the chain is made by consensus. This means that the majority of “nodes” (or computers in the network) must agree that the transaction is valid. The people who own the computers in the network are incentivized to verify transactions through rewards.