What is blockchain technology? What makes it so important?
Imagine a world where you can send money directly to someone without a bank – in seconds instead of days, and you don’t pay exorbitant bank fees.
Or one where you store money in an online wallet not tied to a bank, meaning you are your own bank and have complete control over your money. You don’t need a bank’s permission to access or move it, and never have to worry about a third party taking it away, or a government’s economic policy manipulating it.
This is not a world of the future; it is a world that an avid but growing number of early adopters live in right now. And these are just a few of the important blockchain technology use cases that are transforming the way we trust and exchange value. We’ll get into the rest later on.
Yet, for many, blockchain technology is still a mysterious or even intimidating topic. Some even remain skeptical that we’ll use this technology in the future. This skepticism that exists today is understandable because we’re still very early in the development and widespread adoption of blockchain technology.
2021 is to blockchain what the late 1990s were to the internet. And like the internet, blockchain technology is anything but a fad, it’s here to stay, and if you’re reading this, you’re early too.
This post demystifies blockchain technology. This is your ‘intro to blockchain technology 101’. A complete, easy-to-understand, step by step beginners blockchain breakdown. You’ll learn everything from what blockchain is and why it matters, to how blockchain works (step by step) and what today – tomorrow’s – most promising blockchain applications may be.
You’ll also walk away from this post confident, and well on your way to making informed, independent blockchain technology investment decisions. And you’ll be no slouch if you want to hold your own in conversations with family and friends too!
So let’s dive in
Blockchain 101: Blockchain For Beginners
Blockchain technology is the concept or protocol behind the running of the blockchain. Blockchain technology makes cryptocurrencies (digital currencies secured by cryptography) like Bitcoin work just like the internet makes email possible.
The blockchain is an immutable (unchangeable, meaning a transaction or file recorded cannot be changed) distributed digital ledger (digital record of transactions or data stored in multiple places on a computer network) with many use cases beyond cryptocurrencies.
Immutable and distributed are two fundamental blockchain properties. The immutability of the ledger means you can always trust it to be accurate. Being distributed protects the blockchain from network attacks.
Each transaction or record on the ledger is stored in a “block.” For example, blocks on the Bitcoin blockchain consist of an average of more than 500 Bitcoin transactions.
The information contained in a block is dependent on and linked to the information in a previous block and, over time, forms a chain of transactions. Hence the word blockchain.
Types of Blockchains
There are four types of blockchains:
1. Public Blockchains
Public blockchains are open, decentralized networks of computers accessible to anyone wanting to request or validate a transaction (check for accuracy).Those (miners) who validate transactions receive rewards.
Public blockchains use proof-of-work or proof-of-stake consensus mechanisms (discussed later). Two common examples of public blockchains include the Bitcoin and Ethereum (ETH) blockchains.
2. Private Blockchains
Private blockchains are not open, they have access restrictions. People who want to join require permission from the system administrator. They are typically governed by one entity, meaning they’re centralized. For example, Hyperledger is a private, permissioned blockchain.
3. Hybrid Blockchains or Consortiums
Consortiums are a combination of public and private blockchains and contain centralized and decentralized features. For example, Energy Web Foundation, Dragonchain, and R3.
Take note: There isn’t a 100 percent consensus on whether these are different terms. Some make a distinction between the two, while others consider them the same thing.
4. Sidechains
A sidechain is a blockchain running parallel to the main chain. It allows users to move digital assets between two different blockchains and improves scalability and efficiency. An example of a sidechain is the Liquid Network.
History of Blockchain
Blockchain isn’t just a database, it’s a new technology stack with ‘digital trust’ that is revolutionizing the way we exchange value and information across the internet, by taking out the ‘gatekeepers’ from the process. For a complete and more detailed deep dive check out our article: A Concise History of Blockchain Technology
Blockchain history goes back farther than you might imagine, but we’ve condensed it by answering four critical questions:
Who Invented Blockchain?
The first blockchain-like protocol was proposed by cryptographer David Chaum in 1982. Later in 1991, Stuart Haber and W. Scott Stornetta wrote about their work on Consortiums.
But it was Satoshi Nakamoto (presumed pseudonym for a person or group of people) who invented and implemented the first blockchain network after deploying the world’s first digital currency, Bitcoin.
Cryptography is a deep and fascinating discipline with a history that goes back further than blockchain. For a richer understanding of how cryptography helps blockchain technology, check out: Why Cryptography Makes Blockchain Unstoppable
Who Owns Blockchain Technology?
Because blockchain technology is the technology behind the blockchain, it cannot be owned. It’s like the internet. But anyone can use the technology to run and own their own blockchains.
Who Founded Bitcoin?
Satoshi Nakamoto.
Who Sent and Received the First Bitcoin Transaction?
Nakamoto sent ten bitcoins to Hal Finney, who built the first reusable proof-of-work system in 2004.
How Does a Public Blockchain Work (Step-by-Step)
As a society, we created ledgers to store information—and they have a variety of applications. For example, we use ledgers in real estate to store a house’s records, such as when alterations were made or the house was sold. We also use ledgers in bookkeeping to record all the transactions a company makes.
Bookkeeping mostly relies on double-entry accounting to store transactions. Although this is a step-up from single-entry accounting that lacks transparency and accountability, double-entry accounting also has its pitfalls: Entries are accounted for separately, making it difficult for one counterparty to verify the other’s records.
Records stored using traditional ledgers are also easy to tamper with, meaning you can easily edit, remove, or add a record. As a result, you’re less likely to trust that the information is accurate.
Public blockchains solve both these problems – and the way we trust – by evolving the traditional bookkeeping model to triple-entry bookkeeping: transactions on a blockchain are cryptographically sealed by a third entry. This creates a tamper-proof record of transactions stored in blocks and verified by a distributed consensus mechanism.
These consensus mechanisms also ensure new blocks get added to any blockchain. An example of a consensus mechanism is proof-of-work (PoW), often referred to as “mining.”
Mining isn’t universal to all blockchains; it’s just one type of consensus mechanism currently used by Bitcoin and Ethereum, though Ethereum plans to move to another—proof-of-stake (PoS)— by 2022.
Here’s how this process works with Bitcoin. When sending Bitcoin, you pay a small fee (in bitcoin) for a network of computers to confirm your transaction is valid. Your transaction is then bundled with other transactions pending in a queue to be added to a new block.
The computers (nodes) then work to validate this list of transactions in the block by solving a complex mathematical problem to come up with a hash, which is a 64-digit hexadecimal number.
Once solved, the block is added to the network—and your fee, combined with all other transaction fees in that block, is the miner’s reward. It’s that simple.
Each new block added to the network is assigned a unique key (via cryptography). To obtain each new key, the previous block’s key and information are inputted into a formula.
As new blocks are continually added through the ongoing mining process, they become increasingly secure and harder to tamper with. Anyone caught trying to edit a record will simply be ignored. All future blocks then depend on information from prior blocks—and this dependency from one block to the next forms a secure chain: the blockchain.
You can see this depicted below for house records stored on the blockchain. For example, Block 2 provides a key after taking all the information from Block 1 into account (including the key) and inputting it into a formula. Block 3, in turn, provides a new key after taking all the information from Block 1 and Block 2 into account (including the key) and inputting it into a formula. And so, the process repeats itself indefinitely.
