What Is Blockchain and How Does It Work?
Lifting the lid on the tech we’ve all heard so much about, yet many of us haven’t wrapped our heads around… yet
Although the term “blockchain” has become part of our modern lexicon, a lot of people are left asking, “what is blockchain?” Is it a cultural phenomenon? A reimagining of the internet’s potential? A fool-proof answer to online security issues?
There are more questions surrounding the nature of blockchain than there are cryptocurrencies in existence — and, believe us, there are a lot of cryptocurrencies. (More than 7,850 as of the publication of this article, according to coinmarketcap.com.) But there remains plenty of confusion regarding what blockchain is, what it does, and how blockchain works. You might know that blockchain relates to cryptocurrencies in some way, but you might not know in what capacity, or what other industries this technology applies to.
While nobody is entirely sure who Satoshi Nakamoto is — potentially the creator of Bitcoin (the first cryptocurrency), according to Newsweek — there’s no denying that blockchain is a technology that’s developed, evolved, and grown into one of the defining inventions of our age. With new blockchain benefits emerging every year, it feels as though we’re only at the beginning of a truly remarkable technology.
With that in mind, let’s focus on the big question. What is blockchain, really? And how does blockchain work?
Let’s hash it out.
What Is Blockchain? Blockchain Definition and Explanation
In the most basic sense, a blockchain is a publicly-managed and verified record of transactional data. All of the data blocks are ordered chronologically and are connected to form a “chain” — hence, the term “blockchain.” All of the chain’s old blocks of data are permanent; they can’t be modified or altered retroactively.
Blockchain is an alternative to traditional centralized systems (like the traditional banking and financial system), which is why blockchain is integral to many cryptocurrencies. However, it’s not only useful for cryptocurrencies — there are other potential applications for blockchain in other industries and sectors as well (although Gartner predicts that 90% of such projects for supply chains will fizzle out by 2023). We’ll explore some of those potential applications later in the article.
As far as a technical blockchain definition goes, this technology is a decentralized and distributed public ledger constructed around a P2P (peer-to-peer) system. This system can be openly shared among its users to form an immutable record of transactions. Each of these transactions are time-stamped and indelibly connected to the previous chain link. Each time a transaction is added, the fresh data forms a new block at the end of the chain.
Here’s where it gets clever (and hard for cybercriminals to manipulate). Blockchain is only able to be updated by consensus. That is, the participants in the chain system must agree on additions and changes to the chain itself — something which becomes significant when you factor in that nothing entered into the blockchain can be removed. Verifiable and auditable, blockchains allow for precise and transparent record-keeping.
Blockchain: The Google Sheets of Cryptocurrencies
If that all sounds a little confusing, let’s give you a neat analogy based upon something we all know and love: spreadsheets. Here, we’ll consider the use of traditional Excel spreadsheets versus Google Sheets, and how Google Sheets is similar to a blockchain (but with one very important difference).
Imagine, if you will, a spreadsheet that has been duplicated 10,000 times across a wide network of computers. Now, picture in your mind that this network has been designed to keep this spreadsheet updated in real time. That’s it — that’s blockchain, right there. Let’s delve a little deeper into this analogy and see what else we uncover.
Traditionally, spreadsheet documents that were shared for collaborative purposes had to undergo a certain process in order to make that happen. An Excel document would have to be created, saved, and emailed to a recipient who’d then be asked to make their edits, save once again, and email it back. It worked — there’s no question about that — and there are clear benefits to “locking out” the other party while the editing is underway (for example, in the world of banking, you can’t have two owners manipulating or changing the same record at the same time). However, for many users, it wasn’t the most efficient way of doing things.
You’d run into a variety of spreadsheet management issues. People would lose track of the most recent versions of documents or wind up updating old versions of the spreadsheet. There had to be an easier way for everyone to have access without having 10,000 versions of a spread in different iterations, right?
Enter Google Docs (or, more specifically, Google Sheets) — a real game changer. With a Google Sheets file, all parties with access to a single “live” version of the spreadsheet can view, edit, and modify the document simultaneously at any given time. (While this isn’t a perfect analogy, it gives you the general idea of how a blockchain works.)
An illustrative screenshot from a Google Sheets file
Therein lies a whole number of benefits, which are inseparable from how blockchain actually works. All of the data held on a blockchain exists as a continually reconciled and shared database, and the plus-points that arise from this system are fairly easy to see, and not by any means just in the realm of document sharing. However, unlike a shared Google Sheets file, the blockchain isn’t stored in one location, ensuring that any data it keeps remains public and easy to verify. What’s more, hackers can’t get into a centralized version of the data, and the data is accessible to anyone on the internet at any given time.
How Blockchain Works
Now that we understand what blockchain is, it’s time to actually explore the components of the process and answer the question “how does blockchain work?” How blockchain works, to put it simply, is through a time-stamped series of data records, managed by a group of computers not under the ownership of any single entity, individual, or corporation. The blocks of data (which are, indeed, referred to as “blocks”) are bound to one another with the use of cryptographic principles, forming the eponymous “chain.”
Graphic illustrating what a blockchain is and how blockchain works
Public blockchain ledgers are primarily managed autonomously and are used in peer-to-peer networks to exchange data between connected groups of parties. As is the nature of blockchain, there’s no need for an administrator. The users work together as a collective administrator. Another form of blockchain, generally known as a permissioned or “private” blockchain, allows an organization to both create and administer transactional networks that can be used with partners, either internally or from one company to another.
Every blockchain transaction goes through the same steps regardless of whether it’s used for financial transactions or product tracking. The basic principle of the operation of any blockchain can be broken into four distinct, contiguous steps:
A record is made of each transaction. This record, which contains certain details of the people making the transaction, is authenticated using the digital signature of each.
Each transaction is verified to ensure its validity. This verification process is completed by the computers connected to the network, each of which independently checks to ensure that the trade is legitimate. Because this is a decentralized process, it means that every node in the network needs to agree before the process can be completed.
Once verified, each transaction is added to a block that gets hashed. “Blocks” are basically groups of transaction records, and each one is unique. Each block also carries a code known as a hash value (or hash digest), which both uniquely identifies it and calls out its position within the blockchain. The hash also ensures the integrity of the data to show that it hasn’t been modified since it was recorded in the block.
Once complete, the block is added to the end of the blockchain. This brings us to the end of the blockchain creation and verification process. Once one block is complete, another block will soon follow — typically within just a matter of minutes.