Dummy’s Guide to Blockchain
You might have heard about this newfangled technology called blockchain but didn’t understand how it works or why you should care. Most blockchain articles are highly technical and complicated, making it difficult to understand the fundamentals of blockchain technology without a PhD in computer science. We want to truly simplify our explanation so we can help people understand how blockchain works and why it was created.
What is a blockchain?
A blockchain is, at its core, a record book of transactions. Imagine that you go to the bank and make a deposit. That deposit gets recorded in the bank’s system. WIth blockchain, instead of one party (i.e. the bank) recording that transaction, multiple parties would record the transaction. Thus, there would be multiple and separate records of the same transaction. This is called a decentralized network or decentralized ledger technology.
This is an advantage because instead of one third party holding all the information, now there are numerous records of the same transaction, held by different and unrelated parties through a network of computers. Today, you rely on the bank to accurately record every transaction but those records could be changed, either by the bank itself or by a hacker. This is because the bank holds all authority and access to that information. When you make a transaction, you have to trust the bank, who is a third party representative, to keep an accurate record of your information.
With blockchain technology, any changes to previous transactions must be approved by all the parties who recorded those transactions. In the case where the bank holds all the transaction history, a change could be made very easily, reducing your bank account balance from $1MM to $1, with no additional verification.
In the case of blockchain, if one of the parties who recorded a transaction wanted to go back and change the record of the transaction (again reducing your bank account balance from $1MM to $1), the other parties who recorded that transaction will deny the change because it doesn’t match their record of the transaction. As such, blockchain becomes both a decentralized (i.e. not controlled by one central authority) and trustless system (i.e. you don’t have to trust an intermediary to keep records).
Why is it called blockchain?
Records stored on the blockchain are stored in batches of data, which are called blocks. The very first block of data is called the genesis block. The transactions in the first block are used to create a unique cryptographic hash, which is essentially a unique string of letters and numbers used to verify data. Anyone with that hash can verify the transactions that occurred in that block of data, but they cannot change the data. Each subsequent block then uses data from the previous block to create a new hash. Therefore, the blocks are linked sequentially, forming chains of data that rely on the block before.
What’s so special about blockchain?
You might be wondering why you should care about blockchain at all. How is it better than what we have today and how will it affect your life? We’ve touched on the decentralized and trustless benefits but there are a few more reasons you should pay attention to.
Because it is virtually impossible to change the ledgers or records without quantum computing power that doesn’t exist today, those records are pretty well tamper proof.
One of the biggest issues in governments today is the lack of transparency around things like voting and government records. With voting, we must trust that all steps involved in the voting process is being done correctly. However, with blockchain, all votes would be recorded and the totals recorded and there’s low risk of tampering with the information as its stored on many computers.
Depending on the blockchain being used, there could be millions of records around the world of the same transactions. The possibility of someone hacking into every computer and trying to change the records is fairly impossible, which means that transactions recorded on a blockchain will always remain immutable, or unchanged.
Reduced transaction costs
By cutting out the third party that exists today to oversee and manage a relationship, this can dramatically reduce transaction costs. Because no third party intermediary is required to verify the transaction and process it, this can result in significant savings in fees.
Faster transaction times
Have you transferred money from Paypal to your bank account and it takes 3 days for the funds to transfer? Or tried to deposit a cheque and had to wait 3 days for the funds to clear? With blockchain, financial transactions are completed within minutes. Transactions are also processed 24/7 unlike financial institutions which only make transfers during business hours.
Ready to get your geek on and continue learning about blockchain? We’ve created a crypto glossary of terms to help you with terms you might stumble across in your blockchain adventures.