We will start by answering a simple question and then get into all the details to ensure that, by the end of this article you have a good understanding of blockchain.
"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)."
Many people assume that blockchain and bitcoin are the same. Blockchain is the underlying technology of Bitcoin. They are closely related, but they are not the same thing. In 2008, Bitcoin was introduced as a type of unregulated digital currency created by the pseudonymous Satoshi Nakamoto.
Blockchain was the ledger solution used to securely record facilitating the use of this new currency since there was no bank or government involved to monitor or police the transactions. As such Bitcoin can actually be considered as the first use case leveraging blockchain technology. The confusion between blockchain and bitcoin often arises because these two concepts were introduced at the same time.
Blockchain technology as for example the one used for Bitcoin allows for the recording of transactions on a distributed ledger across a network of users. The open-source technology enables the storage of data from the transactions into blocks. Each block includes a time-stamped record of the transactions with each block linked to the previous one, thus creating a chain. The information stored on the blockchain is fully transparent and permanent without the ability to change or remove previous transaction data from the distributed ledger. This characteristic and solution can be used to solve many inefficiencies in different applications and industries.
There is no doubt that blockchain is an excellent choice for a digital currency. However, it can be used to keep a trusted audit train of ownership of a vast range of asset types. These can be both intangible (e.g. trade finance assets) and tangible (e.g. diamonds) assets. This makes for a highly diverse choice of blockchain applications for multiple sectors and institutions.
So, think of it like this – "each block in the blockchain is connected to all the blocks before and after it. This makes it difficult to tamper with a single record because a hacker would need to change the block containing that record as well as those linked to it to avoid detection".
So if you consider just this trait, it probably doesn’t seem like much of a deterrence, but blockchain has some other inherent characteristics that provide additional means of security.
The records on a blockchain are secured through cryptography. Network participants have their own private keys that are assigned to the transactions they make and act as a personal digital signature. If a record is altered, the signature will become invalid and the peer network will know right away that something has happened. Early notification is crucial to preventing further damage.
Further on, let’s not forget that blockchain is decentralized – and it is precisely due to the fact that they aren’t contained in a central location, that blockchains don’t have a single point of failure and cannot be changed from a single computer. It would require massive amounts of computing power to access every instance or at least a 51 percent majority of a certain blockchain and alter them all at the same time.
Feeling a lot safer, aren’t you?
According to BBHQ – "Without consensus, deals and transactions fall apart and are not saved to the blockchain because they are never agreed upon. Specifically, this means that the participants cannot agree to a truth. For instance, Acme claims to have bought 500 anvils from Anvils Unlimited for $1,000 on April 10, 2018, while Anvils Unlimited claims they only received $900. If the two sides of the transaction cannot reach consensus there is no deal and nothing is added to the blockchain."
Keep in mind that there are different ways to achieve consensus - different consensus algorithms. Here are just some of the examples when it comes to enterprise blockchain consensus algorithms:
Proof of Work - requires network users to resolve a complex mathematical puzzle with the goal to validate a transaction and create a new block
Proof of Stake - selects the creator of the next block based on several stakes related factors such as wealth and age
Practical Byzantine Fault Tolerance - achieves consensus as a result of a minimum number of other nodes in the network ratifying the new block
Proof of Elapsed Time - a hybrid of a random lottery and first-come-first-serve basis
Proof of Authority - requires sign-off by a majority of designated nodes for a block to be created
We hope this explains the basis on which the whole blockchain technology works and why it is perfect when it comes to cryptocurrency trading.
By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates many of the processing and transaction fees. And given how fast the cryptocurrency landscape changes, keeping your eye on all the shifts is now more important than ever. So, make sure you visit EthAnalytics daily to get the fresh numbers and keep track of your investments.