Blockchain technology is changing industries around the world. It’s bringing organizations, governments, financial institutions, and payment platforms into a new digital age. It’s revolutionizing everything around us – and yet many people have no idea what blockchain is or how blockchain technology works.
Today, we’re explaining the core things you need to know about blockchain and blockchain technology. This guide will keep expanding but we want to keep it as concise as possible, yet for anyone to learn anything from beginner to ninja, context must be had. If we could say it in as few words as possible, it would be none at all and just use Satoshi's:
// Nodes collect new transactions into a block, hash them into a hash tree,
// and scan through nonce values to make the block's hash satisfy proof-of-work
// requirements. When they solve the proof-of-work, they broadcast the block
// to everyone and the block is added to the block chain. The first transaction
// in the block is a special one that creates a new coin owned by the creator
// of the block.
So if that was all it took to understand (and eventually you will know what a chain of blocks datachunk was originally) what blockchain distributed ledger technology is, we would end it here, but it's not so enjoy our 2018 what is blockchain guide for any and all.
Blockchain is an open, distributed ledger that can efficiently record transactions between two parties in a verifiable, permanent way. Blockchain is the technology at the heart of bitcoin and other cryptocurrencies. Without blockchain, cryptocurrencies would not exist in their modern form.
Contracts, transactions, and the records of them have long played a crucial role in our modern world. Our legal and political systems rely on contracts and transactions for virtually every core function.
Contracts, transactions, and records are used to protect assets or set organizational boundaries. They’re used to verify identities or chronicle events.
Every day, the world around us is governed by contracts and transactions. However, the way in which we record these contracts and transactions is stuck in the past. These critical tools have not kept up with the digital revolution.
As one article in the Harvard Business Review explained, “They’re like a rush-hour gridlock trapping a Formula 1 race car.” That article goes on to explain that, “In a digital world, the way we regulate and maintain administrative control has to change.”
That’s why so many companies are seeking to implement blockchain technology into various industries – the potential benefits are enormous.
Think of the importance of blockchain like this: much of the world’s infrastructure consists of intermediaries – or middlemen.
We’re not just talking about middlemen like businesses that take a cut of profit for selling goods or services.
We’re talking about lawyers who act as an intermediary between the public and the law, or bankers who act as an intermediary between individuals and their access to creditors. There’s a possibility that lawyers, brokers, and bankers could be made obsolete by blockchain technology in the future.
Instead of requiring intermediaries, blockchain technology would allow individuals, organizations, machines, and algorithms to interact freely with one another.
We’re already seeing this with blockchain and bitcoin. When two individuals want to exchange bitcoin or other cryptocurrencies, they don’t go to a bank and pay a hefty transaction fee. They complete a peer-to-peer transaction over the blockchain.
The blockchain is a distributed ledger that embeds contracts and transactions in digital code.
This digital code – and the record of these transactions – is stored in a transparent, shared database. This database is decentralized, which means it’s held by people (“nodes”) all over the world. This decentralized system protects the blockchain from tampering, deletion, and revision.
Using the blockchain, everything we do has a digital record. That means every process, transaction, task, and payment has a digital record. Each record can also be traced back to an individual: it has a signature that can be identified, validated, stored, and shared.
Ultimately, this allows organizations or individuals to conduct business in a more efficient way: with blockchain, we have a tamper-proof, verifiable, and permanent way to record transactions between two parties.
There’s enormous hype in the world of blockchain right now. Blockchain startups are springing up every day. Many are comparing it to the internet revolution in the early 90s, when companies rushed to take advantage of the power of this dramatic new invention.
However, some – like the HBR.org article mentioned above – cast doubt on the ability of blockchain to revolutionize the world. It’s far from a certain thing.
Some point to security issues outside of the blockchain – like the infamous 2014 Mt. Gox hack, when users lost $450 million USD worth of bitcoin.
Others point to the history of technological innovations. With most major technology changes, there needed to be a substantial technological, governmental, organizational, and societal change to pave the way for that technology.
With a change as substantial as blockchain technology, countless modern institutions would need to fall before blockchain could fully be implemented.
As the Harvard Business Review explains, “It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.”
As we mentioned above, blockchain is a distributed, digital ledger. It’s a peer-to-peer network that lies over top of the internet.
One of the key features of this technology is that it’s a distributed database. It’s decentralized. The database exists in multiple copies across multiple computers. Each of these copies is identical. The computers – or nodes – all form a peer-to-per network, which means there’s no centralized database or server.
Today, organizations maintain centralized databases and servers where all their data is held. This makes these servers a lucrative target for hackers. Blockchain decentralizes data and makes it public but encrypted. Many people believe this makes it tamper-proof.
When a transaction occurs on the blockchain, data about that new transaction must be sent to all computers – nodes – on the network. This means the blockchain stays in sync as one “world wide ledger”. Instead of having multiple conflicting ledgers, there’s a single version of “the truth”.
Another key feature of blockchain is that each transaction on the blockchain is signed digitally, using public key cryptography. Public key cryptography involves the use of two keys – a public and private key. The public key is used to sign and encrypt the sent message, and anyone can see this key.
However, only the recipient has the private key, which means only the recipient can decrypt the transaction. Public keys are used for more than just encrypting messages: they’re also used to authenticate an identity.
The reason it’s called a blockchain is because it’s literally a chain of blocks.
Each block in the blockchain consists of a list of transactions. Each block also contains a block header. Headers contain three sets of metadata, including structured data about the transactions in the block; a timestamp and proof-of-work algorithm data; and a reference to the parent block, or previous block, using a hash.
Using these three sets of metadata, each block is chained together – hence the word blockchain.
You may have heard of bitcoin mining. It’s significantly different from traditional mining, to say the least!
Mining is the process by which new blocks are created on the blockchain. In Bitcoin, a new block is mined every 10 minutes. Some cryptocurrencies have a faster block transaction time, while others have a slower time. Essentially, this means that a Bitcoin transaction takes a maximum of 10 minutes to process.
Mining validates each new transaction on the blockchain. In order to do that, the miner (which is a computer or processor) solves a unique, difficult math puzzle. These puzzles require enormous computational power.
Since Bitcoin was first introduced, the difficulty of these puzzles has increased exponentially, which means more power than ever is needed to solve the puzzles.
To put the computational power into perspective, miners were tracked trying 450 thousand trillion solutions per second to solve the puzzles – and that was all the way back in October 2015 as reported by The Economist.
Why would someone spend all this computational power on math puzzles? It’s because they get rewarded with bitcoin – or other cryptocurrencies, if you’re mining other cryptocurrencies. Miners receive a set amount of cryptocurrency for every block that is mined, along with a cut of the transaction fees for all transactions in the block.
You could write thousands of pages on the history of blockchain technology, including all of the minor improvements, major leaps, and companies formed over the past decade. Instead of boring you with that information, we’ll give you a brief history of how blockchain technology came to be what it is today:
The first mention of blockchain can be found in the original source code for Bitcoin. You can view the original code for bitcoin on Github.
Bitcoin was the world’s first major virtual currency. It was the first time we saw the impact of blockchain technology on the world around us. The currency was officially introduced in October 2008 when a mysterious figure named Satoshi Nakamoto wrote a paper called, “Bitcoin: A Peer-to-Peer Electronic Cash System”.
In January 2009, bitcoin’s code was released onto the internet as open source. Satoshi Nakamoto – whoever that person is – “mined” the first bitcoins and officially launched the world’s largest cryptocurrency.
Soon after, in April 2011, Satoshi disappeared from the internet and stopped contributing to bitcoin forums, papers, or code. Despite numerous attempts to discover who Satoshi Nakamoto is, and even a few cases of misidentification, we know nothing about Satoshi to this day (we’ll talk more about the identity of Nakamoto below).
2013 marked the first year when people really started to hear about bitcoin. Investors surged into bitcoin and blockchain-related startups. The price of bitcoin hit a high of $1108 in November 2013 (a high that has since been surpassed).
Over the years since, other cryptocurrencies have been created. These coins are called “altcoins” – or alternative bitcoins – because they’re cryptocurrencies that aren’t bitcoins. Litecoin and Dogecoin were two of the first to appear, for example. Today, Ethereum holds a solid position as the number two spot behind bitcoin.
There have been a number of innovations over the history of blockchain. Without these innovations, blockchain technology wouldn’t be nearly as useful as it is today. Those innovations include all of the following:
By nature, this is the first and most obvious blockchain innovation.
The second innovation is when people realized that the underlying technology behind bitcoin – the blockchain – could be used for more than just bitcoin.
People realized it could be used for other cryptocurrencies, for example, or for a wide range of other industries and purposes. This is where the history of blockchain technology and innovation really took off.
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