A blockchain is a decentralised, trusted ledger of transactions which occur within a network, and are validated by a network of separately-owned computers using a cryptographic protocol to assess the accuracy of the data contained on the ledger.
The history of blockchain technology
The information kept on a blockchain is shared and maintained in a shared database. Think of it as a spreadsheet replicated across thousands of different computers, fully accessible to anyone, and without relying on a central server that can be hacked. If you take a moment to think about how our economy is dependent upon the accurate storage and accessibility of information, you begin to understand the impact this technology can have on our world.
It all began with Bitcoin which arrived in January 2009 with the publishing of a whitepaper. Bitcoin’s whitepaper was the authored by Satoshi Nakamoto whose true identity still remains a mystery and one much debated. The paper outlined a “purely peer-to-peer version of electronic cash (allowing) online payments to be sent directly from one party to another without going through a financial institution”.
While the paper can be quite technical, its disruptive potential lies in a simple proposition: to replace trusted institutions with a trust-less system. Instead of a central bank backing a currency, Satoshi proposed a decentralised system which records all transactions in that currency which can’t be altered and is validated by the nodes that run its network. So, Bitcoin was born and with it the underlying technology of blockchain.
How does blockchain technology work?
Think how reliant society is on data. Data makes blockchain technology work. However, in the general public’s perception, blockchain is still closely associated with Bitcoin which has experienced a wild ride over the last 12 months, as its price nearly hit $20,000 before stumbling down to less than half of that value.
Security and redundancy
Every organisation in the world values security, none more so than those who deal in invaluable assets like information. For hackers attempting to access private information for their nefarious purpose, a blockchain is an ultimate deterrent. A successful hacker would have to infiltrate countless servers and tamper with all of their records. The logistical implications of such an attack mean that the costs far outweigh the potentially massive benefits.
Fully decentralised and replicated across thousands of nodes, blockchains are virtually unhackable. This technological feature has attracted the attention and investment of powerful organisations in banking, insurance, and legal services industries.
Decentralised network with a shared ledger
One of the central differentiators of blockchain technology is its reliance on a completely decentralised network of computers to validate the transactions or data inputs on the shared ledger. Instead of the main server acting as the guarantor of the data, the idea of a decentralised network that could validate transactions based on a mathematical verification mechanism to which all computers/servers agree to uphold took hold.
Accuracy, security, and record-keeping protocol
When A sends one Bitcoin to B, that transaction is registered on a block with other transactions with a timestamp and communicated to the decentralised network where different machines employ their computing power to validate that transaction (along with the rest of the block).
As a side note, you can replace transaction with any other type of data that has value. That will help you understand how blockchain can be used to record anything of value. The protocol that allows for this validation is brilliant in its inception because it relies on human self-interest to guarantee the integrity of the blockchain.
These different computers charged with verifying the accuracy of the information are competing for a reward in solving a highly complex mathematical problem. The first to solve it transmits the solution to the other machines. When a majority of these nodes get to the same solution, the data on the block is validated and added to the blockchain.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.