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Blockchain Simplified

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block·chain

/ˈbläkˌCHān/
noun
1. an incorruptible digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.
2. a digital ledger that can be programmed to record economic or financial transactions, as well as transactions for anything of value.

This is the definition of a blockchain, and as it is defined as a digital ledger – so you may ask what all the fuss is about. In this section of the knowledge base, we will explore the innovation behind the blockchain and explain why it is having such an impact. We’ll also look at reasons why the blockchain is not applicable to some business models but will be beneficial to others.

Overview

This section will start out by presenting the basics and work toward more complicated areas of discussion. Just as average users do not need to know the technical details of how a graphical user interface (GUI) works in order to use their personal computer, one will not need to know how the blockchain works. That said, it is good to have a basic understanding of the technology being discussed by the media more and more.

Of course, facts will be presented but there are theoretical assumptions made when discussing emerging technology, and the opinions of developers, entrepreneurs, financiers, and others will be shared, expressed or reviewed. There are differences of opinion regarding blockchain, depending on who one asks about the subject.

Bitcoin Blockchain

The blockchain was pioneered by the creator of Bitcoin, an anonymous person or group known only as Satoshi Nakamoto. The importance of the technology for cryptocurrency is that it cannot be modified. To ensure blocks cannot be modified, network participants, known as “nodes”, must agree on the next block to be added to the chain – a process called “consensus”.  The blocks are linked together and no information in any previous block can be altered without changing all subsequent blocks. To do so would result in rejection by the majority of nodes.

Proof of Work is the scheme Bitcoin uses to achieve the consensus required on the network of nodes. It creates a race among the miners to be the first to solve the mathematical problem necessary to present the next block for validation by the network. The first miner to solve the problem and have it validated is rewarded bitcoin.

Many distributed nodes all over the world are working to solve the problem, so it is not possible for one node to present a fake block to the network. It simply would not be validated. You may have heard the “51% attack” referred to – and this simply means that if a group of miners dominated the network, they could propose a block and validate it themselves, thus tampering with the blockchain. Experts agree that it has now become infeasible for a group of miners to obtain 51% domination, and have declared the Bitcoin network to be virtually immune to such attacks. Domination would require significant expenditure to obtain a massive amount of computing power that would result in minimal financial gain. While theoretically possible, it is considered not to be feasible, as the attacker would only be able to insert or remove transactions, not alter transactions or steal bitcoin.

Distributed Ledger Technology (DLT)

A distributed ledger is a database that is replicated with identical copies saved by several nodes (computing devices) independently. Not all distributed ledgers employ a chain of blocks to provide a secure, valid, distributed consensus.

What makes the Bitcoin blockchain unique from other distributed ledgers is that data is grouped together, organized in blocks, blocks are linked to each other, and secured using cryptography. It is a continuously growing list of records with an append-only structure that makes alteration or deletion of previously recorded data impossible.

The applications of a distributed ledger can be imagined beyond monetary use like Bitcoin. DLT can hold any type of information and may be used in situations where maintaining a secure, transparent, tamper-proof record is important. Obviously, there are use cases where retention of all recorded data the Bitcoin blockchain is not necessary and would create enormously large files. Every blockchain is a distributed ledger, but not every distributed ledger is a blockchain.

Differences

What is revolutionary about the Bitcoin blockchain is that it is not maintained by any central authority. However, certain centralized institutions work well but could be improved with increased transparency to create new business models that lower costs for remaining competitive. These institutions might utilize distributed ledger technology vs. a blockchain.

Distributed ledgers are mostly centralized with one or a few validator nodes identified, and other nodes which have read access if given permission from the validator nodes. Hybrid blockchains might be used for public institutions such as educational facilities, government agencies, or public corporations where read access to the ledger is open vs. by invitation. Blockchains like Bitcoin are decentralized with the software for participation free to anyone, and a consensus is required for validation.

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