What is Blockchain?
One of the most talked about and misunderstood technologies of recent times is set to change the way enterprises conduct their daily business.
Blockchain is a technology that is revolutionising the way the internet works. Some of the main distinguishing points of blockchain technology are:
- The technology works by creating a series of data records where each new record is stored in a block and linked to the previous record. The term blockchain is derived from this system of linking blocks of data.
- Blockchain technology makes possible a distributed ledger system which makes records more transparent.
- Blockchain uses cryptography to protect user information, and the distributed ledger system is almost, if not impossible, to hack.
- Blockchain technology forms the backbone of cryptocurrency but also has several other applications.
- Cryptocurrency exchanges on the blockchain network can be centralised or decentralised.
- Decentralised cryptocurrency exchanges are virtually impossible to hack because there are multiple nodes supporting the system.
- Blockchain technology has made peer to peer sharing of content possible without the need for a middleman platform.
- Regardless of what you share via the blockchain network, you retain ownership of your content unless you sell it to someone.
- Personal information is highly secured and protected with private key cryptography.
In a nutshell, the blockchain is a network technology that provides users with a chance to share content or make transactions securely without the need for a middleman or a centralised governing system.
What are blocks?
In very simple terms, a block, which is part of the blockchain, is a data file that records any type of transaction on the network. Data is stored permanently on the block and becomes part of the chain and impossible to tamper with. For example, if you buy two bitcoins, the transaction is recorded in a block along with your private key. The private key is your digital signature and links the transaction to you. It is now forever recorded in one block that on that date, you bought two bitcoins.
If you want to buy something with one bitcoin, you will need to provide your private key. A bitcoin miner will use your key to track the last transaction linked to you and can verify that you have two bitcoins. When you use one bitcoin, that transaction is recorded in a new block and linked to your last transaction with a series of characters. In this way, all your transactions are audited on the network.
What are hashes?
One of the reasons the blockchain is so popular is because the information on it, although distributed, is highly encrypted. Data on the blockchain is encrypted by creating a hash. An algorithm is required to create a hash, and it acts by taking the transaction information and converting it to a series of numbers and letters. Hashes are always of the same length.
On the surface, a hash does not make sense to anyone. This is where miners come in. Miners have the special skill set and the resources to decipher a hash and verify the transaction. Miners get paid in bitcoins that are generated every time they deliver a service.
What are nodes?
The blockchain and cryptocurrency have become synonymous with being decentralised. Decentralisation forms the entire basis of the transparency and the security of the system. But, even a decentralised system requires a support system to give it some form and structure. This support system comes in the form of nodes.
Nodes are focal points of activity distributed all over the blockchain network. It is at nodes that blockchain copies are maintained, transactions are sometimes processed, and records are kept. Nodes consist of individuals that are connected to the system via their own device. Each cryptocurrency has its own set of nodes to keep track of its coins.
What is the difference between a centralised, decentralised and distributed?
The terms centralised, decentralised and distributed often pop up when cryptocurrency and the blockchain are discussed, but what exactly do they mean? And how are they different?
Centralised systems: Centralised systems like governments or banks concentrate power at a fixed point. Information, data, permissions, transactions and so on all pass through the seat of power first before moving forward. Fiat currency belongs to a centralised system and belongs to the governing financial body of each country. It is for this reason that a nation’s currency is only good for transactions within that nation. If you are visiting another country, you need to convert or buy their currency to use there.
Distributed systems: To balance out the lack of a centralised governing body, decentralised cryptocurrency networks have what is called a distributed system. This is where the nodes that were mentioned earlier come in. Nodes are distributed all over the network so that the monitoring of transactions is more widely spread out.
Distributed systems are much more secure than centralised exchanges because a hacker would quite literally have to hack all nodes simultaneously to be successful. Centralised exchanges, on the other hand, make easier targets for hackers.
There is a clear difference between centralised and decentralised systems, but within the decentralised system, there are further subsets. Centralised exchanges and distributed systems can be distinguished by how data is managed on the blockchain network, but an important difference is also how secure each type is. A distributed system is by far one of the most secure and constitutional modes of transacting and sharing information over the internet.