What's Blockchain Technology?
You may have heard the latest buzzword “blockchain” used in various articles by experts in the technology sector. It gets inserted in conversation when Bitcoin is getting discussed as well. So, what exactly is a blockchain, and why do some people think it may be the next ground-breaking technological innovation? Let’s see if we can answer those questions.
What’s Blockchain Technology?
A blockchain is a distributed digital ledger that facilitates secure online transactions between two parties by recording those transactions efficiently and in a verifiable and permanent way. Blocks refer to the grouping of these transactions; likewise, they get added to the end of the blockchain with each block tied to the previous block. Hence, the term blockchain.
The immutable nature of blockchains allows participants to economically audit and verify transactions. The blockchain concept was introduced in 2008 by Satoshi Nakamoto, then implemented the following year as part of the digital bitcoin currency. You can manage blockchain databases autonomously using a peer-to-peer network and a distributed timestamping server. Due to the use of a blockchain bitcoin was the first digital currency to solve the issue of double-spending without the use of a central authority. Now you may be asking yourself, “Okay, so that’s a detailed description, but I don’t see anything revolutionary there. What is special about putting transactions into these blocks and chaining them?” To answer that question, let’s dive more into how participants add transactions to the blockchain.
So, How Does Blockchain Work?
There are two key characteristics of a blockchain:
- Distributed ledger/database
- Each node on the network that participates with the blockchain operates and communicates in a peer-to-peer fashion
Each node on the network has a copy of the entire blockchain, so every transaction is known (pseudonymity ensures the enforcement of transaction privacy). When a transaction between two parties occurs, the node creates it and broadcasts its details in a cryptographically.
Other nodes on the network receive details of the transaction, including details of other broadcasted transactions. The nodes take all the unrecorded received transaction details, verify, and compile them into a single block linked to the last block in the current blockchain. The block broadcasts to other nodes on the network for verification.
Acceptance of the block by other nodes, it’s attached to the end of the current blockchain officially, and the next block created is linked it. To close the loop, the second party in the original transaction is notified the transaction is complete.
Of course, this publication is a simple overview of blockchain technology and how it works. Many analysts predict blockchain technology has the potential to transform business operating models in the long term. The industry still doesn’t consider it a disruptive technology but more of a foundational technology that has the potential to create new foundations for global economic and social systems. More recent blockchain applications have gone beyond just recording transactions by allowing, “smart contracts” allowing computational logic to trigger inside the blockchain under certain situations. Other examples of blockchain technology outside of digital currency include automated voting systems, royalty collection, management of copyrights, real estate transactions, and medical records.
In future articles, we will discuss the implementation of blockchain technology and how the characteristics of blockchain technology keep Bitcoin transactions secure.