Updated: Jul 14, 2021
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A Beginner's Guide
To get first-hand insight into what blockchain is and what it means for modern commerce, you'd have to speak with Satoshi Nakamoto, the figure who started it all with Bitcoin back in 2008.
Only, you won't be able to speak with him. Because, no one knows who he is.
That's right. Like Banksy and the JFK assassination, the true identity of Nakamoto remains an unsolved mystery. And with such enigmatic beginnings, is it any wonder that so many of us remain completely mystified by the whole idea of blockchain?
This is a shame, though. It's a shame for two reasons:
The blockchain is something that could revolutionize the way we approach commerce and finance.
The blockchain really is not so difficult to understand!
So, let's get into it. Consider this your primer on everything blockchain technology, and your stepping-stone into an exciting world.
What is the blockchain exactly?
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The blockchain is, like many revolutionary pieces of technology, actually pretty simple.
The blockchain is a record of transactions that take place across a payment network.
Straight away you can see that, at a basic level, the blockchain is straightforward and easy to understand.
Of course, there is a bit more to it than just this.
• The blockchain is secure.
• The blockchain is reliable.
• And, above all, the blockchain is immune to manipulation.
It is these three elements that make the structure so important to cryptocurrency networks. Let's take a look at this in a little more detail.
The blockchain vs. traditional payment records
Consider your bank for a moment.
It is likely that you use your bank card every single day. You make small purchases using contactless. You make larger purchases using your PIN code. You withdraw money from the cash machine.
What happens when you do any of these things? Your bank balance goes down.
Let's say you check your bank balance at 8 p.m. You have $2,000 in your current account. Overnight, you make no card transactions, and no direct debits go out of your account. Next morning, at 8 a.m., you know your bank balance is unchanged, but you check it anyway – and there it is: $2,000.
The cash machine is not some kind of oracle that can just guess your balance. Nor is it doing any major calculations other than the kind of addition and subtraction we did back in school. It knows your balance because the bank keeps a record of all of your transactions.
But you are just one person. How many customers do you reckon your bank has? A lot.
And how many transactions do you reckon these customers make every day? Well... let's say it's quite a few.
That's a great deal of record-keeping for your bank to keep up with, and yet your bank balance is always correct when you check it. This kind of record-keeping is...
• Fairly reliable
• Fairly secure
• Fairly effective
In fact, it is very similar to the blockchain in the way that it records transactions chronologically in sequence, and in the way that it is used as the basis for a payment network.
But it is different in one crucial sense:
• Your bank record is centralized.
• The blockchain is not. The blockchain is decentralized.
Centralized vs. decentralized
OK, so that last big revelation may have been met with a resounding "who cares?" but bear with me here. The question of centralization or decentralization is a huge one, and it is at the very heart of what makes the blockchain tick.
Let's return to the bank record example.
Your bank's transactions record is:
• Held in the headquarters of the bank
• Backed up with secure storage solutions
• Owned, basically, by the bank's owners
• Subject to security flaws and vulnerabilities
In a nutshell, anything that is centralized has to be "owned" by someone or something. And this ownership means control, which means possibility for co-option and corruption, as well as security vulnerabilities and other problems. Sure, the record is stored securely and backed up, but this provides no guarantee.
So, how is the blockchain different?
The blockchain is:
• Completely decentralized
• Held in the form of a copy that is saved by all users
• Governed by consensus and "owned" by no single entity
• Immune from the security flaws and vulnerabilities that plague banks
What does all this mean?
So, this all sounds great, but you still have a bank card, you still have savings and rely on your debit card for your day-to-day living. Are the risks not too minimal to even worry about? Is the current system not just fine the way it is?
Well, it is, to an extent. Note how we described the current status quo as "fairly" reliable, and "fairly" secure. This is because, despite the trust we place in the banks, things can and do go wrong.
The blockchain is something else entirely.
Because it cannot be manipulated by any user, it provides otherwise intangible units, such as Bitcoin or DASH with a real value.
Because a consensus must be reached before a transaction is finalized, the blockchain cannot be defrauded or tricked.
Because rewards are delivered to users for each block that is written into the chain (more on that later), the network is completely self-sustaining.
Because blockchain-based networks exist in the digital sphere, they are more suitable to supporting digital innovation and growth than traditional payment networks.
All of this makes the blockchain very exciting, indeed.
How does the blockchain work?
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This is where it gets a little bit more complicated. But only a little. Consider this to be phase two of your primer, building on what we've just explored in phase one.
So, the blockchain is exactly what it sounds like: a chain of blocks. Each of these blocks is added to the chain in sequence, and timestamped so this sequence is preserved. With the addition of each new block, all copies of the chain are updated. If a potential fraudster tries to manipulate the network, their record will not match the consensus, and the fraud will be halted.
But what exactly are these blocks? And where are the blockchain copies being stored? This knowledge is critical to understanding how blockchain works.
So a block is not a physical block, in the sense that a house brick might be considered a block. Instead, it is a piece of coding.
On a basic level, a block is a structure for storing information. When a new transaction is logged, the date, the time, and the amount of dollars that changed hands, is recorded, as well as information relating to the participants in the transaction. This data is generated every time a transaction takes place, so where does this data go?
Well, it is written into a block. And this block is added to the chain.
But each block in the chain does not represent one transaction. Oh no, not by a long shot.
The blockchain storage capability is pretty limited, and is only about 1 MB per block.
Yes, only 1 MB, but the transaction data is so small that the network can cram many of these transactions into a single block. In many cases, each block in the chain will host thousands of transactions.
As these transactions are timestamped, they are recorded sequentially in each block. However, the network still needs a way to tell each of the blocks apart. This is achieved with a hash code.
The digital information in each block is converted into a unique code by the network algorithms. The code looks random – and it is, to an extent – but the code itself relates directly to the information in the block.
Tamper with the transaction information, and the code will change.
If the code changes, the block will not match the blockchain record.
If the block does not match the record, the change is not permitted.
So, basically, if you wanted to hack the blockchain, you'd have your work cut out. You'd have to hack not just one block, but all the blocks that came after it in the chain, changing the codes of each and every one. Then, you'd have to do the same across all of the other copies of the blockchain, stored in every user node across the entire network.
Once the block is written into the blockchain, there just ain't no changing it. The transaction history is secured.
Simple, yes. But a remarkably clever and effective system.
You may have noticed the mention of "nodes" back there in that last section.
Nodes are basically computing devices that are owned by network users. These devices are connected to the network and provide the computing power to drive the network forward. They also provide the additional storage needed to boost security by backing up the blockchain with copies across lots of different locations.
So, what happens when you become a node?
Well, to be honest, not much. Your computer will receive a kind of live feed of the blockchain as it develops. This live feed is your copy of the blockchain, and it is used to verify the validity of all others. Because of this, the network grows more secure with each and every node that is added.
This accounts for the storage part of a node's job, but what about the computing power?
Nodes also need to write batches of transaction data into blocks, ready to be added to the blockchain. This is where the added computer power of a node network is so useful.
The node engages in an automatic process known as "mining." This is when transaction data is parceled together in blocks and then added to the blockchain, and the copy of the chain itself is updated across all user nodes.
The user does not need to actively engage in the mining process, or do anything at all other than make sure their node is powered on all the time!
When the mining process is complete and the transaction data is recorded forever in the blockchain, the node will be rewarded with a small percentage of the block value. This enables mining node operators to earn a passive income from their computing devices. It also makes the network self-sustaining and self-managing moving forward.
No central control
None of the things that make traditional payment systems so problematic
Proof of work
Before we move on, a quick note on proof of work.
As the node, and the node's operator, is being rewarded for each completed mining process, certain standards need to be met to ensure that the process is being completed properly. However, the network can't employ a team of overseers to check up on miners as this would be too much like central control. So what's the answer?
Different payment networks solve this problem in different ways, but one of the best-known solutions is a proof of work system.
With the proof of work system, the node must solve an algorithmically generated mathematical puzzle, which proves to the network that the work has been carried out. This maintains the decentralization of the network while ensuring that node users are properly paid.
Different kinds of nodes, and the growing potential of blockchain
The nodes we've touched upon here are just the most common type. These nodes handle mining and storage, but in fact, nodes can handle any number of different functions.
Validation nodes can be used to approve transactions before a complete block is ready to be mined. The transaction will still be subject to the same controls once mining is complete.
Light nodes can provide speedier network functionality but only hold a portion of the full blockchain copy.
Multimedia nodes could be used to transmit different media – such as audio or video files – to users who have paid for them across the network.
Routing nodes can direct traffic through the network to secure high levels of capability, even at higher traffic volumes.
These are just a few of the potential functions and uses of classes of nodes on a payment network. The versatility of these nodes gives us a glimpse of just what the blockchain is really capable of.
Now that you have gained a good level of understanding into this amazing bit of digital engineering, it's time to look to the future. We're going to be taking our series further, exploring cryptocurrencies and the blockchain in much, much more detail. We hope you can join us. It's going to be a wild ride!
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