What Does Blockchain Mean?
Blockchains are lists of records that are linked together using cryptography. Each record is called a block. The blocks contain the record data and a cryptographic hash to the previous block in the chain. The cryptographic hash is created using the data in the record. So, if any of the data is changed, the link to that data will no longer be valid.
This linking creates a secure record history because it is not possible to change a record without altering all the subsequent blocks attached to it, referred to as an immutable ledger. Blockchains are used to record cryptocurrency transactions. The structure of blockchains allows both parties to efficiently verify the transaction.
Because it is the structure of the data that secures the information, blockchains allow transaction records to be open and distributed. All parties can access the entire record of transactions. This allows users to verify that funds are available before a transaction and blockchains create a secure record of the transaction. This makes it harder for someone to make a fraudulent payment.
The transaction ledger can also be stored on peer-to-peer systems because the blocks include the location of the next record. No central intermediary is required. The distributed nature of blockchains makes it harder for hackers to gain access to the system. There is no one central point that is vulnerable to attack.
Techopedia Explains Blockchain
The theory of blockchain has been around for quite some time. David Lee Chaum is credited for proposing the idea in 1982. He presented the theory in his doctoral dissertation Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups. But it wouldn’t be until 2008 that blockchains were implemented with the creation of Bitcoin.
The white paper Bitcoin: A Peer-to-Peer Electronic Cash System outlined the implementation of Bitcoin’s blockchain technology. The paper was published by "Satoshi Nakamoto", who created Bitcoin, but that name is widely accepted to be a pseudonym.
Nakamoto claims that the problem with current financial institutions is that they rely on trust. Payees have to trust a bank and the bank needs to vouch for payments. Blockchains, on the other hand, provide a non-alterable record of all transactions, which is available to all parties. This system gives users proof of transactions removing the necessity for trust in a mediator.
A blockchain network can be further protected with Proof-of-work (PoW). PoW is a consensus algorithm that is used to verify new blocks before they are added to the transaction record. To add a new block, computers compete to broadcast the block. Each computer is given a puzzle that is hard to solve, but easy to verify. The first computer that solves the answer wins the broadcast and a small monetary reward.
This makes it harder to insert fraudulent transactions. It requires a high investment to get the equipment needed to solve these problems and even then you are not guaranteed to be able to broadcast the block. The security of this system relies on the cost of investment being higher than the potential reward of a fraudulent transaction.
There are four kinds of blockchain:
- Public: anyone with internet access can weigh in on the consensus.
- Private: a single, central authority holds the deciding factors.
- Consortium (or Federated): multiple organizations have authority status.
- Hybrid: elements are public access, but privately held authority.
One of the criticisms of blockchain transactions is this computing power requirement. The investment required to maintain the security of a public blockchain incentives companies to create private blockchains. If the blockchain network is private, PoW consensus is not necessary. However, private networks require trust and are centralized, which negates the benefits of blockchains. It has been argued that private blockchains are essentially just convoluted databases.