How does blockchain really work?
What is Blockchain?
Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.
A simple analogy for understanding blockchain technology is a Google Doc. When we create a document and share it with a group of people, the document is distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked out awaiting changes from another party, while all modifications to the doc are being recorded in real-time, making changes completely transparent.
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BLOCKCHAIN EXPLAINED: A QUICK OVERVIEW
- A blockchain is a database that stores encrypted blocks of data then chains them together to form a chronological single-source-of-truth for the data
- Digital assets are distributed instead of copied or transferred, creating an immutable record of an asset
- The asset is decentralized, allowing full real-time access and transparency to the public
- A transparent ledger of changes preserves integrity of the document, which creates trust in the asset.
- Blockchain’s inherent security measures and public ledger make it a prime technology for almost every single sector
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How Does Blockchain Work?
Every chain consists of multiple blocks and each block has three basic elements:
- The data in the block.
- A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash.
- The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).
When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.
Miners
Miners create new blocks on the chain through a process called mining.
In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.
Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the “golden nonce” and their block is added to the chain.
Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely difficult to manipulate blockchain technology. Think of it as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.
When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.
Nodes
One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.
Cryptocurrencies: The Beginning of Blockchain’s Technological Rise
Blockchain’s most well-known use (and maybe most controversial) is in cryptocurrencies. Cryptocurrencies are digital currencies (or tokens), like Bitcoin, Ethereum or Litecoin, that can be used to buy goods and services. Just like a digital form of cash, crypto can be used to buy everything from your lunch to your next home. Unlike cash, crypto uses blockchain to act as both a public ledger and an enhanced cryptographic security system, so online transactions are always recorded and secured.
To date, there are roughly 6,700 cryptocurrencies in the world that have a total market cap around $1.6 trillion, with Bitcoin holding a majority of the value. These tokens have become incredibly popular over the last few years, with one Bitcoin equaling $60,000. Here are some of the main reasons why everyone is suddenly taking notice of cryptocurrencies:
- Blockchain’s security makes theft much harder since each cryptocurrency has its own irrefutable identifiable number that is attached to one owner.
- Crypto reduces the need for individualized currencies and central banks- With blockchain, crypto can be sent to anywhere and anyone in the world without the need for currency exchanging or without interference from central banks.
- Cryptocurrencies can make some people rich- Speculators have been driving up the price of crypto, especially Bitcoin, helping some early adopters to become billionaires. Whether this is actually a positive has yet to be seen, as some retractors believe that speculators do not have the long-term benefits of crypto in mind.
- More and more large corporations are coming around to the idea of a blockchain-based digital currency for payments. In February 2021, Tesla famously announced that it would invest $1.5 billion into Bitcoin and accept it as payment for their cars.
Of course, there are many legitimate arguments against blockchain-based digital currencies. First, crypto isn’t a very regulated market. Many governments were quick to jump into crypto, but few have a staunch set of codified laws regarding it. Additionally, crypto is incredibly volatile due to those aforementioned speculators. In 2016, Bitcoin was priced around $450 per token. It then jumped to about $16,000 a token in 2018, dipped to around $3,100, then has since increased to more than $60,000. Lack of stability has caused some people to get very rich, while a majority have still lost thousands.
Whether or not digital currencies are the future remains to be seen. For now, it seems as if blockchain’s meteoric rise is more starting to take root in reality than pure hype. Though it’s still making headway in this entirely-new, highly-exploratory field, blockchain is also showing promise beyond Bitcoin.
Do you want to learn about cryptocurrency, blockchain, and mining but aren’t sure where to start? You don’t want to waste your money on courses that aren’t going to teach you anything?
