What is the blockchain?
Blockchain is usually used as a term, but it is in its essence, a concept!
Blockchain is a digital ledger that provides a secure way of making and recording transactions, agreements and contracts – anything that needs to be recorded and verified as having taken place.
However, rather than being kept in one place like the traditional ledger book, this database is shared across a network of computers. This network can encompass just a handful of users, or hundreds and thousands of people. The ledger becomes a long list of transactions that have taken place since the beginning of the network, getting bigger over time.
What does this mean?
In simple words, blockchain is a immutable database of continuously growing records, called blocks. Blocks are linked and secured using cryptography where each block contains the hash of previous block.
A blockchain functions as a decentralized database that is managed by computers belonging to a peer-to-peer (P2P) network. Each of the computers in the distributed network maintains a copy of the ledger to prevent a single point of failure and all copies are updated and validated simultaneously. This makes blockchain technology more trustworthy. In past blockchain was commonly associated with digital currencies and bitcoins.
Today, blockchain applications are being explored in many industries as a secure and cost-effective way to create and manage a distributed database and maintain records for digital transactions of all types.
You (a “node“) have a file of transactions on your computer (a “ledger”). Two government accountants (let’s call them “miners”) have the same file on theirs (so it’s “distributed”). As you make a transaction, your computer sends an e-mail to each accountant to inform them.
Each accountant rushes to be the first to check whether you can afford it (and be paid their salary “Tokens”). The first to check and validate hits “REPLY ALL”, attaching their logic for verifying the transaction (“proof of work”). If the other accountant agrees, everyone updates their file…
Pros of blockchains
Your data is sensitive and crucial, and blockchain can significantly change how your critical information is viewed. By creating a record that can’t be altered and is encrypted end-to-end, blockchain helps prevent fraud and unauthorized activity.
All network participants with permisioned access see the same information at the same time, providing full transparency. All transactions are immutability recorded, and are time- and date-stamped. This enables members to view the entire history of a transaction and virtually eliminates any opportunity for fraud.
With blockchain, it is possible to share data about provenance directly with customers. Traceability data can also expose weaknesses in any supply chain — where goods might sit on a loading dock awaiting transit.
Traditional paper-heavy processes are time-consuming, prone to human error, and often requires third-party mediation. By streamlining these processes with blockchain, transactions can be completed faster and more efficiently.
Cons of blockchains
A lot of the existing blockchains are facing serious scalability issues. For example, bitcoin can only handle 7 transactions per second, when Visa can handle 6000.
Since blockchain databases are stored indefinitely on all network nodes, the issue of storage surfaces. With the increasing number of transactions, the size of the database will only expand, and there is no way personal computers can store unlimited data which only gets appended.
Data on a public blockchain is encrypted and anonymous, but lies in the hands of all nodes in the network. There is a possibility someone could trach down the identity of a person in the network through transactional data.
As blockchains spread across the globe, so too do the regulations put in place to govern them. The landscape is constantly evolving and keeping up to date with the rules in different global territories isn’t easy.
Surely it's more complicated?
Yes – but as a concept, not much more. Complexities come in the implementation and the journey to realise value from such implementations. The above explanation will, of course, be overly simplistic for some – but may be a starting point for others.
If you are just starting your crypto journey, Investopedia has a pretty extensive guide to help you through most of the concepts around blockchain.