Blockchain is an innovative technology that has revolutionized the cryptocurrency industry and has also found application in other niches. We often associate it with Bitcoin and for very good reasons – it was created specifically for monitoring Bitcoin transactions. However, the blockchain technology has evolved considerably since then. It is therefore important to understand its impact and potential beyond Bitcoin. Don’t worry if you don’t understand the concept or its benefits. It’s our aim to explain these things in the text you are reading.
To ensure correct understanding, we will digress briefly and consider the processes that paved the way for the appearance of blockchain. High-end technologies have now advanced so far that they are exerting a strong influence on the fundamentals of the economy, business, and the state. They have changed our understanding of trade, property, and trust. One of these technologies relates to cryptocurrencies like Bitcoin.
Many people think that Bitcoin is simply a currency. In fact, this cryptocurrency has many uses, and serving as a means of payment is only one piece of the picture puzzle. The goal of money is to facilitate the process of trading. In recent years, this process has become extremely difficult. Transactions are now carried out worldwide. Traditionally, each of them goes through the accounting department, suggesting that we need entities like banks to help us with all the transactions.
Very often, information about such transactions remains closed to the public. This is why we resort to the services of third parties such as the state, banks, and economists, even the money in our pockets. We trust these parties to facilitate the transfers and money operations. Yet, there is a technology that allows us to create a single network of accounting books that would be open to the whole society. This network is called a distributed database or a blockchain.
In other words, blockchain is a public and unchangeable online database whose functions include indicating who owns Bitcoins and how many. It is important to mention that no-one can forge such a database. To simplify matters, let us consider its title: blockchain is just a chain of blocks, where each block represents a string of information about Bitcoin transactions (their size, the parties involved, etc.).
Keep in mind that a distributed system means blockchain data is not stored on a single server or a network of computers, but on multiple computer systems at the same time. In this way, anyone could get an entire copy of it.
Is blockchain restricted to cryptocurrencies?
We should clarify that this technology is not only about cryptocurrencies. Even though blockchain was created for Bitcoin, it is only the system behind it, and it can be applied in many other areas today. For example, a blockchain system would allow you to track the entire supply chain of a product, from the manufacturer right down to the consumer. For more use cases, check our article: (link)
The main advantage of the blockchain system is that no single person or entity can control it and no-one has access to change data. This doesn’t apply to the traditional monetary system, where banks can control the money flow and the information about each transaction. The blockchain is a distributed database, while the standard financial system is a centralized one at the local level and a decentralized one on a global scale.
How safe is blockchain?
In the blockchain system, each transaction is recorded and adds a new block to the chain of the distributed database. Each block stores information such as the time, date, participants, and size of the transactions, as well as information about the entire network. Sophisticated mathematical algorithms and special programs (miners) monitor the integrity and public availability of the system.
All parts of the network are constantly finding consensus with the general state of its transactions. If someone tries to change the chain on its own, no consensus will be possible, and the operation will be rejected. This kind of operating algorithm prevents the entire network from making changes.
This means that there cannot be a single point of failure for the whole blockchain system since it is decentralized.
Why do we need the blockchain technology?
This technology is a game-changer and major global banks are actively funding it. Their interest is based on trust in network participants, transparency of operations, reduction of documents, and time-savings. In many ways, participants would be able to abandon the services of third parties if they are not very happy with all these intermediaries. Wall Street’s big banks view the blockchain system as a great opportunity to cut costs.
Here are the key advantages of the blockchain technology:
- It doesn’t require third parties to monitor transactions.
- All the users have the power to control the system and accept/reject new data.
- Blockchain data is never partial but always complete, clear, and timely plus available at all times.
- Blockchain data is permanent. Old transactions will remain there forever, which makes it possible to access an accurate history of transactions.
- There is a high level of transparency, unrivaled by other databases and applications in the financial world. Users can monitor every transaction in real time or check the history.
- The blockchain technology is secure.
- Since the system doesn’t involve third parties and intermediaries, the transactions are cost-effective.
- Despite being an entirely transparent system, blockchain still allows you to remain anonymous.
- The technology is automated and can be operated 24/7.
Blockchain is great because it avoids the threat of manipulation and excessive control on the part of intermediaries. As Vitalik Buterin, the inventor of Bitcoin-like cryptocurrency system Ethereum, points out:
“Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organizations and corporations that much — I mean Africa, India, the Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in the countries that haven’t reached that level yet.”
What does each block represent?
We hope that by this point you have already grasped the idea of the blockchain system being a ledger or a chain of fragments called blocks. But what does each block show? What’s in there? In this paragraph, we’ll focus on the blockchain system of Bitcoin. You’ll find out the four main components of every block. Before that, however, we should note that no block is added to the system without the consensus of all users via a special algorithm.
The Bitcoin miners are an essential component of the consensus system applied to monitor and record the transactions. In exchange for working to collect transaction information and add new blocks to the blockchain system, the miners receive a reward equivalent to one Bitcoin for every block. Miners use special software and formulas to achieve that. These formulas and mathematical algorithms are open for all users and represent a key instrument in the validation process (consensus).
Now, let’s go back to the four constituent parts of each block. They are as follows:
- An ID known as “hash” – this is a unique figure for each block.
- The hash of the previous block.
- All the transactions included in the block – note that there may be one transaction or thousands of them in a single block.
- The public key (an identification tool) for the sender and the receiver of the transaction.
As you can see, the reference to the previous block sets a chronological order within the blockchain.
Blockchain and big banks
The fact that Wall Street’s major banks are investing heavily in the blockchain technology says a lot about its potential and suggests a bright future. These institutions are excited about the possibility to cut costs, while we are excited about the prospects of faster money transfers and lower fees.
Simon Taylor, vice-president of blockchain research and development at Barclays, says the following: “Banks do very similar things to each other, even though they compete. They basically keep our money safe and a big computer keeps track of who has what. But getting these computers to talk to each other is remarkably complex and expensive – the tech is getting a little old.”
If big banks choose to share information by applying customized blockchain technology, they could remove intermediaries and most of the manual processing. They could also speed up transactions, which would ultimately translate into lower costs.
Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, JP Morgan Chase, Deutsche Bank, Credit Suisse, Barclays, UBS, and Societe Generale are only a few examples of banking corporations willing to apply the technology.
The bottom line
Now you know that blockchain is a database system that forms the core of Bitcoin and many other cryptocurrencies. However, you may still be failing to comprehend the full potential of this technology beyond cryptocurrencies. But that’s OK. We will develop a separate article to explore that subject, and you can build on the knowledge you’ve gained so far.
Let’s wrap it up for today by saying that blockchain is a system that has already revolutionized data sharing and transactions but its work is far from over.
Latest posts by Anatol Antonovici (see all)
- How To Securely Buy Bitcoins with Paypal - August 16, 2017
- Best Bitcoin Wallets Compared & Reviewed (2017 Updated) - August 16, 2017
- How to Buy Bitcoin – Easy Steps to Get Bitcoins (2017) - August 13, 2017