The backbone of Bitcoin and the future of the internetIf you have been following cryptocurrency, banking, or investing over the last decade, you may have heard the term “blockchain,” the record-keeping technology behind the Bitcoin network. In this article will give you all the info you need.
Blockchain can seem complicated, but its core concept is really quite simple. With a blockchain, many people can write entries into a record of information, and a community of users can control how the record of information is amended and updated.
The distributed database created by blockchain technology has a fundamentally different backbone than other types of “normal” internet databases. Instead of a normal database used by, for example, Wikipedia where “master copy” is edited on a server and all users see the new version, with blockchain, every node in the network is coming to the same conclusion, each updating the record independently, with the most popular record becoming the de facto official record in lieu of there being a master copy.
Blockchain Key Takeaways
- Blockchain is a specific type of database.
- It varies from a typical database in the way it stores information; blockchains store data in blocks that are then chained together. (block+chain)
- As new data comes in it is entered into a fresh block. Once the block is filled with data it is chained onto the previous block, which makes the data chained together in chronological sequence.
- Different types of information can be stored on a blockchain but the most common use so far has been as a ledger for transactions.
- In Bitcoin’s case, blockchain is used in a decentralized way so that no single group or person has control—rather, all users collectively retain control.
- Decentralized blockchains are “immutable”, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.
Main Features of Blockchain
One of the most celebrated features of blockchains is their decentralization. Nodes are generally operated all over the world. Blockchains are also normally publicly available, which means that anyone can participate in the network and see the transactions on the chain. Decentralization is important in a number of ways.
- Due to the fact that everyone in the network owns the data, it is virtually impossible to alter the data without the whole network noticing and opposing the discrepancy.
- This protects the integrity of the data contained in the ledger.
- Through this mechanism, the ledger is also able to solve the double-spend problem.
- What is decentralization?
Decentralization ensures that there is no single point of failure or breakdown. Traditional databases usually have their data stored in servers located in one location. This provides an avenue of failure because if one server is compromised, then the whole network will likely be affected. However, it is not possible to compromise a blockchain ledger in this way due to the sheer number of nodes connected to the network.
- What does “immutable” mean?
Blockchains are immutable. That means once a transaction is accepted into a data set that is added to the ledger as a block, it is very difficult–if not impossible–to change any information contained therein. This is facilitated through the algorithm through which nodes add new data to the ledger. In the case of the Bitcoin network, this is the proof-of-work protocol.
In order to add new blocks to a blockchain, nodes must participate in the activity, which requires them to use the processing power contained in their computers. This is known as the consensus mechanism. Running a consensus mechanism incurs a cost on the user. This means that for an attacker to try to change or otherwise amend any information or data on the ledger, he or she would require an enormous amount of energy which is implausible to acquire, especially in the case of a large network.
- Takeover risk in a Blockchain?
An attacker would have to gain access to over 51 percent of the network in order to launch an attack of this sort. While this has happened in a number of smaller networks, it is “yet” to happen with larger networks like Bitcoin. The risk of such an attack falls as more nodes join a network, thus it is a self-limiting challenge.
What are Forks?
While cryptography helps the network link all blocks in the blockchain and enable and promotes immutability, it is possible for nodes within a network to split a chain in two. This happens, for example, when the majority of the participants in a network agree to upgrade to a new code. This may be as a result of a security issue (as was seen in the Ethereum network after the DAO hack) or in response to a system upgrade (as was witnessed with SegWit in Bitcoin).
The two types of forks are hard forks and soft forks:
- Hard forks lead to the creation of a new blockchain with its own native cryptographic asset
- Soft forks simply change some part of the underlying software but continue with the original blockchain
For instance, as a response to the DAO hack, the Ethereum community implemented a hard fork resulting in two different digital currencies, ethereum classic (ETC) and ether (ETH), running on two different blockchains. Hard forks are also a way through which a number of Bitcoins have come into existence. For instance, litecoin (LTC) is a fork of Bitcoin while bitcoin private (BTCP) is a result of a co-fork between Bitcoin and Zclassic.
Distributed Ledgers versus Blockchain
In the early days of cryptocurrencies, blockchain technology was also regularly referred to as distributed ledger technology. However, it is important to make a distinction between the two.
- Blockchains are a type of decentralized ledger.
- Decentralized ledgers refer to a larger class of database.
This split has come about as a result of the creation of so-called “permissioned ledgers”. These are ledgers that are neither publicly available nor viewable. There are two types of permissioned ledgers: federated/consortium ledgers and private blockchains. Federated databases are controlled by a group of people or corporations, while a private ledger is developed by a single entity. Within permissioned ledgers, only certain entities can view, change, and participate in the network.
These ledgers are typically seen in industries that are keen to utilize the features of blockchain technology but still need to have control over the data contained in their databases. These include the financial sector, governments, and the supply chain. This lack of decentralization has spurred an ongoing debate as to whether these private ledgers can really be referred to as Blockchains. Many believe there should be a distinction between these ledgers, hence the separation of the terms.
What's the future of blockchains?
The blockchain idea has turned out to be a platform that a broad range of applications can be built on top of. It’s still a very new and rapidly developing technology, but many experts have described blockchain’s potential to change the way we work and live as being comparable to the potential public internet protocols like HTML had in the early days of the World Wide Web.
The Litecoin and Bitcoin Cash blockchains operate in a very similar way to the original Bitcoin blockchain. The Ethereum blockchain is a further evolution of the distributed ledger idea; because unlike the Bitcoin blockchain, it’s not solely designed to manage digital money.
Think of the Ethereum blockchain as a powerful and highly flexible computing platform that allows programmers to easily build all kinds of applications leveraging the blockchain (That being said Ethereum is still a cryptocurrency and certainly can be used to send value to another person).
For example, imagine a foundation or charity that wants to send money to a thousand people every day for a year. With Ethereum, that would only take a few lines of code. Or maybe you’re a video game developer that wants to create items like swords and armor that can be traded outside of the game itself? Ethereum is built on blockchain technology and is designed to do that, too.
As we prepare to head into the third decade of blockchain, it’s no longer a question of “if” old-school companies will catch on to the technology—it’s a question of “when.”
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