If you've become interested in cryptocurrency investing, you've likely also encountered the underlying technology known as blockchain. While it may seem complex at first, understanding blockchain is essential for any crypto investor. This guide provides a clear explanation of what blockchain is, how it works, and how you can benefit from this revolutionary technology.
The Historical Foundation: Humanity Relies on Accounting
Throughout history, humans have needed to record transactions. The invention of writing actually emerged in response to this fundamental need. The earliest evidence of writing, discovered on clay tablets in Mesopotamia (modern-day Iraq), was primarily used to record grain storage inventories, documenting inputs and outputs. We can therefore say that accounting predates writing itself.
It's no coincidence that the oldest known name belongs to an accountant. The name 'Kushim' appears on a clay tablet recording a wheat transaction over 5000 years old, demonstrating the ancient nature of commercial exchanges.
This discovery confirms that human history is closely tied to exchanges between peoples. The global economy has developed on a double-entry bookkeeping system, with one column recording entries (credit) and the other recording exits (debit).
However, this transaction recording model has always required a trusted third party to verify account accuracy. An entire economy cannot rely solely on trust between commercial partners.
Blockchain revolutionizes this exchange system by effectively adding a third column to this accounting ledger: the verification column. This represents a true revolution because instead of relying on trusted third parties, human exchanges can now be verified by a computer protocol.
What Is Blockchain? Definition and Origins
Blockchain is arguably the most promising technology since the advent of the internet. Before examining how it works, let's first explore its origins.
The Origins of Blockchain Technology
Blockchain was first conceptualized in 1991 by Stuart Haber and W. Scott Stornetta. These mathematicians wanted to develop a system where document timestamps couldn't be tampered with.
In the late 1990s, Nick Szabo, a developer belonging to the cypherpunk movement, proposed using this technology to secure BitGold, a digital payment system that never ultimately launched.
It wasn't until the creation of Bitcoin in late 2008 that this technology found its first practical application. The Bitcoin protocol is built on a blockchain foundation.
How Does a Blockchain Work?
A blockchain is a distributed database shared among the nodes of a computer network, where each piece of data is secured and encrypted. While primarily recognized as the foundational technology behind cryptocurrencies, its potential extends far beyond. This distributed nature of blockchain ensures increased transparency and security, as information isn't stored in a single location but spread across numerous nodes. The cryptography used in blockchain ensures that data is virtually tamper-proof, making it extremely reliable.
Beyond Cryptocurrencies
Blockchain also finds diverse applications in many sectors, including logistics, finance, healthcare, and more, due to its ability to provide unprecedented traceability and security for shared data. The great innovation lies in its ability to record data and exchange value digitally and in a decentralized manner. In other words, blockchain enables exchanges without needing trusted third parties.
Understanding the Unique Structure of Blockchain
The main difference between a blockchain and a traditional database is how information is recorded. Unlike a conventional database that structures information in tables, blockchain gathers this information into blocks. Blocks are groups that contain sets of information, such as transactions.
Once filled, a block closes and connects to the previous block, creating a chain - hence the term 'blockchain'. This method records blocks, or groups of information, chronologically. The distributed nature of blockchain makes modifying blocks practically impossible.
Thanks to blockchain, information is distributed across multiple nodes in a network. This distribution ensures information accuracy. Even if data is modified on one node, the other nodes remain unchanged, preserving the blockchain's integrity.
For example, if a Bitcoin network user modifies a transaction record, the other nodes simply need to cross-reference their information to detect the fraudulent transaction. This computer system thus enables reliable and transparent data recording. No network node can modify the information it contains without others noticing.
In this way, everything recorded on a blockchain becomes irreversible. This can be a list of transactions (as with cryptocurrencies), but a blockchain can also contain various other information like contracts, digital identities, or company product inventories.
In Simple Terms: What Is a Blockchain?
To define the term simply, a blockchain is a distributed database that records information in blocks added chronologically to one another. We will now examine how blockchain is decentralized, transparent, and secure.
Blockchain: A Decentralized Database
Blockchain doesn't store information on a central server. Instead, it's copied and spread across a network of thousands of computers. Whenever a new block is added to the blockchain, each computer on the network updates its copy of the database to reflect this change.
The decentralized structure of blockchain, where information is distributed across the entire network rather than stored in a central database, significantly enhances its security. In this system, each network node holds a copy of the blockchain, making any attempt at falsification extremely difficult, if not impossible.
If a hacker managed to access one copy of the blockchain, they could only modify that specific copy. This would quickly be detected by other nodes, as each new entry in the blockchain must be validated and match existing copies on the network. This cross-verification ensures the integrity and reliability of the entire system, making blockchain a particularly secure technology resistant to manipulation attempts.
Blockchain: A Transparent Database
On a blockchain, transaction transparency is a key element of its structure and operation. Every transaction conducted on the blockchain is publicly visible, enabling transparent tracking and complete traceability. To consult these transactions, users can use blockchain explorers, online tools that allow real-time visualization of ongoing blockchain transactions.
Although transactions are public and easily accessible through these explorers, it's important to note that their content is encrypted. This means that while you can see a transaction's existence and details such as amounts and wallet addresses involved, the identity of the parties remains anonymous and protected. This combination of accessibility and confidentiality makes blockchain both transparent and secure, enabling traceability without compromising user privacy.
In this way, blockchain users remain pseudonymous but not anonymous. It's not the person's name that appears but the public address of their wallet. It's thus possible to trace the origin of all transactions back to their source.
Open Source Software
Most blockchains are open source software, meaning they're accessible to everyone. Anyone can review the code. This gives developers the ability to audit the blockchain to detect potential vulnerabilities. This also contributes to the democratic functioning of various networks.
Indeed, anyone can suggest system updates. When the majority of network users agree on the need for an update, the community adopts this resolution. Then, community developers proceed with the software upgrade.
Blockchain: A Secure Database
Blockchain is a secure technology for several reasons. First, it's important to note the chronological recording of blocks in the blockchain. As mentioned earlier, each new block adds directly after the previous one. This method makes any attempt to retroactively modify the content of a block extremely difficult once added to the blockchain.
A hash code 'locks' each block. This code results from a mathematical function that converts the block's information into a unique sequence of numbers and letters. This sequence allows information identification without having to access it directly. Thus, to go back and modify the block, a majority of the network would need to reach consensus. To achieve this consensus, it would be necessary to simultaneously control and modify 51% of the blockchain copies. An attack of this magnitude would be extremely costly in both computing resources and money. Moreover, it would need to go unnoticed by network users.
Proof of Work and Proof of Stake
In addition to the hash function that prevents modification of previous blocks, blockchains use consensus mechanisms like Proof of Work (PoW) or Proof of Stake (PoS) for adding new blocks.
Proof of Work is a consensus mechanism where network users lend their computer's processing power to solve a cryptographic puzzle. The first user who finds the solution earns the right to add the next block to the blockchain. In exchange, they receive a small amount of the cryptocurrency they just mined.
Proof of Stake is a consensus mechanism where users lock up cryptocurrency they own. The computer protocol randomly grants the right to validate a block to one of them. In this system, user selection for validating a block directly depends on the amount of cryptocurrency they've locked up. Thus, the more cryptocurrency a user locks, the higher their chances of being chosen to validate transactions.
The common point of these consensus mechanisms is that to attack them, you need to possess at least 51% of the resources (computing power or cryptocurrency to lock). In both cases, the task difficulty makes attacks on these networks unfeasible.
Blockchain is a fascinating technology that can be used in many domains. Indeed, while its most known use is monetary exchange, blockchain can impact many other fields.
Other Use Cases: Concrete Examples
To give you an example, doctors could use blockchain to securely store medical records.
Blockchain offers revolutionary applications, such as replacing cadastral plans with digital recording of land ownership. In logistics, it authenticates product origin and ensures rigorous tracking. Furthermore, blockchain finds innovative use in voting systems, guaranteeing ballot transparency and enabling almost instant result obtaining.
Blockchain also enables secure implementation of smart contracts. A smart contract, recorded and executed on the blockchain, facilitates contractual agreements through computer code. This contract activates when users accept a set of predefined conditions. Once these conditions are met, the smart contract automatically executes the agreement terms.
As you've understood, blockchain is an information distribution technology that is decentralized, transparent, and secure, with applications in many domains. But how can you benefit from this technology's potential? The simplest and fastest way remains investing in assets that rely on blockchain for development.
Foremost among these assets are obviously cryptocurrencies. 👉 Explore secure investment platforms to begin your journey with digital assets backed by blockchain technology.
Frequently Asked Questions
What is blockchain in simple terms?
A blockchain is a decentralized ledger of transactions conducted on a peer-to-peer (P2P) network. With this technology, participants can confirm transactions without relying on a central authority. What can blockchain be used for? Potential applications include transaction settlement, fund transfers, voting, and much more.
What's the difference between blockchain and cryptocurrency?
Although closely related, blockchain and cryptocurrencies are two distinct things. Simply put, blockchain is the technology that enables cryptocurrencies to exist, among other things. It's a decentralized ledger of transactions conducted on a P2P network. In comparison, cryptocurrency is a medium of exchange, created and stored electronically on the blockchain.
How secure is blockchain technology?
Blockchain is considered highly secure due to its decentralized nature, cryptographic encryption, and consensus mechanisms. To alter any information, a hacker would need to control at least 51% of the network simultaneously, which becomes increasingly difficult and expensive as the network grows larger.
Can blockchain be used beyond cryptocurrencies?
Absolutely. Blockchain has numerous applications beyond cryptocurrencies, including supply chain management, healthcare record keeping, digital identity verification, voting systems, real estate transactions, and smart contracts that automatically execute when conditions are met.
What are the environmental concerns with blockchain?
Some blockchain networks, particularly those using Proof of Work consensus mechanisms, consume significant amounts of energy. However, many newer blockchains are adopting more energy-efficient consensus mechanisms like Proof of Stake, which require substantially less computational power and energy consumption.
How can I start investing in blockchain technology?
The most accessible way to invest in blockchain technology is through cryptocurrencies and blockchain-based assets. It's important to research thoroughly, understand the risks, and consider using regulated platforms that offer security features and educational resources for beginners.