What is the blockchain and how does it work?
The blockchain is one of the most trending topics of the digital world in recent times. In this article, the focus will be to understand what is the blockchain? We will also explain its origin, how it works, and why it can be relevant for you in the near future.
After reading this article, you will know everything about:
- What is the blockchain, and where does it come from?
- The objective of the blockchain
- How does the blockchain work?
- Why can the blockchain be relevant to you?
What is the blockchain and where does it come from?
Simply put, the blockchain is a new, decentralized information recording system. In this kind of database, transactions are stored, with the distinctive feature of not being able to be modified or deleted. Later we will explain in detail how this technology works.
The first steps towards the blockchain technology that we know today date back to 1991. In that year, a blockchain system with cryptographic security was introduced to share digital documents with timestamps so that it would be impossible to manipulate them in any way. Despite its innovation, this technology had very little adoption, and the original patent expired in 2004, a few years before one of the most disruptive events in the digital world.
In early 2009, a person (or group of persons) under the pseudonym of ‘Satoshi Nakamoto’ published an article that defined the mechanism for the use of a new digital currency: Bitcoin. As you may already imagine, the mechanism described by Nakamoto was based on the technology we know today as blockchain.
After this event, the blockchain has been the driving force in the creation of new cryptocurrencies, and it has also been used in a wide variety of services beyond Bitcoin, such as notarial registrations, real estate transfers, voting systems, among others.
What is the objective of the blockchain?
At its core, the objective of the blockchain is to eliminate the human confidence factor that throughout history has governed the way we in which transfer information or data with each other.
By applying this technology, each transfer made between a sender and a receiver can be verified following a majority consensus protocol that speeds up the transfer and eliminates the need for a central entity for verification. This brings us to the next step in the history of blockchain technology: how does it work exactly?
the objective of the blockchain is to eliminate the human confidence factor that throughout history has governed the way we in which transfer information or data with each other.
How does the blockchain work?
Very well, we have already covered what the blockchain is and where it comes from, and now we will briefly immerse ourselves into how this technology works.
The starting point to understand how the blockchain works can be found in its very name, “blockchain” or in other words, “chain of blocks.” Each block within the blockchain is an accumulation of transactions made on the network. In practice, each block contains between 2,000 and 3,000 transactions.
Each block of the chain also carries two codes. The first code indicates the block that precedes the current block, and the second indicates the block that follows. In this way, all the blocks in the network are intertwined or chained by what are known as hash codes. Each block has a unique hash code, so this code is usually referred to as the block’s ‘fingerprint’.
Now, imagine a physical accounting book, in which you have the task of recording all the transactions made between an issuer A and a receiver B. Your accounting book would look like this:
Just like all these transactions are recorded in your accounting book, all transactions made in the blockchain network are also registered in single blocks.
What distinguishes the blockchain from other technologies is the process of verifying each of those blocks, which is the responsibility of the network of distributed nodes.
Instead of having to rely on a central entity (in the example above, your accounting book) to verify all the transactions between A and B, the blockchain network is distributed among thousands of computers, known as nodes, around the world. Each node maintains an exact copy of the blockchain. In the case of the Bitcoin blockchain, anyone can download a copy of that “accounting book” and act as a node.
Each time a new block of transactions is going to be added into the blockchain, that block is transmitted to all the nodes of the network for verification using a complex mathematical calculation. If a transaction block is approved by 51% or more of the nodes, the nodes store the block in the transaction history, and the network is updated so that all nodes have the latest version of the blockchain. In practice, this process is repeated every 10 minutes.
By having nodes and a data record scattered throughout the world, the blockchain changes the paradigm of how humans can make exchanges or transactions between peers since the need for a central verification body is eliminated together with the need to trust that central entity to determine the legitimacy of a transaction.
The interesting thing about this mechanism is that the transactions registered in the blockchain cannot be altered or eliminated once they are spread over the network.
Why can the blockchain be relevant to you?
The investment in this technology increases considerably every year, and it is expected that blockchain technology revenues will generate a market size of over 23.3 billion U.S. dollars by 2023 (compared to 1.2 U.S. billions in 2018).
At its core, this technology can be used in any activity that requires recording data in a secure and transparent way.
Now that we know what blockchain is and how it works, let’s look at some tangible examples beyond cryptocurrencies that may be relevant to your daily life.
Signatures and contracts
By incorporating blockchain technology in signatures and contracts, it is possible to guarantee the legitimacy of a document since any information stored in the blockchain cannot be altered in any way. This would help us eliminate any attempt at manipulations, scams, or legal frauds.
Taxes
Regardless of the country where you live, doing tax returns is usually a complicated and elongated activity. With blockchain technology, you could automate these types of tax tasks, and provide the relevant authorities with the necessary access to our data and financial history, to keep your tax returns up-to-date and safely stored.
Identity Management
As users, blockchain technology would allow us to create a tamper-proof digital identity. We could replace usernames and passwords with digital identities based on the blockchain to access applications and websites, create digital accounts, sign and transfer digital documents, among others. In South Korea, for example, the company Iconlook has received 8 million dollars that will be allocated to a digital identity service based on the blockchain called “my-ID”, which aims to make identification authentication so accessible how to have it in our mobile phones and use it in any service that requires our legal information.
Nowadays, fin-tech companies, such as Bitcaribe, are developing solutions to facilitate the way in which we interact with money and offer gateways to the cryptocurrency ecosystem.
We hope this article has helped you discover what blockchain is and how it works, but above all, to consider the uses that might be relevant to you in the near future.
If you would like to read more about the relevance of blockchain for your day to day, we invite you to read the article “The relevance of blockchain beyond Bitcoin” written by our CEO, Nestor Herrera.
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