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WHAT IS A BLOCKCHAIN?



Unless you’ve been living under a rock for the last few years, you have
definitely heard the word “Bitcoin”.

Once you start reading articles about Bitcoin, it doesn’t take long before it
mentions the term “blockchain technology”.






SO WHAT EXACTLY IS THE BLOCKCHAIN?

The blockchain is a digital ledger or shared database. This digital ledger is
the “chain”. And every time new data entries are added, these are all called
“blocks.” They get added in order periodically as it updates and forms the
“blockchain.”



It is the backbone of every cryptocurrency, though its long-term applications
likely include much more than just digital currencies.

In theory, this digital ledger could be any shared database used to store any
information, but in the case of Bitcoin and basically every other
cryptocurrency, it is a digital ledger used to keep a record of transactions for
the network.


HOW DOES THE BLOCKCHAIN WORK?

Specifically, in the case of Bitcoin, each block on the blockchain holds
transaction data, a timestamp, a unique hash reference, and the unique hash
reference of the previous block.

This data creates a chain of blocks that proves the accuracy of its records.



The timestamp proves that the transaction data was published before the block
got its hash. This hash is used to confirm the block’s authenticity, and by
having the previous block’s hash, it can also begin to form a chain that cannot
be edited once published, as to edit would require editing every computer
holding the Bitcoin ledger.

Although new to us, the concept of a blockchain actually has its origins in 1982
and was adapted further in 1991, before being used by Satoshi Nakamoto, the
mysterious founder of Bitcoin, in 2008.




WHAT IS A DIGITAL LEDGER EXACTLY?

A ledger is a book of monetary transactions – a list of credits and debits for a
business or individual. A digital ledger is just one kept on a computer rather
than in a physical book.

This list of transactions is what secures the cryptocurrency’s value. It makes
their value provable rather than speculative, having finally found a solution to
the “double-spend” problem faced by all forms of digital currencies before
Bitcoin.



Before the invention of Bitcoin, all electronic forms of currencies failed as
there was no way to ensure someone did not spend their electronic currency twice
– as information is a lot easier to reproduce and forge than cash or gold. This
is known as the Double Spend problem.

The concept of a digital ledger that was continually updated, shared and agreed
upon by most nodes in the network finally solved this problem.

By requiring all those who want to mine Bitcoin for its reward to hold a full
copy of its digital ledger, it removed the possibility of the double-spend
problem as to cheat the ledger would require cheating more than half the
network.



Simply put, if a Bitcoin has been spent, there is a record of that. Even if it’s
just sitting in a wallet, there’s a record of that too.

The more people who hold this digital ledger, the more it can be
cross-referenced to ensure its accuracy when new transactions are submitted,
making it harder for an individual to submit fraudulent transactions.

Unless an individual controls 51% of the entire Bitcoin mining network, they
cannot successfully submit false transactions.

This is known as a 51% attack, and on a network as large as Bitcoin would
require an immense hacking operation. Beginning at the same time, across
hundreds of thousands of computers, all across the globe.

Meaning, that at this point, it’s unlikely to occur for Bitcoin without some
significant advance in technology first.


WHAT IS CRYPTO MINING?

Crypto mining is the process by which Bitcoin and other cryptocurrencies like it
release new coins and verify their transactions.

This is achieved by those who lend their computing power to verify incoming
transactions being rewarded with newly created Bitcoins as a reward for doing
so.



Creating a positive cycle of miners securing the network through authenticating
its transactions and creating new Bitcoins, which they are then rewarded and can
sell for profit.

However, mining only applies to Proof-of-Work cryptocurrencies.

There are other consensus mechanisms to verify transactions, such as
Proof-of-Stake, which Cosmos uses, or Proof-of-Authority, used by VeChain, but
those are topics for another time.


HOW IS BLOCKCHAIN SECURE?

Looking at Bitcoin, as we just mentioned, requiring a consensus of 51% of the
overall network means that if you upload a false transaction, you need to get a
majority of the network to agree that it is correct.

Which, when there are hundreds of thousands of computers independently connected
around the world, seems unlikely.

Making it harder, all of these computers are decentralised, meaning they do not
report or belong to one centralised server.

This is because, in a decentralised setup, all the participants are disconnected
from each other, running their own machines in their own buildings. If you take
down one server, the rest still exist, holding and hosting a perfect copy of the
entire blockchain history.

Though, it is worth noting that some cryptocurrencies swap this extra security
that decentralisation provides for speed, and as a result, they are either fully
or partially centralised.



As if that wasn’t enough, once a block is added to the blockchain, it is hashed
in such a way that makes changing it impossible.

Since every computer holds a copy, it can’t just be opened and edited, the same
way you can’t submit a fraudulent transaction . Once published, it becomes
public knowledge, screenshotted, and immortalised.

That’s not even mentioning the high-level SHA-256 encryption that secures every
entry on the blockchain, which is some of the toughest encryption on the planet.

SHA-256 is so strong that even with the significant financial incentives for
doing so and zero regulation preventing it, Bitcoin’s encryption hasn’t been
hacked or corrupted in the 13 years Bitcoin has been active.


WHAT EXACTLY ARE THE BENEFITS OF USING THE BLOCKCHAIN?

The main benefits of blockchain technology are transparency, data permanence,
and servers that do not go offline.

Although we have mostly talked about Bitcoin, blockchain technology has begun
being used in multiple other applications other than crypto.

For example, when we think of blockchain again as a shared database instead of a
digital ledger, we find it is already being used to track students’ academic
progress in developing countries, track and discover the location or information
about items in mass storage, or ensure the quality and authenticity of inventory
items in transit.



When we look at blockchain technology, you could pretend we are looking at an
original Atari games console.

Blockchains currently are an early prototype of an industry that looks set to
expand as the years’ progress, with how exactly this technology will be used not
being fully realised yet.






SO, IN CONCLUSION, WHAT IS THE BLOCKCHAIN?

The blockchain is a shared digital database mainly used to verify cryptocurrency
transactions.

It offers a permanent record that cannot be edited, tricked, manipulated, or
conned. It does this by requiring everyone running the network to hold a
complete copy of the network, meaning if one server goes down, the network does
not.

Although currently crypto-focused, the technology itself can be applied almost
anywhere.

For example, I like to imagine a world where government spending is processed
through a publicly viewable blockchain so we can see exactly where it all goes,
but maybe I am just dreaming.



Watch the animated video here:



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