The Blockchain Explained

Perhaps you’ve heard of the blockchain, perhaps not. It’s going through a bit of a hype at the moment in tech land, because it has great potential to change the way people and companies handle transactions and other contracts. It’s definitely worth having a basic understanding of what it is, which I will try to give you today.

For centuries, when making transactions, we have trusted centralized intermediaries to handle and validate them. The easiest example is to just look at our banking system. If you transfer $100 to another account, the bank enters into a ledger that $100 has been deducted from your balance and $100 has been added to the balance of your counterpart in the transaction. The bank maintains a central ledger with all transactions, that nobody else gets to see, and in theory they could abuse that position quite easily. You really have to trust the bank, but what if you did not want to, or perhaps could not rely on a centralized authority to handle your transactions?

Enter the blockchain

Essentially a blockchain is a distributed digital ledger. Blockchains can differ from one another in certain technical aspects of their implementation, but the core concepts for most of these variants are the same. They rely on two things:

1. Everyone who participates in a blockchain has a copy of the entire ledger and can verify every transaction, and
2. The ledger is inherently very hard to tamper with.

But what's with the weird name... Blockchain?? Oh right, well that's simply because it's a chain of blocks. No really! Let me explain.

A 'block' in this case is a (verified) set of ledger entries. Just like a paper ledger has a fixed number of entries per page, a block can only hold a fixed number of digital entries. The 'chain' part of the name refers to the fact that these blocks are linked together sequentially. Hopefully it makes more sense now. Actually the method of chaining the blocks is crucial, as we'll see in a minute.

So what makes this technology work?

Without getting into too much technical detail, each block is validated with an encryption key, called a hash, and each new block contains a copy of the previous block's hash. These hashes are totally unique and depend on the contents of the block, and even a tiny change in the contents of a block would result in a totally different hash. Due to the incorporation of the previous hash in every new block (it is part of the content of the block and therefore influences the hash), they are linked in a way that makes it very difficult to change the contents or the order of the blocks, because a new hash for one block, due to a change in its contents, would immediately invalidate all blocks that come after it.

Hashes are also inherently very hard (computationally intensive) to calculate, and very easy to validate. Therefore, running checks on the validity of chain is many orders of magnitude easier than actually actually building it, and inconsistencies are easily spotted.

When a new block is ready to be validated, there is actually a competition between the participants in the blockchain to be the first to calculate the hash. There is no central hash computer, so that aspect of the system is also distributed. Once there is a winner, the validated block is added to everyone's copy of the chain, and the process continues.

The fact that creating the hash is computationally intensive, means that the existence of a hash is proof that a lot of 'work' has been done to validate the block. This concept of "proof of work" as it is called, is actually used to validate the entire chain.

How? Well let's say you wanted to tamper with the ledger. You would have to create a branch in the chain starting at the block you alter, then you would need to recalculate the hash for every block that comes after that in order for your branch to survive scrutiny. But the original chain would also still be in the system, and now everybody would see the original and your altered version. The concept is that while you are crunching the numbers to find new hashes for existing blocks, more blocks will continue to be added to the original chain and you won't be able to catch up, meaning that your chain will become shorter than the original. Therefore the longest chain, i.e. the chain with the most proof of work, is the one that is trusted by default.

In fact, the maths are such that in order to successfully manipulate the system and keep your chain the longest, you would need about half of the total amount of computational resources in the distributed system to pull it off. Typically, this is something that can be checked and safeguarded against.

These concepts are what make blockchains a potentially very safe way to handle transactions without making use of a central service.

So what?

As you can imagine, this has a lot of potential to become a disruptive technology and many people are already hard at work designing systems that use blockchain technology. Bitcoin and Ether are so-called cryptocurrencies that use a blockchain in order to be totally independent of any banks, governments or other currencies. “Smart contracts” are other developments built on blockchain technology, where the thinking is that in a free market, total strangers should be able to set up strong and trustworthy contracts between them without the intervention of third parties. These are just a few of the growing list of examples that can be found in this promising field.

So what you say? Well imagine a world where banks and notaries are not needed and cross border transactions are just as simple as local ones. Does that change your perspective a little?

Conclusion

Hopefully this article has given you a bit more insight into the workings of the blockchain, and hopefully you are starting to see the potential of this technology.

There is a lot of excitement about blockchain technology, and also a lot of apprehension and uncertainty. Scammers are already using and abusing the technology as well, and there are also no laws or regulations governing transactions and nobody to fall back on if things go wrong. Plenty of reasons to be excited, but also plenty of reasons to keep your wits about you and to be very careful getting your feet wet.

What is safe to say is that this is one to watch!

Disclaimer: Please be aware that this is a very simplified version of the workings of these systems as I understand them. Also, my interpretation may not be totally accurate.