What is Blockchain? How Does Blockchain Work?
Blockchain is most simply defined as a decentralized, distributed ledger technology that records the provenance of a digital asset. The blockchain makes the history of any digital asset unalterable and transparent, giving it the potential for wide ranging disruption in everything from finance to food.
A simple analogy for understanding blockchain is a Google Doc. When we create a document and share it with a group of people, the document is distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked out awaiting changes from another party, while all modifications to the doc are being recorded in real-time, making changes completely transparent.
Of course, blockchain is more complicated than a Google Doc, but the analogy is apt because it illustrates three critical ideas of the technology:
- Digital assets are distributed instead of copied or transferred.
- The asset is decentralized, allowing full real-time access.
- A transparent ledger of changes preserves integrity and creates trust.
Blockchain is an especially promising and revolutionary technology because it helps reduce risk, stamps out fraud and brings transparency in a scaleable way for myriad uses.
Blocks, Nodes & Miners
Blockchain consists of three important concepts: blocks, nodes and miners:
- Blocks store data and every block points to a previous block, creating a chain.
- Nodes are the devices connected to the blockchain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
- Miners create new blocks on the chain.
The blockchain ledger is made up of linked transaction data blocks that continuously link together as long as information is passed throughout, hence the name blockchain. All of the nodes on a blockchain network must approve any transaction via algorithm for the transaction to be trusted and verified. Nodes send the transaction information on the the other nodes. When someone changes the information in a block, the chain is broken unless it is re-mined.
Mining a block isn't easy, especially on a large chain. Miners use special software to solve complex math problems. When the block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially. A tremendous amount of computing power is required to mine a blockchain.
Blockchain transactions are public. Each participant is given a unique alphanumeric identification number that shows their transactions. Combining public information with a system of checks-and-balances helps the blockchain maintain integrity and creates trust among users. Essentially, blockchains can be thought of as the scaleability of trust via technology.
The whole point of using a blockchain is to let people — in particular, people who don't trust one another — share valuable data in a secure, tamperproof way.
— MIT Technology Review
Blockchain's decentralized ledger system features multiple steps to safeguard data being passed along, keeping all changes transparent and preventing the ability of any one entity to corrupt the chain.
Originally created as the ultra-transparent ledger system for Bitcoin to operate on, blockchain has its roots in finance, so it only makes sense that the financial industry has a been a leader in its adoption. The massive amount of fraud, corruption and hacking that occurs on a daily basis makes the security of blockchain a must-have.
In late 2013, Russian-Canadian developer Vitalik Buterin published a white paper that proposed a platform with all of the traditional blockchain functionality with one key difference: it can also execute computer code. Thus, the Ethereum Project was born.
Ethereum blockchain lets developers create sophisticated programs that can communicate with one another on the blockchain. Ethereum programmers can create tokens to represent any kind of digital asset on the blockchain, track its ownership and execute its functionality according to a set of programming instructions. For example, tokens can be music files, contracts, concert tickets or even a patient's medical records. This has broadened the potential of blockchain to permeate other sectors like media, government and identity security.
Thousands of companies are currently researching and developing products and ecosystems that run entirely on the burgeoning technology. Blockchain is challenging the current status quo of innovation by letting companies experiment with groundbreaking technology like peer-to-peer energy distribution or decentralized forms for news media. Much like the definition of blockchain, the uses for the ledger system will only evolve as technology evolves.
Although blockchain is a new technology, it already boasts a rich and interesting history. The following is a brief timeline of some of the most important and notable events in the development of blockchain.
- Satoshi Nakamoto, a pseudonym for a person or group, publishes “Bitcoin: A Peer to Peer Electronic Cash System."
- The first successful Bitcoin (BTC) transaction occurs between computer scientist Hal Finney and the mysterious Satoshi Nakamoto.
- Florida-based programmer Laszlo Hanycez completes the first ever purchase using Bitcoin — two Papa John’s pizzas. Hanycez transferred 10,000 BTC’s, worth about $60 at the time. Today it's worth $80 million.
- The market cap of Bitcoin officially exceeds $1 million.
- 1 BTC = $1USD, giving the cryptocurrency parity with the US dollar.
- Electronic Frontier Foundation, Wikileaks and other organizations start accepting Bitcoin as donations.
- Blockchain and cryptocurrency are mentioned in popular television shows like The Good Wife, injecting blockchain into pop culture.
- Bitcoin Magazine launched by early Bitcoin developer Vitalik Buterin.
- BTC market cap surpassed $1 billion.
- Bitcoin reached $100/BTC for first time.
- Buterin publishes “Ethereum Project" paper suggesting that blockchain has other possibilities besides Bitcoin (e.g., smart contracts).
- Gaming company Zynga, The D Las Vegas Hotel and Overstock.com all start accepting Bitcoin as payment.
- Buterin’s Ethereum Project is crowdfunded via an Initial Coin Offering (ICO) raising over $18 million in BTC and opening up new avenues for blockchain.
- R3, a group of over 200 blockchain firms, is formed to discover new ways blockchain can be implemented in technology.
- PayPal announces Bitcoin integration.
- Number of merchants accepting BTC exceeds 100,000.
- NASDAQ and San-Francisco blockchain company Chain team up to test the technology for trading shares in private companies.
- Tech giant IBM announces a blockchain strategy for cloud-based business solutions.
- Government of Japan recognizes the legitimacy of blockchain and cryptocurrencies.
- Bitcoin reaches $1,000/BTC for first time.
- Cryptocurrency market cap reaches $150 billion.
- JP Morgan CEO Jamie Dimon says he believes in blockchain as a future technology, giving the ledger system a vote-of-confidence from Wall Street.
- Bitcoin reaches its all-time high at $19,783.21/BTC.
- Dubai announces its government will be blockchain-powered by 2020.
- Facebook commits to starting a blockchain group and also hints at the possibility of creating its own cryptocurrency.
- IBM develops a blockchain-based banking platform with large banks like Citi and Barclays signing on.