What is the blockchain?
Blockchain is one of the biggest buzzwords in technology right now. But what is it? And why are all your friends and family talking about it?
Let’s start from the beginning. The first major application of blockchain technology was bitcoin which was released in 2009. Bitcoin is a cryptocurrency and the blockchain is the technology that underpins it. A cryptocurrency refers to a digital coin that runs on a blockchain.
Understanding how the blockchain works with bitcoin will allow us to see how the technology can be transferred to many other real-world use cases.
Bitcoin is the brainchild of a mysterious person or group of people known as Satoshi Nakamoto. Nobody knows the identity of Nakamoto, but their vision was laid out in a 2009 whitepaper called "Bitcoin: A Peer-to-Peer Electronic Cash System."
The bitcoin blockchain
The blockchain behind bitcoin is a public ledger of every transaction that has taken place. It cannot be tampered with or changed retrospectively. Advocates of the technology say this makes bitcoin transactions secure and safer than current systems.
So here are a few facts about bitcoin:
It is not issued by a central authority.
There is a limit of 21 million.
Currently just over 17 million are in circulation.
The first transaction using bitcoin is widely believed to be carried out by a programmer named Laszlo Hanyecz, who spent 10,000 bitcoin on two Papa John’s pizzas in 2010.
The identity of bitcoin creator Satoshi Nakamoto remains a mystery.
Bitcoin has often been used to buy illicit products such as drugs.
How does it work?
The bitcoin blockchain is "decentralized," meaning it is not controlled by one central authority.
While traditional currencies are issued by central banks, bitcoin has no central authority. Instead, the bitcoin blockchain is maintained by a network of people known as miners.
These "miners," sometimes called "nodes" on the network, are people running purpose-built computers that are actually competing to solve complex mathematical problems in order to make a transaction go through.
For example, say lots of people are making bitcoin transactions. Each transaction originates from a wallet which has a "private key." This is a digital signature and provides mathematical proof that the transaction has come from the owner of the wallet.
Now imagine lots of transactions are taking place across the world. These individual transactions are grouped together into a block, organized by strict cryptographic rules. The block is sent out to the bitcoin network, which are made up of people running high-powered computers. These computers compete to validate the transactions by trying to solve complex mathematical puzzles.
The winner receives an award in bitcoin.
This validated block is then added onto previous blocks creating a chain of blocks called a blockchain.
How the blockchain is tamperproof
One of the advantages of blockchain is that it can’t be tampered with. Each block that is added onto the chain carries a hard, cryptographic reference to the previous block.
That reference is part of the mathematical problem that needs to be solved in order to bring the following block into the network and the chain. Part of solving the puzzle involves working out random number called the "nonce." The nonce, combined with the other data such as the transaction size, creates a digital fingerprint called a hash. This is encrypted, thus making it secure.
Each hash is unique and must meet certain cryptographic conditions. Once this happens a block is completed and added to the chain. In order to tamper with this, each earlier block, of which there are over half a million, would require the cryptographic puzzles to be re-mined, which is impossible.
Arjan Karpal