The beginner's guide to blockchain | finder.com

The definitive beginner’s guide to blockchain

We know that everyone's situation is unique and we aim to help you find the right product for you. We may receive compensation when you visit our partners' sites or are approved for their products. You can read more about how we maintain editorial independence and how we make money here.

Discover blockchain: what it is, how it works and who is exploring it in the US.

The blockchain is the infrastructure on which bitcoin and all cryptocurrencies are built. It keeps cryptocurrencies secure by ensuring that no one can tamper with the transaction history while, at the same time, providing complete transparency.

Initially intended to be a public ledger for bitcoin transactions, many cryptocurrencies today are pushing this technology to the limit, and its adoption has been explored by governments and financial institutions.

In this guide, we’ll take a close look at what the blockchain is, how it works and how this technology could change the way organizations do business.

blockchain

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

What is the blockchain?

The blockchain was first introduced by the creator of bitcoin, Satoshi Nakamoto. His true identity is unknown, but he wrote an innovative paper entitled, Bitcoin: A Peer-to-Peer Electronic Cash System. In this paper, Satoshi detailed two principal technologies: bitcoin, a digital currency, and the blockchain, the underlying technology on top of which bitcoin would run.

Because bitcoin is not owned or controlled by a single entity, the transaction data and history could not be stored in a central location, server or database. This problem gave rise to the blockchain, a public database, distributed to all users of bitcoin. Each user would keep a copy of the data, and each user could compare their data with other users to make sure they had the latest version of this ledger.

Since then, it has evolved into something much greater than Satoshi originally intended, but the underlying principles remain the same.

The blockchain has four primary advantages:

  • It is not, and cannot, be controlled by a single entity
  • It has no single point of failure
  • Transactions are embedded in the network, held by everyone using the blockchain
  • Altering information on the blockchain would require tampering with the entire network at once.

How does the blockchain work?

The blockchain is a public ledger of transactions. While the original intent was for it to contain bitcoin transactions, a transaction might now be anything from contracts to records to digital representations of physical assets.

Transactions

Whenever someone requests a transaction, say Amy wants to send Bill 0.001 bitcoin, the transaction is broadcast to the network of bitcoin users. This transaction (along with a set amount of other recent transactions) is validated via a process known as mining to form what is known as a block which is then appended to the end of the existing blockchain in a way that’s permanent and immutable (i.e. it cannot be edited or deleted).

Decentralization

The primary feature of the blockchain is that it’s a decentralized, distributed database of transactions. The most common way of storing such transactions today is using a single database stored on a central server. For example, all your banking transactions are stored on a central database on a server belonging to your bank. If this database were hacked, the bank might have a backup database to compare the data and revert back to the original, but what if that backup was also hacked? How many backups of the database would an organization have to keep, and maintain, in order to be safe?

The blockchain solves this problem by providing a copy of the data to every user of that blockchain. Each and every user keeps a copy of all transactions on their computer – and the majority rules. If one user were to tamper with the data, all the other copies would disagree and flag that one copy of the ledger as corrupt and, subsequently, ignored. This makes the blockchain highly secure by nature as, in order for someone to change transaction data in the blockchain, they would need to hack at least half of all machines using that blockchain at the same time.

Trust

This transparent and immutable nature of the blockchain also solves the problem of trust. There is no third party that you need to trust with your data, no central bank or government, no organization or for-profit business. All transactions are stored on the blockchain and broadcast to every user of the blockchain, and you hold a copy of that same ledger.

How is bitcoin connected to blockchain?

bitcoin cryptocurrencyOne of the first and most well-known uses of blockchain technology is bitcoin, which is a self-regulated, peer-to-peer digital currency. Blockchain is the technology which enables bitcoin users to transfer currency directly to each other without any intermediaries.

Bitcoin has received a significant amount of negative attention over the last few years for its association with drugs and other illegal activities. While bitcoin’s future remains unknown, blockchain, the underlying technology that bitcoin uses, is here to stay.

The future of the blockchain

While initially designed to support bitcoin, there have been many exciting developments based on the blockchain.

  • Finance. Blockchain’s biggest draw at the time of writing (November 2017) remains in finance. In the US, banks and financial institutions have been heavily investing time and money into researching potential ways the blockchain could help improve the way they do business. Nearly instantaneous transactions and in-built verification would cut out a lot of middlemen.
  • Decentralized data. In the same way that the blockchain decentralizes the database of transactions for bitcoin and other altcoins, it could be used to store any type of data. Startups have been investigating the idea of using the blockchain to store data from applications in the same distributed and secure fashion.
  • Smart contracts. Developed by Ethereum, smart contracts are programmable contracts that stay on the blockchain until the conditions specified in the contract are met. Once they are, the contract automatically executes the transaction it was programmed to execute. For example, a smart contract can be developed to send a specified amount of bitcoin to a particular wallet on a specific day of every month (e.g. to pay rent automatically). Smart contracts enjoy the same immutability features of normal transactions.
  • Governance. Because of the completely transparent nature of the blockchain, any sort of poll-taking (e.g. national elections) would benefit greatly from being stored on the blockchain. Once a vote is made, the transaction would be verified and validated automatically, and stored on the blockchain for everyone to see, tamper-proof and permanent.
  • Land Title registration. The blockchain makes any sort of record keeping more efficient, while being publicly accessible makes it fully transparent. With their susceptibility to fraud and the high cost of labour required to maintain them, property titles are a perfect candidate for the blockchain. The move to blockchain has been adopted by a few governments already, including Honduras (2015) and the Republic of Georgia (2017).

Commonly asked questions about blockchain

Was this content helpful to you? No  Yes

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms and Conditions and Privacy Policy.
Go to site