What is a Blockchain?
It seems as though Bitcoin and its compatriots are taking over the world lately with all the coverage they seem to get in the news, on blogs, and on social media. You may even have come across articles comparing the differences between various cryptocurrencies like this one.
If you have read any articles on these things, you may have come across the term “blockchain” a few times. You may have wondered to yourself what exactly that is, how it works, how it is related to cryptocurrencies like Bitcoin and Ethereum, and why people are saying that it’s going to change the way we do everything.
It can certainly be very difficult to find good, simple answers to these questions. With over A$5 Billion worth of money already invested in the cryptocurrency space, more people are getting involved in the space than ever, and education is even more important.
That’s why in this article, we throw all of the technical jargon on the bonfire where it belongs and demystify the seemingly magical world of blockchains in plain, simple language.
What is blockchain?
In short, a blockchain is simply a way of recording transactions between people. There, that was pretty simple, right?
But how does that work, and what makes it so different and special from any other way of recording transactions? That’s where the fun starts.
So imagine we’re sitting on a park bench, and I want to give you a physical photograph. It’s easy, isn’t it? I just hold out the photo with my hand, and you take it. The picture has left my possession (and is no longer accessible to me), and entered yours. This is a simple transaction.
Now imagine we do the same thing, only this time in the digital world. I could email you the picture, and you would have it, but how would you know that I haven’t kept a copy of it for myself? After all, making a perfect copy of something like that is trivial in the digital world.
Perhaps this sounds a little daft on the surface of it. I mean, who cares if I keep a copy of the picture I sent you? But what if instead of a picture, we were talking about something valuable like money? Now it might be more of a problem for me to keep a copy of something I sent you.
This is where blockchain comes in. Basically, I tell a blockchain “hey, I want to send this stuff to this person,” and the blockchain will basically update itself to say “okay, ownership of this thing has changed from person A to person B”.
Now, maybe you could get uncle Bob to watch over us as we make the exchange and make sure that I delete my copies once I’ve sent them. That’s essentially what a bank does. But what happens if there are 10 people who all want to transfer their pictures at the same time? Is uncle Bob going to oversee all of those? What about a hundred people? Or a thousand people? Or a million?
It’s easy to see how this could get pretty unmanageable for our poor uncle Bob over here pretty quickly. This is why it sometimes takes days for money to come in or go out of your bank account. Your bank’s servers can only handle so many transactions at one time.
How does blockchain deal with so many transactions?
This is where blockchain really does something special. Instead of asking uncle Bob to watch over the transaction, blockchain is the equivalent to asking every stranger you run into to watch over it. This is called decentralization, and you can read more about why it’s such a powerful thing by clicking the link.
All of these strangers record the transaction. There’s plenty of strangers about, and the more people there are making transactions, the more people there are likely to be who are interested in making sure those transactions are all above board.
You might ask, how can these strangers be trusted? Simple. You have a set of common rules that they all sign up to, and they prove they are following the rules for each transaction that they oversee by doing some clever mathsy stuff with it that can’t be faked.
What this clever mathsy stuff does is it collects a bunch of transactions together into a “block” (just another name for a group or collection of transactions). It then encrypts them, using information from the previous block to make sure that each block is linked together in a continuous chain.
That may sound complicated, but really an easy way to imagine it is as a mathematical version of puzzle pieces, where each block is like one puzzle piece. Each puzzle piece is designed specifically to fit in with specific other pieces around it.
You can’t take a puzzle piece from one location and put it somewhere where it doesn’t belong. It won’t fit for a start, and even if you force it to fit, it would be instantly obvious to anyone looking that it didn’t fit there.
In the same vein, this continuous chain of blocks (a “Block-Chain”) can’t be tampered with or rearranged, and each block can be verified by anyone. This is what makes it so powerful and useful. You don’t need to trust the strangers, you just need to trust the maths that the strangers are using.
Blockchains have opened up a whole new world of possibilities because people have realised very quickly that cryptocurrency is only the beginning of what blockchains are potentially capable of (if you want to know more about cryptocurrencies though, this article is a great place to start).
Decentralised exchanges, voting systems, and even entire companies can potentially be run entirely on blockchain technology. And that’s only what people are experimenting with right now. Who knows what incredible things blockchains will be used for ten years from now!
That just about wraps things up for this article. If you’re thinking of getting into cryptocurrency yourself, but don’t know where to start, MyVested is a simple to use app that takes the guesswork out of cryptocurrency. If you’d like to know more, just head over to https://www.myvested.com and have a look around.
Do you know of any awesome blockchain-based projects that we haven’t mentioned?
Do you have an idea for something great that blockchain could be used for?
We would love to hear all about it.
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