What is Blockchain?

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At this point in time, you’ve probably heard about blockchain technology and how it’s changing the world.

But what actually is blockchain and how does it help solve problems?

Blockchain 101

Like the name indicates, blockchain stores information in batches, called blocks, that are linked together in a chronological order to form a continuous line—a chain of blocks. Keep in mind that blockchains are append-only, which means that you can only add information.The most common use for blockchain so far has been as a ledger for transactions in the cryptocurrency world.

Let’s start with the 3 key elements of a block:

  1. The data stored in the block.
  2. The nonce, which translates to “number used only once”. A nonce in blockchain is a randomly generated number when a block is created, which then generates a block header hash.
  3. The hash, which is a number permanently attached to the nonce. It is created by a mathematical function that turns digital information into a string of numbers and letters. If that information is edited in any way, then the hash code changes as well. Basically, a hash acts like a digital fingerprint.

When a block is created, a nonce generates the cryptographic hash where both the nonce and hash are unique to the block. Additionally, every block also references the hash of the previous block in the chain.

To understand better how blockchain works, we must also grasp the concept of decentralisation. In simple terms, there is no central certifying authority where participants need to go through when confirming transactions, which means no one computer or organisation can own the chain. When someone requests a transaction, the transaction is broadcasted to a peer-to-peer network which consists of computers known as nodes. The network of nodes perform validations on the transaction and user’s status with known algorithms. Every node has its own blockchain copy and the network will have to approve any newly mined block for the chain to be updated.

This is where mining comes in. Mining is the process by which new blocks are added to the circulation. Miners use sophisticated hardware to come up with solutions for incredibly complex computational mathematical problems. More specifically, the mining program is finding a nonce that generates an accepted hash, which by the way, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found! Once the miners have found the correct nonce, their block is added to the chain. In turn, the miners will be rewarded financially for the successfully-mined blocks. When someone makes a change to any of the earlier blocks in the chain, it requires re-mining not just the block with the change, but all of the blocks that come after it.

Benefits of blockchain

Enhanced security

As blockchain serves as an immutable digital ledger where no participant can alter or tamper with a transaction once it’s been recorded, we can expect a greater security for our sensitive and private data. Apart from preventing fraud and unauthorised activity, personal data can be anonymized and permissions are required to gain access to them.

Increased transparency

Using a distributed ledger, data is recorded identically across different decentralised nodes and this guarantees that all network participants with the necessary permissions are able to view the same information at the same time, providing full transparency. With this, it helps participants eliminate any fraud attempts by bad actors as all other nodes would cross-reference each other and easily pinpoint the node with the incorrect information.

Greater efficiency

By eliminating the need for third parties for verification, the usual overhead and transaction costs can be significantly lowered. Automation in terms of “smart contracts” can also come into play, where a set of rules can be stored on the blockchain and executed automatically to quicken the process and further reduce any human errors.

The bottom line

Despite blockchain still being viewed as somewhat of a niche technology, we can see the increase of this technology being implemented across many practical applications. Undoubtedly, blockchain will be a key part in making operations more secure, accurate and efficient in time to come.