What Is Blockchain?
Guest article by James Page
See also: ¿Qué es la cadena de bloques?
Blockchain technology entered our lives with the advent of cryptocurrencies. The world’s first blockchain, the Bitcoin blockchain, was designed by Bitcoin’s pseudonymous creator Satoshi Nakamoto in order to prevent the double spending problem. Later on, many altcoins adopted Bitcoin’s code and the concept of a blockchain to produce their own blockchain-based cryptocurrencies and products.
A blockchain is essentially a data storage system where multiple people can upload and process data collectively. Cryptocurrencies like Bitcoin use blockchain to store transaction information to make sure nobody can manipulate Bitcoin and/or spend bitcoin they don’t have. While data security is traditionally a centralized process, where only a few people have control over large datasets, blockchains reverse this trend by delegating the responsibility of data protection to the public.
In this post, we will go over what blockchains are and explore how they work, especially in relation to cryptocurrencies like Bitcoin. We will also go over different types of blockchains and a few use cases to see where blockchain technology is today.
What Is the Purpose of a Blockchain?
Perhaps it is easier to explain what blockchains are if we start by explaining what they are used for. A blockchain is essentially a special database for recording, distributing, and protecting information through the collaboration of multiple actors. While most databases are typically run by a single authority, a blockchain depends on multiple actors to function.
For example, a social media site like Facebook uses its own network to collect and store data and we plug into that network through the world wide web. However, when Facebook servers go down, that data becomes inaccessible to us because everything depends on those servers. In such a scenario, the people in charge have to fix the associated problems to make the network available to the public again.
Blockchains present a unique solution to this problem by utilizing cryptography and consensus algorithms. Generally, blockchains are not stored in particular servers but they reside in networks that are composed of many nodes (computers). That means that blockchain servers are decentralized in a way that regular servers are not. When a blockchain node goes down, other nodes in the network continue to provide access to the dataset, keeping it safe, secure, and immutable.
Blockchains make it possible to create datasets where multiple people can make changes without a single authority overseeing the process. The system depends on code and cryptography to make sure the data on the blockchain remains valid.
How Does a Blockchain Work?
Blockchains depend on immutability and consensus to function. Immutability means that information on the blockchain can’t be tampered with once it is recorded on the blockchain. Once data gets put on the blockchain, it is permanent and can’t be altered by anyone, at least in principle.
Consensus refers to the agreement between blockchain users (or nodes) regarding which version of the data should be accepted by the blockchain as valid. Basically, the consensus mechanism ensures nodes will reject false information if someone tries to upload inconsistent data to the network.
These principles work together to create a decentralized record-keeping infrastructure. Consensus rules provide a mechanism for validating information and the information on the blockchain becomes immutable once it is validated.
Blockchains take advantage of cryptographic protocols to ensure immutability and consensus. Different blockchains take different approaches to apply these principles and there are several cryptographic protocols in use depending on the purpose and nature of the blockchain in question.
Example: How the Bitcoin Blockchain Works
We can look at the Bitcoin blockchain to understand how these protocols work. The Bitcoin blockchain is a database for Bitcoin transaction information. You can think of it simply as a public and distributed ledger.
When someone makes a Bitcoin transaction, they interact with the blockchain by requesting to add a line to the ledger which represents their transaction. Bitcoin verifier nodes, or “miners,” as they are otherwise known, use the consensus mechanism to make sure the transaction information is valid and add it to the Bitcoin ledger.
The ledger is broadcasted to all the other nodes in the network, which can cross-check and verify the information for themselves. Technically, anyone can become a “miner node” for Bitcoin, which makes the cryptocurrency a decentralized system that isn’t controlled by any single authority. Even if a node gets compromised, the ledger remains secure because all the other nodes in the network continue to cross-check and broadcast it.
Why Are Blockchains Secure?
As mentioned above, different blockchains use different measures to ensure the safety and accessibility of the information on the blockchain. Most cryptocurrency blockchains are public blockchains, which means they depend on large decentralized networks and cryptography to ensure the safety of assets on the blockchain. There are also private blockchains that depend on a select few miners to ensure the validity of information stored on that blockchain.
We will talk more about the differences between public and private blockchains in the next section, but it is important to understand that both of these types rely on cryptography for security.
We talked about how blockchains are essentially databases for different kinds of information. Digital currencies like Bitcoin use blockchain to keep track of transaction information, but there are different use-cases for blockchains in many other sectors.
One constant with blockchains is the structure of the database: as the name blockchain implies, blockchain databases are made of blocks of data chained to each other in a linear fashion. That means that the information on one block is logically and cryptographically consistent with the previous block on the blockchain. If someone tries to change the contents of a block in the blockchain, they wouldn’t be able to succeed unless they changed all the previous blocks as well because each block contains the digital signature of the previous block.
Therefore, changing the contents of a single block on the blockchain requires changing the entirety of the blockchain. Only an entity with 51% of the whole blockchain’s network power can accomplish such a change. Public blockchains are by nature decentralized and they are mostly protected from a 51% attack, though some smaller networks can be vulnerable to these attacks if their network isn’t decentralized enough.
What Are the Different Kinds of Blockchains?
There are four main types of blockchains. While Bitcoin and most other digital cryptocurrencies use public blockchains, there are also private, permissioned, and consortium blockchains used for different purposes.
Public blockchains are typically permissionless and trustless systems. Anyone can participate in the blockchain as long as they have the necessary resources. These blockchains depend on cryptographic consensus mechanisms and decentralized networks for activity and security.
Private blockchains are owned by private third parties and they have security measures such as access control, monitoring, and internal control features. Typically, there is a central authority that manages the network and decides who can add and validate the blockchain data.
Both public and private blockchains can also be permissioned blockchains. There are certain restrictions on who can add data to the blockchain on permissioned blockchains.
Lastly, there are also consortium blockchains in which multiple organizations (such as banks, insurers, markets, tech companies, and so on) can manage a blockchain together. Consortium members share the responsibility of running the blockchain by defining and enforcing rules about who can participate in the blockchain.
A Few Words Before You Go…
Blockchains are cryptographic databases for collecting and keeping information among multiple participants. While they first became popular for running decentralized cryptocurrencies, they are now used in many different industries for different purposes (including but not limited to banking, insurance, healthcare, and entertainment). Blockchains offer a way of secure, traceable and transparent data collection for public and private organizations.
