If you’ve been following the advance of technology in the financial sector over the past decade, you’ve no doubt heard of blockchain, the record keeping technology which had its first real world application with Bitcoin. It is often described as a “distributed, decentralised, public ledger.” Though there are simpler definitions out there.
Importantly, blockchain has been cited as having the potential to significantly change the way we carry out financial transactions online. So what does it all mean?
At blockchain’s most basic level, it’s just that – a chain of blocks. The block is a piece of digital information which is stored in a public database, the chain. Rather than having one entity looking after the books, you have many computers working together.
What is a block?
Blocks are made up of three chunks of information:
- Date, time and amount.
- The transaction participants. Though instead of using your name, your purchase is recorded without any identifying information – you have a unique digital signature, kind of like a username.
- Each block stores information that distinguishes from other blocks and is referred to as a “hash”. Think of it as a unique code to record the transaction.
How does it all work?
When a block stores new data it is added to the blockchain. However, four things must happen for it to do so:
- A transaction has to occur.
- The transaction must be verified. This is usually done by a large network of computers across the globe.
- The transaction must be stored in a block. Often with many other transactions.
- The block must have its own unique hash.
When that new block is added to the blockchain, it becomes publicly available to view. That’s right, anyone can see it. Looking at Bitcoin’s blockchain, you can see that each block has a time, a location and who it is relayed by.
Is it private?
Anyone can view the contents of a blockchain. Users can also opt to connect their computers to the blockchain network. Their computer then receives a copy of the blockchain which is updated automatically when a new block is added. This might mean that a blockchain has thousands (sometimes millions) of copies. With such information being spread across such a wide network, it makes it very difficult to manipulate. Think of it as a massive verification network.
The only information about users is limited to their digital signature or username.
Is it secure?
Blockchain is, for the most part, secure. After a block is added to the end of a blockchain, it’s difficult to go back and edit the contents. Say a hacker wants to edit a purchase you’ve made on Amazon so that you made two purchases instead of one. When they edit the purchase it’ll change the hash (the unique code). A block contains both the hash of the current block and the hash of the previous block.
In order for a hacker to change a single block, they would need to change every single block after it on the blockchain. Recalculating all those hashes would need an immense amount of computing power. The cost of organising an attack would vastly outweigh the benefits.
So there you have it…
A quick summary of blockchain and how it works. If you want to get into the nitty gritty and find out more, the web is full of information on how it works and how it may change the way we do things in the future.