Blockchain is one of the most talked about technology concepts in recent years. But many still have difficulty understanding blockchain technology. Read on to learn the basics about what blockchain really is.
What exactly is a blockchain?
A blockchain is a distributed database or ledger that is shared between individual computers in a computer network. Like a database, a blockchain stores information electronically in digital format.
Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, in maintaining a secure and decentralised record of all transactions. The innovation of a blockchain is that it guarantees full transparency and security of a record of data and generates trust without the need for a trusted third party. Thus, parties do not need to have their transactions approved by, for example, a bank.
An important difference between a typical database and a blockchain is how the data is structured. A blockchain aggregates information into groups, known as blocks. A block refers to a set of information.
Blocks have certain storage capacities, and when they are filled, they are closed and connected to the previous blocks, forming a chain of data known as the blockchain. All new information following the last added block is aggregated into a new block. The new block will then also be added to the chain when it is filled.
A database usually structures its data in tables, whereas a blockchain, as the name suggests, structures its data in chunks (blocks) that are strung together. The block contains an irreversible timeline of data when it is implemented. Once a block is populated, it cannot be changed and becomes part of this timeline. All subsequent blocks in the entire chain are given an exact timestamp when they are added to the chain.
How does blockchain technology work?
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. In this way, a blockchain is the basis for immutable ledgers or records of transactions that cannot be altered, deleted or destroyed.
The blockchain concept was first proposed as a research project in 1991, before its first widespread application in use: along with Bitcoin in 2009. In the years since, the use of blockchains has exploded in many ways through the creation of various cryptocurrencies, NFTs and smart contracts.
Is Blockchain technology secure?
The technology itself creates security and trust in several ways. For starters, new blocks are always stored linearly and chronologically. That is, they are always added to the "end" of the previous block in the blockchain. After a block has been added to the end of the blockchain, it is extremely difficult to go back and change the contents of the block unless a majority of the network has agreed to do so.
This is because each block contains its own hash, along with the hash of the previous block, as well as the aforementioned timestamp. Hash codes are created by a mathematical function that turns digital information into a series of numbers and letters. If this information is edited in any way, the hash code changes as well.
Let's say an attacker, who also has a single computer on a blockchain network, wants to modify a blockchain and steal cryptocurrency from everyone else. If the hacker were to change their own single copy, it would no longer match everyone else's copies. When everyone else cross-referenced their copies against each other, they would see that one copy stand out, and the hacker's version of the chain would be discarded as illegitimate.
Succeeding with such a hack would require the hacker to simultaneously check and modify 51% or more of the copies of the blockchain, so that their new copy becomes the majority copy and thus the agreed chain. Such an attack would also require an enormous amount of money and resources, as they would have to remake all the blocks because they would now have different timestamps and hash codes.
Due to the size of many cryptocurrency networks and how quickly they are growing, the cost to carry out such a feat would likely be prohibitive. This would not only be extremely expensive, but also likely futile. Doing such a thing would not go unnoticed, as network members would see such drastic changes to the blockchain.
Bitcoin vs. the cryptocurrency blockchain
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with. But it wasn't until nearly two decades later, with the launch of Bitcoin in January 2009, that blockchain had its first application in the real world.
The Bitcoin protocol is built on a blockchain. In a research paper introducingannouncing the digital currency, Bitcoin's pseudonymous creator, Satoshi Nakamoto, referred to it as "a new electronic cash system that is fully peer-to-peer, with no trusted third party to approve transactions".
The key thing to understand here is that Bitcoin simply uses blockchain as a means to transparently record a ledger of payments, but blockchain can in theory be used to immutably record any number of data points. This could be in the form of transactions, votes in an election, product inventories, government identifications, deeds to homes and more.
Currently, tens of thousands of projects are looking to implement blockchains in a variety of ways to help society do more than just record transactions - for example, as a way to vote securely in democratic elections.
The nature of blockchains' immutability means that fake votes would become much harder to carry out. For example, a voting system could work so that every citizen in a country would be issued a single cryptocurrency or token.
Each candidate would then be given a specific wallet address, and voters would send their token or cryptocurrency to the address of the candidate they wish to vote for. The transparent and traceable nature of blockchain would eliminate both the need for human vote counting and the ability of fraudsters to tamper with physical ballots.
How are blockchains used?
As we now know, blocks in the Bitcoin blockchain contain data about money transactions. Today, there are more than 10,000 other cryptocurrency systems running on the blockchain. But it turns out that blockchain is actually a reliable way to store data about other types of transactions, too.
Some companies that have already incorporated blockchain include Walmart, Pfizer, AIG, Siemens, Unilever and a host of others. For example, IBM has created its Food Trust blockchain to track the journey that food products take to get to their locations.
Why do this? The food industry has seen countless outbreaks of E. coli, salmonella and listeria, as well as hazardous materials accidentally introduced to food.
In the past, it has taken weeks to find the source of these outbreaks or the cause of illness from what people eat. Using blockchain allows brands to trace a food product's route from its origin, through each stop along the way and finally its delivery.
If a food is found to be contaminated, it can be traced right back through each stop to its origin. Not only that, but these companies can now see everything else the food may have come into contact with, allowing them to identify the problem much more quickly and potentially save lives. This is an example of blockchain in practice, but there are many other forms of blockchain implementation.
Banking and finance
Perhaps no industry benefits more from integrating blockchain into its business operations than banks. Financial institutions only operate during business hours, usually five days a week. That means if you try to deposit a check at 6 p.m. on Friday, you'll likely have to wait until Monday morning to see if your transaction went through.
Even if you make your deposit during business hours, the transaction may still take one to three days to confirm due to the large volume of transactions the bank has to process. Blockchain, on the other hand, never sleeps.
By integrating blockchain into banks, consumers can see their transfers processed in as little as 10 minutes - basically the time it takes to add a block to a blockchain, regardless of holiday or time of day or week. With blockchain, banks also have the ability to exchange money between institutions faster and more securely. That creates high credibility.
In the stock trading industry, for example, the settlement and clearing process can take up to three days (or longer if trading internationally), meaning that money and shares are frozen for that period.
Given the size of the amounts involved, even the few days that money is in transit can entail significant costs and risks for banks.
Currencies and blockchain technology
Blockchain forms the basis of cryptocurrencies like Bitcoin. A user's data and money are essentially in the hands of their bank. If a user's bank is hacked, the customer's private information is at risk. If the customer's bank collapses, or the customer lives in a country with an unstable government, the value of their currency could be at risk.
By spreading its operations across a network of computers, the blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority, such as a bank. This not only reduces risk, but also eliminates many of the processing and transaction fees.
It can also allow those in countries with unstablee currencies or financial infrastructure a more stable currency with more applications and a wider network of individuals and institutions with which to do business, both nationally and internationally.
Using cryptocurrency wallets for savings accounts or as a means of payment is particularly meaningful for those who have no government identification. Some countries may be war-torn or have governments that lack any real infrastructure to provide identification. Citizens of such countries may not have access to savings or brokerage accounts - and therefore there is no way to keep their money safe.
While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network. The most well-known example of blockchain being used for illegal transactions is probably The Silk Road, an online marketplace for illegal drugs and money laundering on the dark web that operated from February 2011 until October 2013, when it was shut down by the FBI.
The dark web allows users to buy and sell illegal goods without being traced by using the Tor browser and making illegal purchases in Bitcoin or other cryptocurrencies. Current US regulations require financial services providers to obtain information about their customers when opening an account, verify each customer's identity and confirm that customers do not appear on any list of known or suspected terrorist organisations.
This system has both advantages and disadvantages. It gives everyone access to financial accounts, but also allows criminals to trade more easily. Many have argued that the good uses of cryptocurrency outweigh the bad uses of cryptocurrency, especially when most illegal activities are still conducted through untraceable cash.
While the cryptocurrency Bitcoin has been used in the past for such illicit purposes, its transparent nature and value as a financial asset has actually meant that much illicit activity now uses other cryptocurrencies such as Monero and Dash. Today, illegal activity represents only a very small proportion of all Bitcoin transactions.
About the author
Sofie Meyer is a copywriter and phishing aficionado here at Moxso. She has a master´s degree in Danish and a great interest in cybercrime, which resulted in a master thesis project on phishing.