You’ve probably heard of blockchain. But like most Americans, you probably don’t have any idea what it is.
It can’t be as simple as a chain of blocks, can it? Like something you’d build out of Legos? Surprisingly enough, if you try to think of the digital equivalent of your Lego chain, you’re on the right track. Just think of those Lego bricks as blocks of data, and the concept will start to come together.
Many have conflated blockchain with cryptocurrencies like Bitcoin, too. They are related, but they’re not the same thing.
Bitcoin, you may remember, dominated headlines in late 2017 when it soared in value to more than $17,000 per “coin”, and as of May 2018, is worth around $9,000 a pop. The cryptocurrency markets have since moved beyond the fringes of the financial world and are now attracting real investment.
But we wouldn’t have bitcoin, or any other cryptocurrencies, for that matter, without blockchains.
What is blockchain?
Blockchain may seem difficult to conceptualize. So, we’ll start with an analogy that most people can understand.
Blockchains are like Excel spreadsheets. And each cell in the spreadsheet is a block. The information contained within each cell is linked, or otherwise embedded in the spreadsheet, much like a single encrypted block is embedded in a blockchain.
A blockchain is different from a spreadsheet in a number of ways, but their similarities can help you grasp the concept.
How blockchain works
Blockchain is also called a distributed ledger. Think of it as a digital database that stores encrypted information in blocks. The information can never be changed once it’s entered. What’s more, the ledger doesn’t exist on a single computer or hard-drive, like an Excel file you might use to keep track of your spending.
Blockchain is a distributed ledger, or database, that stores encrypted information.
Instead, it’s distributed among a network–hundreds or even thousands of servers that can be anywhere in the world. And the network continually updates the blocks in the database, confirming to the rest of the network that a transaction has taken place.
The distributed nature of the ledger may make it much more secure against hacking, altering, or destroying the data it contains, as the entire network must validate any changes.
Someone could, for example, get into your computer and delete transactions from your single Excel spreadsheet, changing the data. The same feat would be almost impossible when the data is encrypted and simultaneously updated on thousands of computers.
Each entry in this ledger is called a “block”, containing stored information. These blocks are linked, or chained together, creating an ongoing “blockchain.”
Why and how blockchain is used
Though there are many potential uses for blockchain, there are currently two primary ways people are currently using the technology: As a record-keeping system, and as a transactional platform for digital currency.
Some companies are using blockchains to create encrypted systems to store sensitive data, like medical records. Others are using the technology as an anti-counterfeiting measure, sniffing out fake diamonds and pharmaceuticals with detailed and unalterable tracking records in supply chains. Several governments are also using it in a number of ways, including preserving public records and even administering payment systems.
These are the primary reasons why individuals and organizations opt to use blockchain over a traditional database:
- Decentralization (data is stored across a network)
- Data security
- Auditability and transparency
While there are some clear advantages to using blockchain to store information and conduct transactions, there are possible downsides, too. Blockchains are slow, for example, compared to their database brothers because they are both distributing data and relying on distributed processing power.
Blockchain and cryptocurrency
A lot of talk about blockchain revolves around cryptocurrency, such as bitcoin. That’s because most, if not all cryptocurrencies are enabled by blockchain technology. Bitcoins, for example, are “mined” using blockchain.
Ethereum, which is also ledger-distributed and uses a blockchain platform, isn’t merely a cryptocurrency, but is also a technology that decentralizes computing. Ethereum has a tradeable component, called Ether, but it is mostly used by software developers to deploy applications.