Blockchain – Basics 101

So what is blockchain?

To put it simply, Blockchains are a form of databases whereby information is stored. As with most databases, whilst many people may be able to access and even make changes to the database information, it is usually owned or administered by a single individual or entity, also generally known as a centralised database.

In effect, the security and legitimacy of the information contained within the database are controlled by potentially one individual or single entity. Think of this point like a bank account you hold. In effect, your bank account information is solely controlled by your financial institution.

So how are blockchains different?

The main difference a blockchain works as opposed to a traditional database is that the storage is typically de-centralised. By that, it means that copies of the information within the database are distributed throughout the network of users.

In effect, this means all parties have a record of all transactions that have been made. In reality, most blockchains however employ cryptography that protects the actual information been seen by other parties on the network, even though it is stored there.

But how does it work?

Each time a new transaction or new information is made, the new block is sent out to the peer-to-peer network (participants in the particular network) to verify that the trade/transaction is real. The network is able to check on the legitimacy of the new information as within the block contains a form of security data. One example of this is the hash of the block. The hash of the block is its unique identity (akin to a fingerprint). The new block also contains the hash of the previous block so in that way there is a trace of where the block fits into the chain.

If the majority of the participants in the network detect an anomaly in the new block such as incorrect data or the previous information being incorrect the block can be rejected. If the network however accepts the block as legitimate and all information is correct the new block is added to the existing chain.

Once a valid block is added it is very difficult to change information within an existing block as any changes will affect the hash (fingerprint), alerting the network to an error. Furthermore by tampering with only one blockchain does not change all the various copies of the blockchain in the network due to its decentralised nature.

Who would use it?

The first use that comes to mind is banking, such as cryptocurrencies. Other industries include supply chain management, insurance, and automotive by way of car electronic wallets (parking fees/tolls/e-charging etc). As more industries realise benefits for their way of operating this list will continue to grow.

In summary, the key benefits of using blockchains allow the users actual transparency of transactions as well as trackability and security of the data which is less susceptible to hacking, reduced costs as the need for third parties is reduced, and the information is not just isolated to one record keeper.

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