The Ultimate Guide to Understanding
Introduction to Blockchain Technology
Blockchain technology can be a confusing concept to understand.
Luckily, we are here to simplify things. Blockchain technology is a relatively new concept and rapidly growing piece of foundational technology, like internet or cloud computing. Similar data structures have existed long before the popular cryptocurrency bitcoin was conceived, however, principal theories of blockchain architectures used today were first outlined and defined in the original bitcoin white paper written and published by Satoshi Nakamoto in 2008.
As this nascent technology is ripe with ongoing innovations, it is best to keep an open mind and expect new related-technologies to continue to emerge. Below we explore key definitions and concepts to understand of the basic pillars behind this revolutionary technology. Alternatively, visit our blockchain glossary to view more definitions.
What is the definition of Blockchain?
Blockchain vs. Distributed Ledger
What is the difference between the two?
A blockchain is just one type of distributed ledger, not all distributed ledgers necessarily employ blocks or chain transactions.
Although the term ‘blockchain’ is used more frequently than ‘distributed ledger’ in discussions, a blockchain is only one of the many types of data structures that provide secure and valid achievement of distributed consensus. The bitcoin blockchain, which uses ‘Proof-of-Work Mining’, is the most publicly proven method used to achieve distributed consensus. However, other forms of distributed ledger consensus exist such as Ethereum, Ripple, Hyperledger, MultiChain, Eris, and other private enterprise solutions.
How do you explain Blockchain Technology?
Blockchain Technology Simple Explanation
Are you curious why it is so difficult to find a simple explanation of blockchain technology? This is because it is similar to asking for a simple explanation of internet in 1995.
As one of the originators or blockchain technology public research, our simple explanation of blockchain can be described as “distributed spreadsheets”.
All participants in the particular blockchain network have access to this spreadsheet. Participants have access to the data on the spreadsheets, continually check the validity of data on those spreadsheets, add new spreadsheets to the overall chain of existing ones, and support the existence of all distributed spreadsheets through avenues such as mining.
Blockchain Technology Technical Explanation
Providing a technical explanation of blockchain technology is ironically easier than providing a simplified one.
A blockchain is a chain of chronological blocks.
A block is an aggregated set of data that is collected and processed to fit inside it through the process of mining. Each block is identified via a cryptographic hash and time stamp. When a new block is formed, it will contain a hash of the previous block, so that blocks can form a chronologically ordered chain from the first block ever generated in the entire blockchain (also called the Genesis Block) to the newly formed block. This process is repeated over-and-over again to grow and maintain the network.
How Does a Blockchain Work?
Explain what is in a Blockchain and how it works.
Much is often discussed about the benefits of blockchain technology, or how blockchain will revolutionize various outdated industries. Conversely, little is often discussed about how a blockchain actually works; primarily from the perspective of the actual software architecture.
We attempt to explain this concept by breaking down the concept of a blockchain, into two separate components – a block and the chain:
Characteristics of a Blockchain
What are the key features of a Blockchain?
Understanding how a blockchain works from a technical point of view, is valuable only to the extent of developing or troubleshooting one. In order cohesively grasp the potential unto apply blockchain technology, you must also understand the characteristics of a blockchain. It is important to note that not all characteristics listed below will apply to all blockchains. Blockchain technology is an adaptable technology that can be modified to fit specific purposes.
Probably the most important characteristic of blockchain is consensus. Blockchain consensus refers to the ability of all anonymous network participants, agreeing network’s rules are followed and there is only one truth in the blockchain environment. Consensus can be achieved in many different ways such as Proof of Work (PoW) algorithm or Proof of Stake (PoS) algorithm.
Blockchain’s network resiliency is largely attributed to its distributed architecture. Continuing with the bitcoin blockchain example, each user of the bitcoin blockchain that is running a full node on their computer will have download a full copy of the whole blockchain. Each full copy will include data for all transactions recorded on the bitcoin blockchain. After the copy has been downloaded, the node can then run-independently to process transactions and propagate them further across the network. Nodes can also contribute to network-consensus via mining by including transaction data in a block and then finding a proof-of-work for the block. An important concept about blockchain’s distributed network is that there is no central node processing and distributing the data, but every node can run independently and broadcast any work that is proved.
In the case of the bitcoin blockchain, information stored within the blocks is bitcoin transactional data. However, this feature extends further beyond just cryptocurrency transactions, and can extend into smart contracts, as used on the ethereum blockchain.
How do you know that your cryptocurrency transaction is valid? How do you know that the ether-cryptocurrency (ETH) you have in your digital wallet really belong to you? Blockchains ensure provenance, in a pre-programmed way. In traditional banking, you know your money is in the bank because the bank tells you it is. In a blockchain transaction, each activity is tracked, recorded, and fully traceable; without a third-party required to attest to a specific action.
No participant in the blockchain network can modify a transaction after it has been recorded – no exceptions. If an error is mistakenly, you cannot edit or undo it. The erroneous record cannot be erased, and always be visible once recorded. To correct the error, a new transaction must be generated, which will reference the erroneous record.
Who has access to the view and edit the information in the blockchain? In a shared open public ledger, such as the bitcoin blockchain, everyone has access to view and append to the blockchain. Conversely, a blockchain can be more privatized and have stricter access to who has permissions to view and edit the blockchain. These types of privatized chains are typically found in private enterprise blockchains, where data tends to be more sensitive.
Types of Blockchains
What are the different types of Blockchains?
Blockchain is a continually evolving technology. Because of its foundational technology characteristics, new applications are being continuously developed on top of its framework. This means that new there are new sets of requirements to support said innovations. These new requirements mean a specific blockchain that works for one application, may not work for another. This problem is solved by creating different types of blockchains. We explore the two most common types of blockchain below:
Open Source Standards
Blockchain technology open standards and consortiums
The future of mainstream blockchain technology will likely not result in one blockchain to rule them all.
Instead, there will likely be many implementations of blockchain technology and it is to everyone’s benefit that they all be interoperable with each-other. The result of this is emerging open source, neutral protocols and standards for various implementations.
The most well known blockchain consortiums and collaborative projects are included below:
Blockchain Technology Guides
Different Blockchain Technologies
Although blockchain is considered to be a foundational technology, other exciting technologies have been derived from it. Further explore these technologies by continuing with one of our other “Ultimate Guide to Understanding” web resources on Cryptocurrency or Smart Contracts.