- Blockchain is a simply a distributed but connected ledger that stores data (such as transactions), which is shared across a network
- Within a blockchain, every block (collection) of data is given a unique value (called a hash created from a hash function)
- This unique value (hash) also notes when the hash is created and its position.
- The hash values rely an each other as a reference to the last block-hash, and these references to new hashes continue they form chain (blockchain).
Blockchain: the Distributed Ledger
- Simply, a ledger is a record keeping book or document that stores all the transactions of an organization (e.g movements of assets, contracts, payments etc.)
Ledgers allow organizations to properly monitor all their finances & track economic history.
- As a ledger the blockchain stores transactional data, making it a digital ledger.
- It is also a distributed ledger because it is shared with everyone connected to its network( computers or nodes).
- Furthermore, each person on the network has access to the complete history of a ledger as it is sent with the network. This makes it a decentralized network as it has to central ledger like the bank ( prone to hacks/manipulation of centralized ledger).
Why use the blockchain?
- Blockchains, remduce dependancy on third parties or middle man, and two nodes or people can easily transact with each other
- Highly secure and dependable data, that is transparent
- Blockchain Networks with high utility use cases yield high financial rewards (e.g finance — cryptocurrencies).
Use case: Blockchain in Finance (Cryptocurrency)
Cryptocurrency is simply a digital medium of exchange, made up of three main features; a secure blockchain, wallets and mining.
Firstly, a crypto currency uses the blockchain to secure the network through cryptography (data encryption).
- Furthermore, cryptocurrency uses these cryptograph algorithms to create hidden messages and create digital signatures to secure users within the network.
Digital signatures enables the network to prevent manipulation , they are more efficient than physical signatures and prevent impersonation
- Each individual digital signature is based on two keys a private key and a public key.
Digital signatures are represented in the form of private and public keys
- These private and public keys allows an individual to digitally sign data, such as transactional data.
- A digital signature is an encrypted hash value created from a combination of the data( being stored or transferred) and the user’s private key.
- The public key is used to decrypt the digital signature
Wallets & Cryptocurrency
Wallets are the objects (locations) that store the private and public key of an individual in the network.
- Wallets enable users to monitor their crypto currency balances and transactions.
- For wallets, the public key acts as an address where individuals can send digital money to. While the private key acts as the digital signature to verify and validate the transfer of cryptocurrency.
Mining & the Blockchain
Mining cryptocurrency is a process where, miners (computers servers run by indivuals or corporations) under take the work of supporting & adding transactions to the blockchain network and get rewarded for their efforts.
- When users submit and make crypto currency transactions to the network, the transactions a sent to a data pool of unconfirmed transactions
- Therefore miners take these unconfirmed transactions, verify and include them within a blocks of data in the network
- The act of mining is done through solving a computational puzzle called the proof of work algorithm
- This proof of work algorithm is usually challenging, with a low probability of solving them, thus mining becomes computationally expensive and time consuming due to the trial and error process (hence the name mining)
However, once a miner solves the proof of work algorithm, they are then able to add a block of data to the blockchain which other miners will see and verify
- Miners take on this challenging task because they are rewarded cryprocurrencies for adding blocks to the blockchain.
- This also gives the cryptocurrency control over the rate at which new transaction are added
Mining rigs are supercomputers designed with the sole purpose of mining blocks for cryptocurrencies, with a goal of racking up these mining profits
Bitcoin: the 1st Cryptocurrency
In regards to cryptocurrencies, Bitcoin is the dominant player which was released in 2008 as the first cryptocurrency & major use of blockchain networks.
- Bitcoin shares the typical features of a cryptocurrency, with a blockchain as the backbone of the network and uses digital wallets to store private and public keys for signatures
- In addition, bitcoin has a mining system that grants rewards and manages the network transactions with a proof of work system
Currently, there are many other cryptocurrencies such as Ether, Litecoin and Cardano, with different purposes but share the main blockchain features
- Aside from finance (cryptocurrencies), blockchains are be implemented to secure voting, supply chain, entertainment, healthcare, documentation and identification systems.
However, many skeptics believe blockchain is too complicated, but the same was though about the internet. So lets see what happens in a decade from now.
