What is Blockchain Technology and How Does it Work?

What is Blockchain Technology and How Does it Work?

That’s why imagine blockchain as a technology that keeps track of every digital transaction that happens online, whether it is an exchange of goods and services or personal data. Then it puts this data into encrypted blocks that are protected from any modification and spreads the parts across a network of computers known as “bitcoin nodes.”

For the past several months you’ve likely heard a lot about cryptocurrency, bitcoin, and blockchain. But what do they mean? And why this mysterious currency has suddenly become so popular?

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Let’s get started from the blockchain basics.

Getting Started with Blockchain Technology

As people become increasingly digital, they are starting to look for more efficient and secure financial services.

Bitcoin is just one example of something that uses a blockchain. Cryptocurrencies are just one example of decentralized technologies.

The origins of blockchain are a bit shadowy. It was created by a person or a group of people known as Satoshi Nakamoto who invented the technology in 2009 so that people could anonymously make payments without a mediator to verify transactions. It was primarily designed to simplify, authorize and store the information of transactions involving the transfer of bitcoins and other cryptocurrencies.

Blockchain is not an innovation. It is rather a mix of tested technologies used in a new way. It is a combination of three technologies: Internet, private key cryptography, and a protocol governing incentivization. This successful combination made the idea of its founders extremely useful and helped to avoid third parties thus making the entire process easier.

How Does the Blockchain Work?

A blockchain is composed of two ingredients: a decentralized network designed to verify transactions, and a ledger maintained by a network. Although everyone can see the transaction ledger, the system is completely hack-proof. How can this happen?

Due to encryption, blockchain transactions are tied to previous transactions. Furthermore, the records are open to all participants of a blockchain ledger. That’s why if hackers want to get in, they also need to hack previous records in a blockchain.

Blockchain transactions are approved by algorithms on the nodes. Participants can also choose to set up a public or private blockchain, which in turn limits the number of computers that are verified and trusted.

Difference Between Public and Private Blockchains

There is a lot of debate around public versus private blockchain. Basically, public blockchain is an Internet while private blockchain is an intranet. Cryptocurrencies such a bitcoins are public blockchains that enable peer-to-peer transactions. Interacting in public blockchains requires tokens and usually has its rules for participants. In a public blockchain, anyone can use cryptographic keys and can become a node. Moreover, participants have a right to walk away from being nodes and then get full access to the network activity since they left.

On the other hand, private blockchains require the permission to read the information and limit the participants who can operate on a blockchain and who can write new blocks into the chain. Such blockchains use applications development platforms, or blockchain-as-a-service platforms (as Microsoft and IBM).

How Companies Use Blockchains?

Big companies always promote innovation, and the increase of blockchain-based smart contracts makes blockchains the mediators that help close business deals and execute automated exchanges of data. Hundreds of companies use this technology for global payments, tracking sales and even music sharing. That’s why blockchain potential is enormous: a company can put almost everything on a blockchain when it comes to transactions.

The Future of Blockchain

There is no doubt that blockchain is a highly disrupting technology that potentially can affect the world as we know it today.

According to Melanie Swan, author of Blockchain: Blueprint for a New Economy, “Bitcoin is just one example of something that uses a blockchain. Cryptocurrencies are just one example of decentralized technologies. And now that the Internet is big enough and diverse enough, I think we will see different flavors of decentralized technologies and blockchains. I think decentralized networks will be the next huge wave in technology. The blockchain allows our smart devices to speak to each other better and faster.”

Blockchain is much more than digital currencies and financial transactions. It covers hundreds of industries that depend on intermediaries such as finance, banking, insurance, healthcare, and others. Blockchain promises to democratize most of these sectors and give them stronger protection against hacking attacks and corruption.

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