What is blockchain?
Blockchain is a way of organizing data so that transactions can be verified and recorded through the consensus of all parties involved. The system is founded on the concept of an authoritative ledger that records events.
While current data systems hold that ledger in a single, centralized location, a blockchain requires each individual participant – or node – to hold a copy of the record. Any potential changes to the record must be compared against each and every node before being approved, which strengthens security and reduces the likelihood of unauthorized changes.
For example, let’s say that Joe is being tried in court for stealing Pauline’s purse. Typically, a court reporter would be employed to type out everything that Joe says into a court record. If Joe admits to the crime, this transcript of the proceedings will function as irrefutable proof that he confessed. This document is kept in the court’s offices, under lock and key.
But Joe’s friend Bob wants to help Joe out by eliminating the record of his crime. Bob steals a copy of the key, opens the court’s office, erases Joe’s confession, and leaves.
Since there’s no other official record of Joe’s admission, there court cannot prove that Joe ever admitted to stealing the purse.
This is how the current generation of data repositories work. Bob wasn’t authorized by the court to have a key to the centralized location where the data lived, yet he gained access anyway and used it improperly. Joe’s crime has been erased from history, as far as the legal system is concerned.
Now, let’s say Joe is up to his old tricks again, and goes out on the street to snatch Jessica’s purse. But this time, there are ten bystanders with smartphones, and each bystander independently records the deed. Now there are ten records of what Joe has done, and no easy way for Bob to change every single bystander’s video in exactly the same manner to make it look like Joe is innocent.
The only way the record of this event could be changed is if all the bystanders come together and decide, as a group, to alter each copy of the video in precisely the same way. That is unlikely to happen.
If all the bystanders agree as a collective system that the data should continue exist in its current format, the event becomes locked in time as a fact that has happened. It is an entry in the ledger: a fixed point that cannot be changed.
Once the chapter has been closed on this event, it is known as a “block.” The block is redistributed to each node, which re-validates the change and agrees to edit its version of the ledger to include this new event.
Every subsequent potential change to the data must be validated against this block before it can be added to the “chain” of events. This is accomplished through sophisticated matching algorithms that verify the party’s right to access or alter the data.
When it comes to financial matters, or a virtual currency like Bitcoin, it’s easy to see why this is important. Every participant in a transaction must agree that a payment took place at a certain time for a certain amount, or the transaction is void.
All transactions depend on the ones that went before it. If Joe empties his account and has a $0 balance, he cannot then write a $20 check to Bob from that same account an hour later. Neither Bob, Bob’s bank, nor Joe’s bank will agree that the transaction is valid once the check bounces.