What is Blockchain?

"Big banks and some governments are using blockchains to revolutionize how they store information and conduct transactions. There are many reasons to do this, including faster speed, lower costs, greater security, and fewer errors.

A blockchain also eliminates central points of attack and failure. None of these reasons requires cryptocurrency per se. However, many important blockchains are based on Satoshi Nakamoto's Bitcoin model, and here's how they work.

Bitcoin or other digital currency isn't saved in a file somewhere. Instead it's represented by transactions recorded on a blockchain. Think of it as a global spreadsheet or ledger. Each Bitcoin transaction entered on it is verified by a large peer-to-peer network.

Each blockchain is distributed. That means it runs on computers provided by volunteers around the world. It also means there's no central database to hack. It doesn't mean all distributed ledgers are blockchains. A distributed ledger is a database existing in many places with many people using it. Not all distributed ledgers have the encryption and verification standards of a blockchain. A blockchain is a specific type of distributed ledger, just as a square is a specific type of rectangle.

The blockchain is public, it's open-source code, it's a protocol, not a product. Anyone can view it at any time because it's located on the network, not inside a single institution. The blockchain has heavy duty encryption, using public and private keys. Think of it like the two key system to access a safety deposit box. Unlike Target or Home Depot, there are no weak firewalls to attack. Unlike at Morgan Stanley or the US Federal Government, there are no untrustworthy staffers to steal secrets.

Every 10 minutes, like the heartbeat of the Internet, all transactions conducted on the Bitcoin network are verified, cleared, and stored in a block. The block is linked to the preceding block and to the block before it, creating a chain of blocks. Each block must refer to the preceding block to be valid. The structure permanently timestamps, and stores exchanges of value, and it prevents anyone from altering the ledger.

 

This validation process makes theft impossible by any practical measure. If you wanted to steal a bitcoin, you'd have to rewrite the coins' entire history on the block chain. What's more, you'd have to do it without being detected by millions of other people working on it. Well, that's practically impossible.

 

Some scholars say capitalism was able to thrive because of the invention of double-entry bookkeeping. It's a system where a credit in one account always matches a debit in another. Well, blockchain, a worldwide ledger of value, goes much further. We can program a blockchain to record virtually everything or anything of value and importance, not only payments and profits, but birth and death certificates, marriage licenses, deeds, titles of ownership, educational degrees.

 

Beyond financial accounts, it can also track votes, medical procedures, insurance claims, and even the origins of every ingredient in our meal. It can track anything that we can express in code. What's more, it verifies these records in near real time.

 

Soon, billions of smart things in the physical world will be communicating with each other. They'll be sensing and responding to conditions through sensors. But they'll also be able to do transactions. They'll be buying their own electricity and sharing important data, doing everything from protecting our environment to managing our health. So, this Internet of everything needs a trustworthy ledger for everything."

Don Tapscott

Co-Founder and Executive Chairman of Blockchain Research Institute

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Blockchain can be compared to a book of permanent records, where every page acts as an information holder

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Let’s take a closer look at existing data storage solutions to understand the difference between these systems:

  • Centralized systems — all data entries and activities are usually managed using one central server. This increases the risk of a single point of failure, and also means that the controlling entity (such as banks or government institutions, for example) act as decision-makers.

 

  • Decentralized systems — generally rely on multiple server nodes, each of which serves a subset of the total end clients.

  • Distributed systems — all data and records of transactions are encrypted and stored not in one server, but in a system of interconnected, independent nodes and terminals. This ensures independence from centralized entities, transparency, and security.