What is Blockchain?

24 June 2020

If this technology is so complex, why call it “blockchain?” At its most basic level, blockchain is literally just a chain of blocks, but not in the traditional sense of those words. When we say the words “block” and “chain” in this context, we are actually talking about digital information (the “block”) stored in a public database (the “chain”).

“Blocks” on the blockchain are made up of digital pieces of information. Specifically, they have three parts:

Blocks store information about transactions like the date, time, and dollar amount of your most recent purchase from Amazon. (NOTE: This Amazon example is for illustrative purchases; Amazon retail does not work on a blockchain principle as of this writing)

Blocks store information about who is participating in transactions. A block for your splurge purchase from Amazon would record your name along with Amazon.com, Inc. (AMZN). Instead of using your actual name, your purchase is recorded without any identifying information using a unique “digital signature,” sort of like a username.

Blocks store information that distinguishes them from other blocks. Much like you and I have names to distinguish us from one another, each block stores a unique code called a “hash” that allows us to tell it apart from every other block. Hashes are cryptographic codes created by special algorithms. Let’s say you made your splurge purchase on Amazon, but while it’s in transit, you decide you just can’t resist and need a second one. Even though the details of your new transaction would look nearly identical to your earlier purchase, we can still tell the blocks apart because of their unique codes.

While the block in the example above is being used to store a single purchase from Amazon, the reality is a little different. A single block on the Bitcoin blockchain can actually store up to 1 MB of data. Depending on the size of the transactions, that means a single block can house a few thousand transactions under one roof.

How Blockchain Works

When a block stores new data it is added to the blockchain. Blockchain, as its name suggests, consists of multiple blocks strung together. In order for a block to be added to the blockchain, however, four things must happen:

A transaction must occur. Let’s continue with the example of your impulsive Amazon purchase. After hastily clicking through multiple checkout prompt, you go against your better judgment and make a purchase. As we discussed above, in many cases a block will group together potentially thousands of transactions, so your Amazon purchase will be packaged in the block along with other users’ transaction information as well.

That transaction must be verified. After making that purchase, your transaction must be verified. With other public records of information, like the Securities Exchange Commission, Wikipedia, or your local library, there’s someone in charge of vetting new data entries. With blockchain, however, that job is left up to a network of computers. When you make your purchase from Amazon, that network of computers rushes to check that your transaction happened in the way you said it did. That is, they confirm the details of the purchase, including the transaction’s time, dollar amount, and participants. (More on how this happens in a second.)

That transaction must be stored in a block. After your transaction has been verified as accurate, it gets the green light. The transaction’s dollar amount, your digital signature, and Amazon’s digital signature are all stored in a block. There, the transaction will likely join hundreds, or thousands, of others like it.

That block must be given a hash. Not unlike an angel earning its wings, once all of a block’s transactions have been verified, it must be given a unique, identifying code called a hash. The block is also given the hash of the most recent block added to the blockchain. Once hashed, the block can be added to the blockchain.

Is Blockchain Secure?

Blockchain technology accounts for the issues of security and trust in several ways. First, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you take a look at Bitcoin’s blockchain, you’ll see that each block has a position on the chain, called a “height.” As of January 2020, the block’s height had topped 615,400.

After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash, along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.

Here’s why that’s important to security. Let’s say a hacker attempts to edit your transaction from Amazon so that you actually have to pay for your purchase twice. As soon as they edit the dollar amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash. And the next, and so on.

In order to change a single block, then, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block is added to the blockchain it becomes very difficult to edit and impossible to delete.

To address the issue of trust, blockchain networks have implemented tests for computers that want to join and add blocks to the chain. The tests, called “consensus models,” require users to “prove” themselves before they can participate in a blockchain network. One of the most common examples employed by Bitcoin is called “proof of work.”

In the proof of work system, computers must “prove” that they have done “work” by solving a complex computational math problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain. But the process of adding blocks to the blockchain, what the cryptocurrency world calls “mining,” is not easy. In fact, the odds of solving one of these problems on the Bitcoin network were about one in 15.5 trillion in January 2020.1 To solve complex math problems at those odds, computers must run programs that cost them significant amounts of power and energy (read: money).

Proof of work does not make attacks by hackers impossible, but it does make them somewhat useless. If a hacker wanted to coordinate an attack on the blockchain, they would need to control more than 50% of all computing power on the blockchain so as to be able to overwhelm all other participants in the network. Given the tremendous size of the Bitcoin blockchain, a so-called 51% attack is almost certainly not worth the effort and more than likely impossible. (More about this below.)

Blockchain’s Practical Application

Blocks on the blockchain store data about monetary transactions—we’ve got that out of the way. But it turns out that blockchain is actually a pretty reliable way of storing data about other types of transactions, as well. In fact, blockchain technology can be used to store data about property exchanges, stops in a supply chain, and even votes for a candidate.

Bank Use
Use in Cryptocurrency
Healthcare Uses
Property Records Use
Use in Smart Contracts
Supply Chain Use
Uses in Voting
Real Estate
Identity solution
Equity token products
Marine insurance
Foreign exchange transactions
Bilateral payments
Food Safety
Repurchase agreement
Stock Exchange
Mark ownership
Licensing and intellectual property
Certificate
Advertising
Point-to-point payment
Automation equipment
Recruitment business
Law enforcement
Regulation and supervision

What’s a crypto wallet?

A cryptocurrency wallet is a piece of software that keeps track of the secret keys used to digitally sign cryptocurrency transactions for distributed ledgers. Because those keys are the only way to prove ownership of digital assets – and to execute transactions that transfer them or change them in some way – they are a critical piece of the cryptocurrency ecosystem.

Better known as “crypto wallets,” they are like the keys to the blockchain car. Without those keys, the car won’t run. And without them, there would be no way to prove ownership of a digital asset – anything from a bitcoin to a token representing some kind of asset.

There are two main types of crypto wallets: hardware and software (also known as cold and hot storage wallets, respectively). Hot storage wallets are accessible via an internet service such as Coinbase, one of the largest cryptocurrency exchanges that supply online wallets for users, and can be further segregated into online wallets and client-side wallets managed locally on a user’s computer or mobile device.

There are also paper wallet generators, which create keys that can be printed out or rendered as QR codes.

Cold storage wallets are downloaded and reside offline on a piece of hardware such as a USB drive or a smartphone. Exodus.io and Dash QT are two examples of cold storage wallet software. Cold storage wallets can also be purchased as devices with the software already installed on them; these kinds of devices are sold by vendors such as Trezor and Ledger.

Hardware wallets can be further divided into crypto-assist type wallets that simply handle the keys and signing of arbitrary data and are sometimes called hardware security modules (HSMs). “And then there are hardware wallets that handle generating and signing complete transactions that are then sent to the distributed ledger network,” Huseby said.