What is blockchain technology?
Toon's expertise is Bitcoin. Joins the Telegraph's Crypto Update regularly.
When you’re reading this article, we assume you’re interested in the technology behind your cryptos, and that’s great! When you make a cryptocurrency transaction, all the things that happen below the surface remain unnoticed. But the blockchain is the silent motor behind a cryptocurrency. It’s just like with the internet; you’re not thinking about the Transmission Control Protocol or the Internet Protocol, you just want to watch funny cat videos.
So now that you are here, what is blockchain? Simply put: a blockchain is a ledger in which transactions and other information are stored. In a blockchain, information is bundled into blocks which are linked to each other in a chain. Think of it as a long freight train, but one that runs on the rails of the internet.
How does blockchain work?
We wish we could explain it to you in a single sentence, but that’s nearly impossible. So get comfortable, make yourself a cup of coffee, and we'll explain it to you in detail.
Let’s start with cutting the word blockchain in two parts: “block” and “chain”.
All crypto transactions are stored on a blockchain. These transactions are not just randomly thrown together on a large pile. No, they are bundled in “blocks” and sorted from old to new.
And the “chain”? The blocks are attached together into a chain, by means of cryptography. This way, each block is chronologically and cryptographically connected to another block. That is one of the things that makes a blockchain so difficult to hack. If you were to change information in a block from 2015, then you’d have to alter all the blocks that have followed it as well.
Picture that freight train again. If you want to take out the wagon in the middle, you will need to drag along all the wagons that come behind it as well. Quite a heavy task if you ask us.
Another important feature is that a blockchain is openly shared. There is no central power; all participants are in charge together. Thousands of individual computers monitor and verify transactions on the blockchain. Together they form a decentralized network. A single power can’t simply change information that’s been stored.
Additionally, every participant on the network has a copy of the blockchain. That makes cheating or fraud virtually impossible. Does everyone have the same version of the blockchain, but someone else has their own version? Then the group overrules.
And what if someone deletes their copy of the blockchain? Then there are always other copies out there. A bit like that silly picture of yourself that you shared in your friends' group app. You may have deleted it yourself a long time ago, but your friends still have it.
What kinds of blockchain are there?
A small throwback to the year 2017. There was a total solar eclipse, Ed Sheeran made an appearance on Game of Thrones, and fidget spinners became a thing out of nowhere. But it was also the year of the blockchain hype. Suddenly you heard it everywhere: the blockchain is the next big thing!
But actually there is no such thing as “the blockchain”. There are many different types of blockchains, each having its own characteristics. Cryptocurrency fans may claim their version of blockchain is the best, but it really depends on what you consider important. For example, what do you value more in a blockchain: speed or safety?
The bitcoin blockchain is the most well-known, so in this article it is used as a point of reference. Other blockchains differentiate themselves in several aspects:
Can everyone see the blockchain?
The bitcoin blockchain is publicly available, for everyone to see. You can look up every single receiving address and see what the current balance is.
But that is not the case with every blockchain. Some blockchains are closed. For example, health care data can also be stored on a blockchain. But in that case it is not desirable to make this information available for everyone to see, due to doctor-patient confidentiality.
Can everyone check transactions?
With bitcoin, everyone is welcome to join the network and verify transactions. All you really need is a computer with a stable internet connection.
Some other blockchains require permission to participate in the network. Blockchain in logistics is a good example of this. Only suppliers and stakeholders can check and change information there.
What is the timeframe between two blocks?
Another important difference is the time in between blocks. With bitcoin it takes ten minutes on average to verify a block of transactions and add it to the blockchain. With ethereum that timeframe is a mere fifteen seconds.
How are blocks verified?
Okay, now we’re getting to the technical part, but bare with us, since this is the real important stuff. The way transactions are verified can differ. With bitcoin it happens by means of “Proof of Work”. Participants of the network use their computing power to add blocks to the blockchain. Or literally put: in this way they prove that they have done work.
As a reward for that work they get bitcoin in return.
There are also blockchains with a different mechanism. With “Proof of Stake” someone can add a block if they can prove that they have a lot of coins. Ethereum, for example, wants to make the transition from Proof of Work to Proof or Stake.
So there you go, one blockchain is not the other! Do you have a pressing question about a blockchain?