How Blockchain Technology Works (Easy Explained!)

Blockchain technology can seem daunting to understand, but its central premise is actually very straightforward. A blockchain is like a database or a ledger that stores information. The way that blockchain differs from traditional databases and ledgers is what makes this technology so powerful. Three key unique elements of blockchain are decentralization, transparency, and security. As we look at what blockchain is and how this technology can be applied across many industries, we’ll explore each of these elements in greater depth below.

Overview for Fast Readers

A blockchain is a type of digital database.
Blockchains hold information in groups known as blocks, and blocks are added one at a time to a growing chain.
Unlike traditional databases, blockchains are decentralized and transparent.
Before being added to the chain, blocks are verified independently by thousands or more nodes, or individual computers in the larger network.
Blockchain is best known for its application in cryptocurrencies like Bitcoin, but it has a multitude of potential uses.

Blockchain for Beginners

A blockchain is a means of storing information electronically. Prior to the development of blockchain technology, there were already many ways of storing information, so you may be wondering why blockchain was necessary and why many experts consider it transformational.

To make sense of why blockchain is unique, it’s helpful to compare it to a traditional database system for storing information. Even the very largest databases are typically centrally controlled, with information access limited to certain users. Databases may hold vast quantities of information which are available to a large number of people, but there are still limitations in play. Anyone looking to make changes to the database must typically input new data through the central controller of that database, and the central controller thus holds enormous power over that database—as well as a significant security risk. If the central controller is breached by a hack or other theft, for example, the information in the database is highly vulnerable.

By contrast, a blockchain is decentralized, meaning that there is no one owner of the database or one central repository where information is held. Without a single owner, the database itself can be updated or modified more efficiently by many participants in a collaborative way. With the information distributed in this way, blockchains tend to be much more secure than centrally-owned databases, both from external threats as well as from the risk of a single participant in the sharing of information gaining a disproportionate amount of power over the other participants.

Before we dig deeper into how blockchain works, it’s worthwhile to clarify one point: traditional databases can also be “distributed” across multiple users as well. Any time multiple people email one another a spreadsheet document, for instance, a database is being distributed to new users who can input or delete information. A crucial distinction between this kind of distribution and the distribution that blockchain achieves, however, is that the above example involves a database being copied in its current, fixed form, while still under a central authority, while blockchain utilizes a peer-to-peer decentralized organization strategy called a protocol.

Who Invented Blockchain Technology?

It is difficult to say exactly who invented blockchain technology. The first blockchain is often attributed to Bitcoin, the pioneering crypto network launched by the pseudonymous computer scientist Satoshi Nakamoto launched in 2009. Bitcoin undoubtedly put blockchain on the map and was crucial in popularizing the technology. However, the concept of blockchain can be traced back roughly 20 years earlier than the launch of Bitcoin, to pioneering work by cryptographers Stuart Haber and Scott Stornetta.

How Does a Blockchain Work?

Put simply, a blockchain groups pieces of information together into blocks. A block can contain a fixed amount of information. When the block is “full,” it is added as a new chain to an existing link of earlier blocks and a new block is begun. This means that a blockchain is an ever-growing chronological chain of blocks of information. Because blocks are added consecutively and time-stamped, the blockchain is also a chronological ledger.

A key issue that blockchain aims to address is known as the immutability problem. Digital records are notoriously easy to alter or falsify when stored using traditional means. This is a problem in Bitcoin transactions, but it is also a more widespread issue across industries and applications. Blockchain aims to address this problem by utilizing hashes. A hash is a string of characters of a fixed length that is generated through a cryptographic algorithm based on a variety of inputs. Change the input even slightly and the hash changes entirely. In the case of Bitcoin, a transaction between Bitcoin users generates a hash that also includes input from all earlier transactions. Thus, if either the current transaction or any previous transaction is altered after the fact, the hash will be changed. This means that outside sources can check the hash to make sure that it has not changed, thus verifying that a transaction hasn’t been falsified even though the details of the transaction itself aren’t known.

This gets to another crucial component of a blockchain, which is verification. As we’ve indicated above, there is no central authority in control of a blockchain. This means that there is no single entity or individual that can verify the information being added to blocks—in the case of Bitcoin, this is definitely a good thing, as the volume of transactions would make the verification process incredibly slow for any one person! When we say that blockchain is decentralized, we mean that it consists of thousands or even millions of individual computers spread around the world, rather than a single computer, server, or set of servers in one location. Each of these individual computers is known as a node. Many nodes independently verify each block of information before it is added to the chain, helping to ensure that the individual record is substantiated and that the blockchain ledger is continuously reconciled. What’s more, the ledger is also publicly viewable, so there is a great degree of transparency in the process.

What Can a Blockchain Be Used For?

You may have heard about blockchain in regards to a cryptocurrency like Bitcoin or Ethereum. While blockchain technology is incredibly important for many cryptocurrency networks, in reality it has many additional applications.

Bitcoin

As the most prominent application of the technology, Bitcoin is a useful demonstration of the potential of blockchain. The Bitcoin blockchain stores records of transactions. Because Bitcoin is a digital currency, it is especially important that precautions be taken to ensure that a single Bitcoin can’t be used in multiple transactions at once—this is known as the double spending problem. When Bitcoin users complete a transaction using a Bitcoin wallet, the blockchain verification process helps to ensure that the entire Bitcoin network realizes that the transaction has taken place, making it impossible for that same Bitcoin to be spent a second time by the spender.

To incentivize Bitcoin users to participate in the node verification process necessary for the blockchain to be maintained, Bitcoin utilizes a process known as mining. Put simply, Bitcoin miners act as nodes in the Bitcoin blockchain, working to verify blocks by solving hashing problems. Mining relies on a concept known as Proof of Work, which refers to the way that miners prove to the network of verifiers that they have expended computer power participating in the verification process.

Is a Blockchain Really Secure?

With so many participants in a blockchain, it may be hard to believe that it is truly secure. We’ll explore a couple of the additional ways that blockchain ensures that information is protected and accurate.

First, blockchains often make use of a technology called digital signature. Digital signatures, like real-life signatures, are used to verify that someone is who they claim to be. They utilize cryptography and are a secure way of guaranteeing that a message or bit of information is coming from a trusted source.

Another tool that blockchain utilizes to enhance security is known as public key cryptography. A common application of this principle is found in the Bitcoin wallet and transaction system. In this case, a public key and a private key are independent but related tools used to encrypt and decrypt information for added security. As the names suggest, a public key is available to anyone in the network, while a private key is known only to a particular user. Anyone in the network can utilize an individual’s public key to encrypt a message to that person, but only the same person’s private key can be used to decrypt that message.

Advantages of Blockchain

Some of the many advantages of blockchain technology include:

Chronological record-keeping
Records are immutable
Decentralized (managed by a large network of computers rather than a single entity)
Transparency
Security compared with other database systems

Disadvantages of Blockchain

While blockchain has tremendous potential, it also does have some disadvantages. The decentralized node system could theoretically be taken advantage of, for instance. If a single user (or a group of users working together) could control more than half of all nodes in a blockchain network, that user or group of users could unilaterally alter or falsify records in the blockchain. This process, known as a 51% attack, is possible because the group in the majority could effectively stop other nodes from being able to independently verify new blocks.

Blockchain Secure Network vs. Unsecure Network

Another potential disadvantage to blockchain networks is the phenomenon known as hard forking. A hard fork occurs when the underlying protocol of the blockchain is fundamentally altered, thereby invalidating (or validating) previous blocks. With the new protocol, nodes in the network will no longer accept older versions of the blockchain, and the result is that a blockchain “splits,” with one version operating under the earlier set of rules and a second blockchain adopting the new rules going forward. A hard fork tends to occur when a significant disagreement among verifiers takes place. As an example, Bitcoin has experienced multiple hard forks throughout its history, resulting in new versions of the cryptocurrency such as Bitcoin Gold and Bitcoin Cash in the process.

What Does the Future of Blockchain Look Like?

Blockchain has been hailed as a revolutionary technology with broad applications outside of the cryptocurrency space. As of yet, though, other industries are just beginning to explore the possibilities of this technology. Some of the potential areas in which blockchain could be used include:

Voting and election security
Supply chain monitoring
Medical data storage and processing
Cross-border payment processing
Money laundering tracking and prevention
Personal identity security applications

Summary

Blockchain technology is fundamentally a chronological grouping of information that is independently verified and immutable. Unlike other ledgers and databases, blockchains are not owned by one central authority, but rather are dispersed across a wide network of computers. The information within a blockchain is gathered in blocks and those blocks are linked together into a chain using cryptographic processes. While blockchain is a relatively straightforward concept, it has wide-reaching potential for the management and protection of information in the digital age, and this has led many experts to predict that it will transform a variety of industries going forward.