What is a simple blockchain explanation
WHAT IS BLOCKCHAIN? A SIMPLE EXPLANATION.
Blockchain, a term that nobody can ignore today. There is talk of the blockchain revolution everywhere, whether on YouTube, in podcasts, books or articles, blockchain technology is THE topic, also for large companies such as McDonalds, Nestlé, or IBM. The latter operates the “Food Trust” platform, for example. This is based on blockchain technologies and is used to trace food in order to create more transparency.
Most people will probably be familiar with the word blockchain in connection with the cryptocurrency Bitcoin.
But what exactly does a blockchain do? How does it work? In which areas is it already being used and where is its potential for the future? In this article we explain everything you need to know about blockchains in a simple and understandable way.
What exactly is it that makes a blockchain so revolutionary?
Blockchain technology has made a name for itself as an almost tamper-proof technology for online transactions. This is precisely why it plays a revolutionary role when it comes to security and trust when it comes to the exchange of critical and sensitive information between multiple parties. Topics that have been in focus, especially since the global financial crisis in 2008.
Again and again, banks, insurance companies and other central institutions are accused of having abused the trust of their customers in dealing with monetary values.
How would it change our world if these central authorities were suddenly superfluous? What if transactions were secure and no longer had to go through potentially corrupt instances that could be bribed or hacked?
Exactly such an idea was put forward in 2008 under the pseudonym Satoshi Nakamoto. It was the hour of birth of Bitcoin, a crypto currency that enables secure online payments without having to rely on control bodies such as banks.
The blockchain is a kind of accounting system for bitcoins, these would not work without the blockchain. Bitcoins are only one of many possible uses for blockchains. In simple terms, not only one car (Bitcoins) of a certain type can drive on one street (blockchains), but different cars.
Theoretically, blockchains are conceivable in all those contexts in which critical information is exchanged between several parties, such as in banks, authorities, food producers or in logistics.
By eliminating central instances, blockchain technology also enables control to be shifted away from the aforementioned instances.
Blockchain in detail: what is a blockchain and how does it work?
A blockchain is a decentralized database technology. The databases are distributed on many different computers around the world and connected online. Each database has the same complete information. The integrity of this database, i.e. protection against subsequent manipulation, is ensured by cryptographic chaining, i.e. the hash value of the previous data record (called block) is stored in the subsequent data record (block). This literally creates a chain of blocks, the blockchain. You can read how this works in detail here: "The function of a blockchain simply explained using Bitcoin" (set the jump label to the corresponding heading below in the text)
The Bitcon blockchain is currently the longest existing data record chain in the world.
Transparency and pseudonymity with blockchains
All transactions made are stored in the database and can be viewed by all users for an unlimited period of time. As if you could see all the accounts and transactions of a particular bank. However, since this could be used improperly, the corresponding accounts are pseudonymized.
Pseudonymized means that personal data are changed in such a way that they can no longer be assigned to a real person or only with great effort. Therefore, the other users do not see the names of the other users, but similar to an account number, each user receives their own address, which consists of letters and numbers. The identity of the real person is not revealed through this address, as long as the respective person does not divulge this information in a transaction or in other ways.
In general, it is advisable to use such an address only once, so that the connection between address and identity cannot be established at some point.
The function of a blockchain simply explained using Bitcoin
In order to understand exactly what makes the manipulation of a blockchain database so difficult or impossible, it is important to understand the following terms and their relationship to one another:
- Consensus procedure
- Hash value
Mining a block
The terms mining and miner are based on mining for a reason. Just like mining coal or gold, the miner basically mines bitcoins.
Miners within a blockchain network provide computing power to solve complex cryptographic tasks and thereby verify a block of data, the transactions. If this task has been successfully completed, a new block is generated. This means that the network is constantly monitored.
The miner receives bitcoins, so to speak, as a reward for providing the computing power and solving the task. Therefore, new bitcoins are introduced into the system through mining.
When Bitcoins were still at the very beginning, you could still solve these cryptographic tasks from your home computer, but today the computing power is no longer sufficient.
Back then there were 50 Bitcoins for completing a block, today there are 12.5 Bitcoins, and the reward is halved after every 210,000 blocks. The logical consequence of this is that it is not possible to mine an endless number of Bitcoins. The number of bitcoins is limited to 21 million coins.
Consensus procedure - verification of a block
But how exactly does the miner verify a block? A so-called consensus procedure is used, one of the most popular procedures is Proof-of-work Method, but it is only one of many. The proof-of-work method for bitcoins, for example, uses the SHA-256 algorithm. SHA stands for secure hash algorithm. Using this method, a hash value is calculated, which is saved in the current and the following block. But why does the storage of this value make the blockchain virtually tamper-proof?
A hash is always the same length and is a sequence of numbers and letters. It is also referred to as a type of digital fingerprint of data because it is almost a larger amount of data clearly indicates.
The consensus procedure now works, roughly simplified, as follows:
- An arbitrary rule is established that the hash value of all blocks must start with a certain number of zeros, let's say 7.
- Now the miner, or rather the miner's computer, tries to find the right hash value, which starts with seven zeros, for the data of a block in order to validate the transaction and to append a new block to the chain. Every block has one Nonce, this is a series of numbers.
The miner finds the hash value by changing the nonce until it receives a hash value with seven zeros as the result.
- The hash found is stored in the current and subsequent new block and so it continues every time a new block is added
Suppose the blockchain consisted of 5000 blocks and someone, let's call him Paul, would go and manipulate the data in block 3000 in his favor. The moment the data changes, the hash value also changes automatically, as this is like a fingerprint, it is different for all data.
The hash value has changed and so all 2000 subsequent blocks are automatically invalid. Because block 3001 has stored the original hash of block 3000 and now recognizes that it is no longer the same as before.
In order to create a valid blockchain again, Paul would have to go and re-mine all blocks from 3000 to 5000 so that the values are correct again. The longer the blockchain, the more complex the process.
This attempt at fraud can, however, be exposed relatively easily by the other participants in the network or by their computers. Since a blockchain is a decentralized database, each of the other users has a complete copy of the blockchain on their computer. This is how the other participants see that the hash values of Paul's blocks no longer match theirs. The attempted fraud is exposed. The data within a blockchain are therefore as good as forgery-proof.
This decentralized consensus procedure can thus replace a third trustworthy entity, such as a bank, in order to confirm the integrity of a transaction.
In general, the majority principle decides which blockchain is regarded as the officially valid one. Thus, the more users it has, the more secure a blockchain is. In the example, all other participants have the same blockchain, except for Paul.
Theoretically, however, potential fraudsters can take advantage of this majority principle.
This is also referred to as the 51% attack. This would mean someone could manage more than 50% of the miners. He would thus own more than 50% of the hashrate, his blockchain would assert itself as the official one.
Other areas of application for blockchains
Data that is stored in a blockchain is
- transparent (visible to all users)
- Updates can only be made if everyone agrees
The function that would normally have a central authority such as a bank or an authority is transferred to the participants in the system in a blockchain.
All of these points make a blockchain interesting far beyond the boundaries of Bitcoin. Whether, as mentioned, in logistics or food production or property rights, such as land, or the rights of an artist to his music. The areas of application are diverse.
The platform based on blockchain technology enables Food Trust IMB reviewing supply chains, from local farmers to the supermarket.
Blockchain technology is also becoming increasingly interesting for advertising and marketing. For example, there is currently a JICWEBS pilot project in which companies such as McDonalds and Nestlé are participating.
Blockchain technology is intended to maximize the visibility of advertisements, reduce online fraud and also reduce advertising costs, since a blockchain solution could also make cost-intensive intermediaries superfluous here.
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The future of blockchains
Blockchain technology is particularly interesting for countries in which corruption and the smear of authorities are a major problem. The transparency of the blockchain makes such abuse extremely difficult.
If you pay something by credit card, the money first goes through several instances before it finally reaches the target person. With cryptocurrencies like Bitcoin, the money is much faster with the recipient. In addition, intermediaries, such as banks, consider transactions of less than 20 cents to be unprofitable due to the transaction fees, which means that a large part of the world's poorer population is excluded.
Since blockchains can replace many services of a bank free of charge and transactions with very small amounts are also possible, this gives people without a bank account access to the global economy.
In this way, blockchain technology opens up previously undreamt-of possibilities.
Ted Talk about how the blockchain will radically transform the economy
- security: A blockchain is almost impossible to manipulate
- Decentralized database: This has several advantages. On the one hand the Resilience through the redundant storage of the blockchain on the computers of all users. On the other hand, the equality of all users, as there is no central responsible person.
- The blockchain makes middlemen and central bodies such as banks superfluous
- Versatile in use
- Information flows are becoming faster and more reliable
- Increasing Power consumption, through the computing power that mines require
- Despite the extremely high level of security against manipulation, the residual risk remains one 51% attack
- Challenge: integrating blockchain technology into the existing IT landscape
- Scalability / storage requirements: The memory requirement grows with each additional block
Transparency: Depending on your point of view, transparency can be seen as both an advantage and a disadvantage. On the one hand, the transparency makes possible manipulation of the blockchain more difficult, on the other hand, even if the users are anonymous, other users have insight into their own transactions. For example, competitors can see prices.
Conclusion - blockchains enable control to be shifted away from centralized instances
In many ways, blockchain technology is indeed revolutionary. The decentralization and the extremely difficult manipulation of a blockchain enables the control of monetary values or information to be shifted away from central authorities. It remains to be seen which and how far the effects of such a technology will extend in the future
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