What is a Blockchain?

Blockchain Basics

What is a Blockchain?

The blockchain is probably one of the most important inventions of the 21st century. Many people believe that it can change a number of industries and even politics. But most of the time blockchain is associated with Bitcoin. But blockchain technology is much more than just the technology behind Bitcoin as there are many more use cases for it. “Blockchain technology could change our world more than people imagine” is a quote from Jack Ma, famous chinese tech entrepreneur and founder of the Alibaba Group. Blockchains allow for limitless exchange of information, values and goods without central institutions like banks, governments or companies.


But what exactly is a blockchain?

A blockchain is an incorruptible digital ledger that can be programmed to record almost everything of value. In the case of Bitcoin and many other cryptocurrencies, a blockchain records transactions. So a blockchain is just like a database. This database belongs to nobody and to everybody at the same time, because it is shared. The data of a blockchain isn’t stored in just one location, it is distributed. A network of nodes is designed to regularly update the blockchain and store the data. The data is hosted by millions of computers simultaneously and it is accessible to anyone. This makes the blockchain decentralized.

The blockchain is invented by a person or a group of people known by the pseudonym Satoshi Nakamoto. The identity of Satoshi Nakamoto is still unknown. The same person or group also created Bitcoin which is the first form of digital cash. With the invention of blockchain a major problem was resolved which held the advancement of digital money back for quite some time: the double-spending problem.

Until 2008 all digital currencies had the same problem which could only be resolved by a central institution. The double-spending problem allows users to spend the same digital token twice. Double-spending leads to devaluation and inflation of a currency. In 2008 Satoshi Nakamoto released the whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”, which offered a solution for the double-spending problem with blockchain technology.


Features of a blockchain



Blockchains are decentralized. Decentralization means that a system is not controlled by only one party. Everybody has control over the system. Centralized systems rely on a central authority to securely exchange data with other users, while blockchains utilize consensus mechanisms across a network of nodes. This allows blockchains to work without a central institution which controls the system. Decentralized systems are accessible from everywhere, at any time and everybody can join.


Because a blockchain is not run by a central institution, it is also transparent. This means that every interaction on the system is traceable and visible for every user of the network. For example: transactions on the Bitcoin blockchain are all traceable on the public ledger and for everybody to see. If you have the transaction ID of any transaction, you can easily look it up on the public ledger and see the two parties involved in the transaction.


While every interaction on a blockchain is traceable and transparent, the users are not. Users of a blockchain are represented by an encrypted sequence of numbers. This makes it nearly impossible for anybody assign users of a blockchain to real identities. If we take a look at the Bitcoin blockchain we can see that users have a public address which is a 160 bits long sequence of numbers. This address allows you to receive and send Bitcoins on the blockchain.


All interactions on the blockchain are irreversible. There is no central institution that can change or reverse anything that happened on the blockchain because it is decentralized. A blockchain is a chain of blocks. Whenever a new block is added to the chain, it can’t be reversed. And every information that the block contains is on the blockchain forever.


Advantages of a blockchain



The system of a blockchain is very secure because it is decentralized , irreversible and transparent. Every information is distributed and saved on every node on the network. This means that data can’t be stolen or modified because the same data is available on other nodes aswell. Hacking a blockchain is almost impossible because the data is always available on multiple nodes. To manipulate information on the blockchain, hackers would have to manipulate the data on thousands of computers at the same time.


Having access to a blockchain requires only a connection to the internet. That’s far less requiring than to access a bank or any other financial institution. Blockchains are decentralized. No central institution can decide who participates and who does not. Blockchains give new opportunities to people who could not participate in global trade up until now.


Before decentralized systems, we had to trust intermediates like banks or other institutions. With decentralized systems there are no intermediates. We trust the underlying technology when using a blockchain. This means that we don’t have to trust any intermediates anymore.