What is Blockchain technology? A step-by-step guide for beginners

Ever since the inception, Bitcoin has made a lot of news. Many people say Bitcoin is the next big thing and have already made predictions that it will replace the current financial system. The blockchain is much bigger than the next big thing as it’s the backbone of bitcoin and similar cryptocurrencies. Furthermore, cryptocurrency is one of the applications of the blockchain technology.

In this post, I will try to explain this whole thing in the simplest way. For those who are into cryptocurrency or want to get into this to reap exponential profits, this post is for you. For others who just want to learn and know about it, this post will be super informational.

Without further ado, let’s begin¬†ūüėČ

Note: This post contains the explanation to the blockchain, w.r.t cryptocurrency. As it’s the best-known application of blockchain till date.

As part of this guide, you will be seeing:

  1. What is blockchain?
  2. What is the difference between the blockchain and a database?
  3. How does blockchain work?
  4. Where did the blockchain come from?
  5. How do cryptocurrencies use the technology?
  6. Who will use the technology?
  7. Applications of the blockchain technology

This will be a long post, get some caffeine¬†‚ėē

Read also: What is the scope of blockchain in future?





What is Blockchain?

A blockchain is a chain of blocks containing records of the transactions connected to each other in a chronological order.

To begin with, let me clear the misconception that Bitcoin and the blockchains are one and the same.

It’s not.

The blockchain is much bigger than bitcoin, ethereum¬†and all the cryptocurrencies put together. Blockchain came into limelight after the Bitcoin revolution happened. But if you take a look at Bitcoin whitepaper, you wouldn’t find any obvious mention of “blockchain” anywhere in it.

But there’s something more…

Though there’s no specific mention of the technology that we are going to discuss here. There’s a hidden gem that leads us to the existence of this technology. The whole concept of Bitcoin, as explained in the whitepaper, revolves around blocks of anonymous transactions adding to the public ledger which anyone in the world can view & manage. The blocks that get added to the distributed public¬†ledger, form the Bitcoin blockchain.

A blockchain is a chain of blocks containing records of the transactions connected to each other in a chronological order. 

Does this make sense now?

A blockchain is accessible by anyone and can be managed by anyone. This is the best part of a blockchain.

Now to help you visualize it, here’s another explanation:

Blockchain is a network of connected computers that have the same list of past transactions, and this list is accessible on every computer on this network. Furthermore, these transactions are validated by all the computers, updating the transactions consistently.

What is the difference between blockchain and a database?

Sure, blockchain deals with records(blocks) that contains information of the transactions happened in the past. This pretty much makes this to appear as a database. But let me tell you, it is not a database.

A database is typically a storage of records of values of a similar data type. Unlike, the blockchain, a database isn’t available across the computers. Even if its available, not everyone can access it. If robustness and security wasn’t an important feature, there’s nothing a blockchain can do that a database cannot.

Below are the major differences between a blockchain and a database.

How does the blockchain work?

how does blockchain works
Source: Blockgeeks

Blockchains are upgraded version of databases, but not a database. As you’ve seen in the previous section, blockchain is not a database but much bigger and better than that.

To justify the name, each block is chronologically connected to two other blocks Рone before it and one after it. Similarly, each transaction within any block is connected to other transactions in form of a mirkle tree. A mirkle tree formation is a digital structure and fundamental part of a blockchain and does the heavy lifting of securely verifying a large amount of data. Blockchain is open source software that can be accessed by anyone with an internet connection.

blockchain

If I were to explain the working of blockchain in few & simpler steps, it would be as follows:

  1. A miner creates a block with a certain number of transactions. The number of transactions is not restricted, it can be anything. But it depends on the miner, who has to determine the number of transactions his/her/their computers can process. The miner will then validate it by the hash tree.
  2. The miner than finds the hash of all the transactions that are in the block he/she/they are going to verify. A hash is an output of fixed length with the information of all the transactions as input. The miners make use of hashing algorithm, which is different for different cryptocurrencies. Bitcoin uses SHA-256 as the hashing algorithm.
  3. Once the hash is achieved, the miners then publish the block to the distributed ledger, commonly known as the blockchain.

That’s a brief on how blockchains work. This is the basic functioning of it, with only the important steps mentioned. There’s a lot happening in the background, explaining which is out of scope for this post. I will be writing a separate post in coming weeks to explain it in detail.

So, let’s move on.

Where did blockchain come from?

Sure, bitcoin brought the concept of blockchain to the limelight, many believe that Satoshi Nakamoto, the pseudo name used by the person/group who invented the revolutionary Bitcoin.

Sorry to break the chain, it’s not true. Bitcoin has just implemented the concept of the blockchain. The existence of blockchain dates back to 1976, when the whitepaper, New Directions in Cryptography came out. The paper discusses the distributed ledger which we today call as the blockchain.

Furthermore, with this as the base, another paper on How to time-stamp a digital document was released in the 1990s. It took a couple of decades to actually implement these and come up with something called cryptocurrencies.

How do cryptocurrencies use blockchain?

Cryptocurrency, Bitcoin is not same as blockchain.

All cryptocurrencies are using blockchain technology to power its functioning, all at different degrees of usage and implementation. But at the foundational level, it’s the blockchain that rules. Since Bitcoin was the first of its kind implementing this technology, everyone thought that both are one and the same and Satoshi invented it.

When it comes to Bitcoin, a transaction is approved/verified every 10 minutes, which the miners adds it to the distributed ledger. To make this happen, the miners make use of powerful computing hardware that powers the mining process.

Executing the hashing algorithm (in Bitcoin’s case, it’s SHA256) requires a powerful CPU, GPU and cooling system as the computers involved in this process heats up a lot. This is not affordable by an individual, hence a group of people (known as mining pool) together do the mining of any cryptocurrency.

The blocks that are generates in the process of mining are then available on the public ledger(imagine the physical ledger with records from across the world). This public ledger that has records from across the globe, remain accessible, up to date & uneditable because of the blockchain technology.

And, this is how the technology helps run cryptocurrencies be what they are.

So basically, cryptocurrencies cannot exist without this technology but the opposite isn’t true. Cryptocurrencies use cryptography to anonymously communicate information from one peer to another. To maintain this information with utmost anonymity and still accessible across the globe, nothing is powerful other than blockchain technology.

However, IOTA uses tangle to get the same thing done that the blockchain does in other cryptocurrencies. But the results are not that efficient and the implementation is also totally different.

blockchain vs database

Blockchain technology: A network of nodes

By now, you must have one thing clear, that this technology is all about the nodes(blocks) in chronological connection to each other.

So let me explain, how this node or blocks work. 

Any computer or any device that can connect to the internet is a potential mining hardware. It just depends on the processing power to mine cryptocurrencies. So, this device that connects the network and validates the transactions get a copy of all the blocks that are on the chain.

Now, imagine this network of nodes/computers/device that is accessing the chain of blocks as the devices on the internet. All the devices that can connect to the web can see any information, anytime from anywhere. Multiple devices can view the same piece of information any number of time(s).

The only major difference between the internet and blockchain is that the node connecting the internet do not have to validate or mine anything for the internet to function. Whereas the miners have to do this to keep the chain running and generate new cryptocurrencies in the process of mining. Furthermore, each node(miner) in the chain of blocks is an “administrator” and participates in the mining process voluntarily. For this, the miners also get an incentive as a reward. However, that’s just a certain percentage of the coins that generates per block.

Decentralizing the mainstream system with blockchain technology

At the very core, the chain of blocks in known for decentralizing systems. 

Just like it has done to the financial system. It has taken control from one central place/person to the whole world. Anyone with the internet connection has the power to participate and make a difference in the transactions in the blocks.

Let me tell you why decentralizing would help in day to day lives.

You know the cryptocurrency with help of blockchain has been busy replacing the traditional banking systems. Why do I think the traditional system will be completely taken over the new and much better system? It’s the following:

  • There are no fees for keeping your money and speed is guaranteed:

Since there are no middlemen that used to charge you a hefty amount to transfer your funds from one account to another, ‘digitally’. Banks used to charge for just making the funds just digitally available to the recipient and not actually moving it. Furthermore, it still takes at least 2 days for cross-border transactions. In cryptocurrency, the funds are moved in minutes and with comparatively fewer fees.

  • Full privacy and security:

The biggest flaw of the traditional banking system is that it has a single point of failure. An attack on the system, the full system is under control of the attacker. On the other hand, the decentralized financial system is all over the globe, there’s no single point of failure, no single node that’s weak and prone to attacks. Hence security is a definite thing that people would find here. Sure, there have been attacks on this system too but the attackers¬†were able to steal the funds not the information. Since the information is encrypted with help of cryptography. Building a full-proof zero-attack platform would take time, till them using a hardware wallet like Ledger Nano S or Trezor would do the needful.

  • Public yet protected:

Sure, the cryptocurrencies are changing every industry beginning with the financial industry. The whole system will be soon completely public, but this doesn’t mean the privacy is compressible. It is not going to happen.

Who will use the blockchain technology?

The technology has no limit to where it’s useful. The finance industry is one industry that’s the perfect use case of the technology. If you are not a tech savvy, you don’t have to worry as the technology is not going to affect your daily life directly, at least not any soon.¬† A world bank report stats that around $550 billion was spent as money transfer in 2017.

Even if half of these transfer were made via the traditional banking system, it’s should have taken at least a day on average to reach the destination. This is a huge percentage to tackle and hence a lot of companies and startups are hiring blockchain developers to solve this problem.

The technology is so broad that there’s hardly anything that cannot be done by it. The technology will come in handy for distributed storage, voting, file sharing(torrent), data maintenance,¬† and whatnot. Like you can store your confidential documents, vote for the candidate you want to govern you, share large files without worrying for the storage space.

The only limit in this technology is the developer’s creativity.

blockchain

Applications of the blockchain technology

While the technology is still in early stage of its existence, only one industry is majorly hit by this technology. Here are the existing applications of blockchain technology:

  • Smart Contracts

Smart contracts are nothing but pre-written rules by the developers that execute for certain trigger(s) are fired or certain conditions are met.¬† Consider this example. You are a musician and earn from music streaming services like iTunes, SoundCloud, Spotify etc. Say these services pay you 20 cents per dollar earned by them. First, it’s too expensive second it’s difficult to manage your earnings. There’s a startup solving this problem using blockchain. Opus is building a platform where the musicians can upload their music and earn 98% of revenue. All the calculations are done by the smart contracts and the blockchain takes care of the revenue share, censorship, transparency.

  • Sharing

While companies like Airbnb, CouchSurfing making its way to the international share economy, its no wonder what such technological advancements can do. OpenBazaar, a blockchain implementing platform that lets you buy & sell pretty much anything. Unlike other shopping sites like eBay & Amazon, which charges for listing an item and when bought by the end user, OpenBazaar does not charge anything. Nothing for listing, nothing when sold. Thanks to the blockchain technology, the platform is a peer to peer network that has no middlemen.

  • Crowdfunding

Gone are the days when an idea requires a funding from VCs before getting started. Now with help of cryptocurrencies, you can fund your idea. In 2016, an experiment by Ethereum based DAO was successful in raising $200 million in just 2 months. The participants bought the “DAO tokens” showing their support for the idea.

  • Governance

When it comes to governance, there’s always a second thought after the results come out. Something unexpected happens and something tells you there was adulterating in the votes that came in. With this technology, the results can be transparent, publicly accessible, & distributed system.

There are many applications of blockchain technology that are already existing and some are under experiment/developments.

Final thoughts on blockchain technology

While the technology grows to its true potential, it’s a matter of patience how it transforms the world. The technology has deeply affected just one industry and it’s already ahead of the traditional financial system. Though the application of blockchain, cryptocurrency is yet to get a green signal from many countries.

Countries like the US, have legalized the application but with strict regulations allowing trading of very few cryptocurrencies out of almost 1600 cryptocurrencies & token. While India is yet to welcome the cryptocurrency.

Not just cryptocurrencies, there are a ton of applications that can transform the digital world we are living in. It will bring transparency & privacy to whichever industry we implement it in.

This completely anonymous technology comes with its own flaws. While it keeps your transaction, data, information completely anonymous, it also hides criminal activities too. Unless there’s a governance on these type of transactions, this technology will not get a green signal from most of the countries. If we make the transactions readable, the technology will lose its unique feature, and become useless. If we don’t there a challenge of governing illegal activities using this technology. This is the biggest challenge that is stopping blockchain from completely taking over.

Future has the answer for all. What do you think should be the solution to this problem? Let me know in the comment section below. Do you know someone who’s looking for this information? Share this with them, also share in your social network.

To get exclusive posts right in your inbox, join my mailing list and join the telegram channel to receive instant updates right on your smartphone.





Shubham Davey

Internet marketer, SEO Consultant, photographer, and blogger. The Internet is my second home, first is India. Networm and tyro.

Leave a Reply