What is Blockchain and How does it Work

What is Blockchain and How Does it Work

Despite all the things surrounding Bitcoin, Ethereum, and other cryptocurrencies, many financial experts claim that you should really be paying attention to the technology driving them.

According to Lule Demmissie, president of Ally Invest, “the underlying technology on which most cryptocurrencies rely, namely blockchain, is a transformative technology.” And one of those transformations happens to be the emergence of cryptocurrencies.

Beyond the influence of cryptocurrency on our financial portfolios, some people think blockchain technology has the potential to transform almost every aspect of our lives. It is referred to as a “revolution” by Dr. Richard Smith, executive director of the Foundation for the Study of Cycles, a nonprofit organization whose goal is to research cyclical patterns that appear in all societies and economies.

Blockchain technology has value, even to crypto skeptics. Blockchain, according to Chris Chen, CFP of Newton, Massachusetts-based Insight Financial Strategists, is the true gem. Compared to well-known cryptocurrencies like Bitcoin, which he calls a “flash in the pan,” he thinks blockchain is likely to last much longer. The way we conduct business will keep changing thanks to blockchain.

All of that is wonderful, but what exactly does it mean? Here are some key facts about blockchain technology and a possible blockchain revolution.

Blockchain: What Is It

Consider a blockchain as a cutting-edge, electronic record-keeping system.

Blockchain is the technology that many cryptocurrencies, including Bitcoin and Ethereum, are built on, but its special method of securely storing and transferring information has more uses than just cryptocurrencies.

A distributed ledger is one that uses a blockchain. Multiple computers, referred to as “nodes,” can keep records simultaneously thanks to distributed ledger technology (DLT). Any user of the blockchain can act as a node, but doing so requires a lot of computing power. Nodes store, verify, and approve data within the ledger. This contrasts with conventional record-keeping techniques that keep data centralized, like on a computer server.

A blockchain groups together the data that is added to the ledger into blocks. A chain of new blocks is continuously added to the ledger because each block can only store a finite amount of data.

A cryptographic “hash” serves as each block’s individual and distinct identifier. The hash safeguards not only the data contained in the block from anyone lacking the necessary code but also the block’s position in the chain by identifying the block that came before it.

A partner in PwC’s Financial Services Advisory Practice, Vikas Agarwal, describes the cryptographic hash as “a set of numbers and letters that can be up to 64 digits long.” That is the special code that makes it possible for the puzzle pieces to fit together.

Once data is added to the blockchain and hashed, it cannot be changed and is irreversible. Every node has a copy of the complete history of data that has been added to the blockchain since its inception. It wouldn’t affect the data stored by other nodes if someone tampered with or broke into one computer and changed the data for their own benefit. Since it doesn’t match the majority, the altered record can be quickly identified and corrected.

In order to reverse engineer the system and figure out what all those hashes are, Agarwal claims that it would be nearly impossible to replicate the computing power used on the back end.

The Process

Here’s an illustration of a blockchain transaction that shows how it can be used to confirm and store Bitcoin transactions.

A customer buys Ethereum or Bitcoin.

Through Bitcoin’s decentralized network of nodes, the transactional data is transmitted.

The transaction is verified by nodes.

The transaction is grouped with other transactions to form a block after it has been approved, and this block is then added to a chain of transactions that is constantly expanding.

The transaction record is permanently stored in the completed block, which is encrypted and immutable on the blockchain.

Anyone who owns Bitcoin has access to the transaction history thanks to Bitcoin’s open blockchain. Although it can be challenging to determine who is behind an account, the record identifies which accounts are making transactions on the blockchain. Additionally, with public blockchains, any user who has the necessary computing power can act as a node and approve transactions before they are added to the blockchain.

Yet not all blockchains are open to the public. In order to control who can make changes or additions to a blockchain, it is possible to design them as private ledgers. On a private blockchain, there may be a smaller pool of participants, but participation is still decentralized. Private blockchains use the same encryption techniques to maintain the security of any data stored in the database.

A secure, decentralized permanent record of information has generated interest across a range of industries and may hold answers to many of the security worries, record-keeping problems, and data ownership issues we currently face.


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