With the recent wave of discussion and attention on cryptocurrency, there are many words thrown into the mix that may seem unfamiliar. “The Blockchain” is one such concept.
The experts indicate that it’s a type of database that allows all cryptocurrency users to keep a unified ledger, but what exactly does that entail?
We’ve heard it said that the blockchain helps prevent fraud and hacking, but how does it work, exactly? Is it any different from other online banking options? What makes it so preferable?
If you’re looking to explore the world of cryptocurrency, you’ll need to start at the very beginning. Understanding what the blockchain is, and how it works, can help you feel more secure in your investing and spending process.
So what is a blockchain?
Consider your bank ledger. You track all of your purchases in order. Years ago, when we all had checkbooks, we maintained our ledger by noting every single transaction, incoming or outgoing. Today, banks do this for us when we use our debit cards. You can review all of your statements in order, and the bank takes care of the math.
Imagine, then, if you had a shared bank account, and each individual who had access to this bank account kept track of all of their spending on a single page in the same ledger. In the world of blockchain, the ledger is the blockchain, and each page is considered a “block.”
Blockchain is a very different and specific type of database. You’ve likely encountered several databases in the past. If you’ve ever logged onto a shared spreadsheet, or worked in an inventory type of software, you’ve dealt with a database. A database contains a collection of information that can be shared amongst a group of people. It’s typically housed on a server, which can be created across hundreds or thousands of computers that allow hundreds or thousands of people access to the information in the database simultaneously.
Rather than putting all of the information together at once in a table, like many databases do, a blockchain breaks data down into blocks. Each block is capable of storing a certain amount and type of data. Once a block is full, it will link to the block filled prior to it, creating a chain of blocks. Hence the name “blockchain.”
One very important thing to keep in mind is that a blockchain cannot be reversed. Like a stone tablet, whatever information is placed in each irreversible, time stamped, and part of the shared timeline forever.
Transaction Verification on the Blockchain
Cryptocurrency transactions are not instantaneous. Instead, every purchase is validated with a “proof of work” or “proof of stake” process.
Proof of Work
Proof of work is a process in which computers attempt to solve mathematical puzzles created by algorithms to validate and thus receive cryptocurrency via transactions. These puzzles aren’t something that can easily be solved; in fact, those who receive crypto via proof of work transactions rarely break even after considering the computing resources needed to solve the puzzle.
Proof of Stake
Proof of stake is very much like bank collateral. Each individual has the ability to verify transactions up to the amount they front or “stake” in the communal safe. The stake owner of each transaction is rewarded for their role in validating. Still, all transactions will be checked and verified via majority consensus of leger holders.
Is the Blockchain Safe?
Many feel that the blockchain is safer than a traditional bank account for several reasons.
The fact that data on the blocks is always stored chronologically and cannot be altered helps some feel more secure. Blocks can only be changed if the majority consensus agrees upon it.
Additionally, the information within the blocks is combined with hash code. Hash code is data that is turned into a gibberish string of letters and numbers via a mathematical function. If the information in the block is ever changed, the hash code will also be changed, which makes it easier to track alterations and their origins.
Therefore, if a hacker were to hop into the blockchain and make a change to transactions, their version would not match anyone else’s. Their hash code would be altered, and it would be very easy to spot who has the invalid version of the blockchain.
Since the majority consensus rules, a hacker would need to successfully update 51% of the existing blockchain copies in order to take over the chain. This would be incredibly time consuming and expensive. And remember, blocks are timestamped, so this effort would be easily noticed by everyone sharing the blockchain. They could in turn create a new chain, and make every transaction on the hacked chain completely worthless.
So is it impossible to hack a blockchain? No, it’s certainly possible. But it would be essentially pointless, as the assets would be useless at the end of the effort. Without profit, it’s not really a good use of time for most hackers.
The concept of a blockchain may seem more complicated that it really is, only because it’s new and unfamiliar to us. However, knowing that it’s a decentralized – meaning shared by all – database of sorts can help demystify some of the process.
The idea is to create a process by which verification is carefully considered, either by code or by humans, and all transactions are agreed upon by consensus. While this doesn’t differ too much from some higher level banking and investment processes, it is a little strange for those of us who don’t deal with finances far beyond our own wallet.
If you choose to invest in cryptocurrency, you’ll be able to learn more about that particular company’s blockchain and processes. Be sure to read the fine print about consensus requirements and verification processes so that you can become more familiar with how things work for that particular blockchain. Even though blockchains offer greater security, it’s always a good idea to understand what your money is doing for you.