Blockchain 101

With the advent of widespread technology and all of the conveniences that the digital world brings to users, it was only a matter of time until the demand for a form of digital currency saw results. For many internet users, this arrived via Bitcoin, a kind of currency that exists solely in the digital landscape. The popularity of Bitcoin surged when it gained mainstream attention around 2012, however there were many questions about the way in which digital currency functioned and how secure the transactions made with it would be. These concerns should come as no surprise – after all, one of the major problems that comes with handling any form of money is security. How can users ensure that their information and their money was safe while completing transactions online? The answer came in the form of the blockchain.

What is blockchain technology?
An undeniably ingenious creation, blockchain technology is the current backbone of the online economy. It’s a form of digital security and accountability that allows for transactions of digital currency like Bitcoin to be initiated, validated, and recorded. Much as the name implies, the block chain is created by chaining various blocks of information together to create a unified string of information. This process will be explained in more detail shortly, however for now it might help to think about the blockchain as a spreadsheet that is constantly updated almost instantaneously in order to reflect any requests that have been made using the digital currency in question (for the purposes of this article, I’ll use Bitcoin as the primary example moving forward). That means that any and all transfer requests are recorded in the sheet (blockchain) where they are authenticated and subsequently completed. This process is completed by computers rather than people, which makes it one that is both more secure and less prone to user error than other methods of financial authentication and security. And thanks to the relatively “hands off” procedure, the blockchain allows users to exchange value without deferring to a central authority like a bank.

The technology is often referred to as a “digital ledger”, and I find that to be a particularly apt comparison. If you spend any time at all managing your finances, you are probably familiar with the concept. A ledger is where you record your various financial transactions, both deposits and withdrawals, in order to keep a handle on your overall financial health. The blockchain is essentially a giant ledger, but it doesn’t keep track of only your information – it tracks everyone who uses the currency in question, and records that information publically. That probably sounds a bit concerning, right? Well, you can rest easy; the technology is not quite as straightforward nor as simple as it sounds.

How does the blockchain work?
As mentioned briefly above, the blockchain works by taking blocks of information and chaining them together. This results in a big ledger, which in this instance is referring to a digital file working to track all transactions involving Bitcoin. This ledger is not kept on a remote, or central, server, but rather is distributed via a variety of private computers that create a network. Each computer that stores the ledger data and executes the commands responsible for verifying and completing requests is known as a node. Every node located in the network is responsible for keeping and maintaining a copy of the ledger.

To talk about how requests are made and authenticated, it’s helpful to think about a more common experience. Many of us have transferred funds between accounts using mobile banking or by logging into our accounts online. We select the “transfer” tab, input the amount and choose the destination, and then click the “send” button to start the process. You probably haven’t spent much time thinking about it, but what you are really doing with these actions is sending a request to your bank’s network to send money somewhere else. Once it has been determined that the request is really coming from you and is not fraudulent, the action completes and your money transfers. The blockchain operates in much the same way.

When one user wants to send Bitcoins to another user, they send a request to the network saying as much. The network receives this message and distributes it to every node (computer) that is connected. The nodes take that information and apply it to their ledgers, updating the Bitcoin balances of the users in question. All of this is done through the use of a wallet. Just like in the real world, this digital wallet is used to exchange and store Bitcoins. Every user has their own wallet, and every wallet is protected by two kinds of “passwords”, known as keys: a public key and a private key. The private key is used to send the request in a secure, encrypted way. The nodes that receive this message decrypt it using a user’s public key. It is only when both of these keys work in tandem that the request can be deciphered by the computers in question and applied to the ledger.

In order to keep track of the order in which these transactions are made, transactions occurring at the same time are grouped into “blocks” – the same blocks that are then added to the blockchain. Each block of transactions also contains a link to the previous block, which helps order them chronologically on the chain.

Finally, it is important to note that because blockchain technology rests on a series of computers rather than a single, remote source, it is not as vulnerable to attack or security threats as other options. Even if one computer is out of commission for some reason, in other words, the other nodes in the network will continue to update the ledger and keep track of Bitcoin transactions. This helps ensure that information is never lost.

While there is much more to say regarding blockchain technology, the above is a very preliminary introduction to the concept. I hope it helps you better understand how digital currency works.