The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. In this way, a blockchain is the foundation for immutable ledgers, or records of transactions that cannot be altered, deleted, or destroyed. This is why blockchains are also known as a distributed ledger technology (DLT).
First proposed as a research project in 1991, the blockchain concept predated its first widespread application in use: Bitcoin, in 2009. In the years since, the use of blockchains has exploded via the creation of various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.
Blockchain is an especially promising and revolutionary technology because it helps reduce risk, stamps out fraud and brings transparency in a scalable way for myriad uses.
Blockchain technology achieves decentralized security and trust in several ways. To begin with, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain.
After a block has been added to the end of the blockchain, it is extremely difficult to go back and alter the contents of the block unless a majority of the network has reached a consensus to do so. That’s because each block contains its own hash, along with the hash of the block before it, as well as the previously mentioned timestamp.
Hash codes are created by a mathematical function that turns digital information into a string of numbers and letters. If that information is edited in any way, then the hash code changes as well.
Let’s say that a hacker, who also runs a node on a blockchain network, wants to alter a blockchain and steal cryptocurrency from everyone else. If they were to alter their own single copy, it would no longer align with everyone else’s copy. When everyone else cross-references their copies against each other, they would see this one copy stand out, and that hacker’s version of the chain would be cast away as illegitimate.
Succeeding with such a hack would require that the hacker simultaneously control and alter 51% or more of the copies of the blockchain so that their new copy becomes the majority copy and, thus, the agreed-upon chain. Such an attack would also require an immense amount of money and resources, as they would need to redo all of the blocks because they would now have different timestamps and hash codes.
The whole point of using a blockchain is to let people — in particular, people who don’t trust one another — share valuable data in a secure, tamperproof way.
Blockchain consists of three important concepts: blocks, nodes and miners.
As each transaction occurs, it is recorded as a “block” of data
Those transactions show the movement of an asset that can be tangible (a product) or intangible (intellectual). The data block can record the information of your choice: who, what, when, where, how much and even the condition — such as the temperature of a food shipment.
Each block is connected to the ones before and after it
These blocks form a chain of data as an asset moves from place to place or ownership changes hands. The blocks confirm the exact time and sequence of transactions, and the blocks link securely together to prevent any block from being altered or a block being inserted between two existing blocks.
Transactions are blocked together in an irreversible chain: a blockchain
Each additional block strengthens the verification of the previous block and hence the entire blockchain. This renders the blockchain tamper-evident, delivering the key strength of immutability. This removes the possibility of tampering by a malicious actor — and builds a ledger of transactions you and other network members can trust.
Every chain consists of multiple blocks and each block has three basic elements:
- The data in the block.
- A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash.
- The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).
When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.
Miners create new blocks on the chain through a process called mining.
In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.
Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the “golden nonce” and their block is added to the chain.
Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely difficult to manipulate blockchain technology. Think of it as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.
When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.
One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.
Combining public information with a system of checks-and-balances helps the blockchain maintain integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.
Imagine that a company owns a server farm with 10,000 computers used to maintain a database holding all of its client’s account information. This company owns a warehouse building that contains all of these computers under one roof and has full control of each of these computers and all of the information contained within them. This, however, provides a single point of failure.
What happens if the electricity at that location goes out? What if its Internet connection is severed? What if it burns to the ground? What if a bad actor erases everything with a single keystroke? In any case, the data is lost or corrupted.
What a blockchain does is to allow the data held in that database to be spread out among several network nodes at various locations. This not only creates redundancy but also maintains the fidelity of the data stored therein—if somebody tries to alter a record at one instance of the database, the other nodes would not be altered and thus would prevent a bad actor from doing so. If one user tampers with Bitcoin’s record of transactions, all other nodes would cross-reference each other and easily pinpoint the node with the incorrect information. This system helps to establish an exact and transparent order of events. This way, no single node within the network can alter information held within it.
Because of this, the information and history (such as of transactions of a cryptocurrency) are irreversible. Such a record could be a list of transactions (such as with a cryptocurrency), but it also is possible for a blockchain to hold a variety of other information like legal contracts, state identifications, or a company’s product inventory.
Because of the decentralized nature of Bitcoin’s blockchain, all transactions can be transparently viewed by either having a personal node or using blockchain explorers that allow anyone to see transactions occurring live. Each node has its own copy of the chain that gets updated as fresh blocks are confirmed and added. This means that if you wanted to, you could track Bitcoin wherever it goes.
For example, exchanges have been hacked in the past, where those who kept Bitcoin on the exchange lost everything. While the hacker may be entirely anonymous, the Bitcoins that they extracted are easily traceable. If the Bitcoins stolen in some of these hacks were to be moved or spent somewhere, it would be known.
Of course, the records stored in the Bitcoin blockchain (as well as most others) are encrypted.