A blockchain system lies at the basis of all cryptocurrencies, allowing them to function in a decentralised way, without the oversight of a financial organisation, a software developer, or any kind of management. Broadly, it is a publicly available ledger system, which allows every user to verify transactions carried out within a particular platform. Additionally, depending on the cryptocurrency, the system may allow users to gain rewards through block verification or “mining”.
A chain of linked blocks
A blockchain is literally a chain of blocks, which are small units comprised of a number of transactions; in case of cryptocurrencies, often financial transactions or sets of smart contracts. Once completed, such a block goes into the permanent part of the blockchain, and a new open block is generated for new transactions and contracts.
This new block contains a “hash” of the old block, which is a link or function referring to this previous block: in this way, the blocks become a chain.
Safety and security
The blockchain exists so the transactions in the chain cannot be altered or deleted; the blocks are cryptographically locked, but additionally, the blockchain is also protected by the fact that it is stored on a great number of different computers at once. In a sense, it does not work very differently from publicly editable wiki sites, such as Wikipedia, where users can make edits which they become instantly visible on other users’ devices.
The difference, though, is that a blockchain functions without being controlled by a central administrator or team of administrators. Instead, the blockchain simply elects the most popular record of the blockchain, i. e. that which exists on most users’ devices, as the “official” chain, the most recent block of which will become parent block to the future chain. This prevents hackers from meddling with a blockchain; the chain will quite simply revert to the most commonly known block and cast out any anomalies.
Applications of blockchain technology
Blockchain technology is based on older principles connected to, for example, cryptography, but only became reality after the Bitcoin blockchain was theorised and then established by Bitcoin founder Satoshi Nakamoto in 2008. In this application of blockchain technology, financial transactions that use Bitcoin are registered in a public ledger verified by users and can thus take place without centralised authority and while keeping users’ funds safe from fraud. Additionally, the Bitcoin blockchain launched the concept of Bitcoin “mining”, whereby users who put their processing power at the disposal of the platform to verify and thus complete blocks receive a certain amount of BTC in reward for each block “mined”.
Since the conceptualisation of Bitcoin, however, other platforms such as Ethereum have picked up on blockchain technology for broader purposes than simply that of logging financial transactions. Ethereum, for example, uses the blockchain system to maintain the Ethereum Virtual Machine, which allows for the running of all numbers of applications in a decentralised manner. This includes not just the maintenance of cryptocurrencies, but also, for example, the distribution of new software, the safeguarding of voting results and private messages, and so forth. This multiplicity of functionalities is maintained through use of smart contracts.