You probably heard the following statement hundreds of times already on mainstream media: Bitcoin may not be worthwhile but its underlying technology, the blockchain, definitely is.
You may also have heard the expression Distributed Ledger Technology or DLT on your crypto adventure. Many bankers use it and many talk about how it can disrupt our world, therefore this DLT must mean something right? Indeed, it is but don’t get it twisted: the Distributed Ledger Technology is just a fancy rebrand of the blockchain term used by bankers to detach themselves from the ‘evil’ Bitcoin world.
Everyone is aware of the blockchain’s potential, from the so-called anarchist and libertarians to the more traditional bankers and CEOs. But what is this blockchain exactly? Is it like a database? Is it like a ledger? Yes and… actually yes, but it’s also much, much more than that. And to understand it, all you have to do is read the next paragraphs. Don’t worry though: this won’t take long. Plus you won’t have to be an IT geek to understand what you’re about to read. We at CryptoHQ will make sure to explain this disruptive technology in plain English, no specialized over-the-top IT slang or lingo involved.
Blockchain As A Database
To start things off, let’s compare the blockchain with something we are all familiar with nowadays: a database.
The database structure is omnipresent in the modern world, on our desktop or laptop, on our smartphone or tablet. The game you play or the programs you are running daily contain many databases, even the site you are currently on, CryptoHQ is one big database.
But what is a database? The term is so widely-spread that many can’t quite get an actual sense of its meaning. Well, a database is nothing more organized data. Pieces of data structured and sorted in a certain way for efficiency purposes.
Think of Facebook for example. According to Wikipedia, as of June 2017, Facebook has about 2 billion active users worldwide. Each of those 2 billion posts, comments, shares, likes, and so on. Such activity in simple terms creates data that must be structured and stored somewhere so it can’t just disappear. The user must have a history of his or her activity on the platform, right? That’s why such data is organized into many databases that are stored on the Facebook servers.
There is a problem though: because of the centralized structure, the servers are quite vulnerable. These computers that store Facebook data are ‘bundled’ together in one single place. Therefore, if a group wants to attack the platform, they can focus all their resources and efforts on that single place, where the servers are located. That creates the Single Point of Failure or SPOF problem: if they succeed to harm the servers, the ‘network’ will stop functioning and 2 billion users worldwide won’t be able to use Facebook.
While the blockchain is a database, it is fundamentally different from Facebook or some other centralized system vulnerable to SPOF. In the blockchain’s case, the organized pieces of data are spread out within a network.
Bitcoin, for example, has no actual central servers where the blockchain is stored. The database is stored among the network’s peers that happen to be spread from Canada, Northern Europe, and Russia to South Africa, Australia, and New Zealand. In other words, the database is shared all around the world. If a group of hackers decides to attack the Bitcoin network, they can’t virtually put it down. Why? Because the network doesn’t have the SPOF problem, the group would have to attack ALL nodes who store the database from Canada, Northern Europe, and Russia to South Africa, Australia, and New Zealand.
That is why you often heard and will continue to hear Bitcoin is hack-proof. No attacker can put the network offline. The Bitcoin blockchain isn’t in a single place, it’s distributed everywhere around the world.
Blockchain As A (Distributed) Ledger
What about the ledger part then?
We all know by now Bitcoin and many other cryptocurrencies are a form of money. If you don’t, then it’s about time you start reading What is Bitcoin?
The data that has to be organized and stored is financial in nature. In the real world, how is financial data registered? You are right, in a ledger. We use a ledger to keep track of our spendings.
That is why the blockchain was invented in the first place. To get rid of the trusted third party – bank, mint – Satoshi Nakamoto thought of a unique system in which all Bitcoin transactions are stored in a database. This database or ledger – it is a history of transactions after all – would also solve the double-spending problem aka spending the same coin twice. The ledger would act as a validator as one could go all the way back to the very first transaction to see if a double-spend actually happened. No ‘trusted’ third-party intervention.
The ledger would be distributed across a network so if one node acted in a malicious manner trying to change the ledger, the ‘honest’ majority would intervene immediately. The integrity of the distributed ledger would be ‘untouched – as long as 51% or more of the participants are actually ‘honest’ of course.
Important to mention is that Ethereum was built the same way. Its underlying technology is a blockchain, a shared database, a distributed ledger of transactions. The developers only changed the perspective one can have when looking at any given transaction to make the technology even more functional than Bitcoin.
Why The Blockchain?
Ok, the blockchain is a database, a ledger distributed across the network, you might say, but why blockchain and not DLT? Why does this term actually mean? Why ‘block’ and why ‘chain’?
Databases are all about functionality and efficiency, so, Nakamoto applied the same principles to his/her/their creation. The creator(s) decided to organize transactions and bundle them together into ‘blocks’ which can contain from several to hundreds of transactions. Each block would be added to the database every approximately 10 minutes. Of course, for other cryptocurrencies like Ethereum, there is even a tighter window when transactions can be stored together into a block.
Most importantly, using some clever cryptographic engineering, Nakamoto linked the blocks together like in a chain: every 10 minutes, a block is added at the end of the chain, linking itself to the previous block. Again, this is done using some complicated cryptography using HASHES, HASH pointers, and the Merkle tree.
The basic idea behind all these terms is this: if one wanted to change a transaction in a block at a certain time in the past, he would have to overwrite all the blockchain before the particular block because of this inter-connectivity. And that wouldn’t be possible since the first block in the chain called the Genesis Block is hard-coded aka it cannot be changed without modifying the very foundation of Bitcoin.
Thus, the blockchain is immutable: once a transaction is added, that transaction cannot be overwritten – changed or canceled – anymore.
Working The Blockchain One Step At A Time
Having explained the term and the idea behind it, let’s also briefly discuss how the blockchain actually works. How are the blocks of transactions added to this distributed ledger? And how are the transactions added to a block in the first place?
Step 1: You make a Bitcoin payment to an online store. The transaction is broadcasted on the network.
Step 2: Some of the participants working at maintaining the network hear your transaction and spread ‘the news’ to other participants who weren’t listening in a process called transaction propagation or flooding. This way, your transaction reaches the vast majority of the nodes.
Step 3: Specialized participants called miners take your transaction and bundle it together with other transactions while trying to solve a cryptographic puzzle.
Step 4: If one of the miners who heard your transaction solves the puzzle, your transaction will be added in the blockchain. That’s ONE CONFIRMATION (the block with your transaction is in the blockchain)
Step 5: To avoid malicious behavior, the online store would need THREE to SIX confirmations before releasing the product you are trying to buy. So, two confirmations mean another block was added after the block with your transaction. Three confirmations mean two blocks have just been added and so on.
Step 6: The transaction is confirmed and you get the product you bought with Bitcoins.
Why does the vendor need confirmations? Based on consensus!
In the perfect network, there would be only one version of the blockchain. However, in the real Bitcoin world, because of various problems (network connection, delays), there are quite a few versions of the blockchain, each showing a fairly different reality. But what’s unanimous Bitcoin reality, the one we can see with our naked eye? The longest chain with the most blocks as established by general consensus. That is why a vendor or an exchange needs more than one confirmations to accept your payment. The vendor or the exchange need to be sure the transaction is on the longest chain aka the unanimous Bitcoin reality.
Why Is The Blockchain A Disruptive Technology?
After all this intensive reading, you are probably wondering by now why is this disruptive for the tech world. Aren’t databases enough? Or banks?
Well, not really. In the first part of this article, we already discussed the limits of centralized databases and servers. A blockchain is hackproof because an attacker needs way too many resources to successfully harm it, it cannot focus on one single location anymore. To put the Bitcoin blockchain offline, for example, he or she needs to attack all nodes simultaneously, nodes localized all around the world.
Moreover, many say the blockchain is much more efficient than the traditional technologies. The DLT is faster – instant almost – and cheaper. But is it? At the time of this article, we aren’t quite sure. Yes, there are many pilots around the world trying to shift their perspective to the blockchain, YET the recent Bitcoin, Ethereum – and NOT only – scaling problems showed us this is not the case… at least for the time being. Different technologies are being developed all around the world to make the blockchain cheaper and faster, but these technologies are still in the testing phase.
We can say however the blockchain can solve the trust issues ever-present on a variety of niches and industries. This technology is trustless as you don’t have to trust the other party to make a transaction. All you have to do is trust the code and the process who more often than not acts like a trustless escrow – see smart contracts for example.
Last but not least, privacy is key in a blockchain-type structure and is more often than not a necessity in the financial world. Using cryptography and some other clever techniques, one can hide information that otherwise would put a party at risk. Also, cryptography can be a very reliable solution to validate certain information – NOT only transactions – faster and in a more secure manner.
Hopefully, you all understood this new disruptive technology. Worth mentioning: we left a few details out just to make it simpler for you. To deeply understand the blockchain, you would need programming and cryptographic skills. For starters, however, the information you’ve just read is more than enough.
Don’t worry though, if you are still lost, we’ve got the perfect summary for you: