What is Blockchain - everything you need to know for noobs

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So what exactly is blockchain?

In essence, blockchain is the underlying technology behind most, but not all, cryptocurrencies.

Even if you’re not familiar with blockchain, you will probably have heard of Bitcoin. Bitcoin is a peer-to-peer electronic cash system, also known as “cryptocurrency”, which basically allows people to make instant, anonymous transactions online. Bitcoin records every single transaction made on its network in a public record. This is known as the “blockchain”.

Who created blockchain?

Created by the entity known as Satoshi Nakamoto, blockchain was initially developed to solve the problem of double-spending in digital currency. Blockchain went on to be the basis for Bitcoin as it is an accurate, public ledger that doesn’t rely on central management and is virtually impregnable. It is gaining popularity for its potential in other applications and industries.

Blockchain’s collaborative maintenance means that it eliminates middlemen and creates a transparent ledger that ensures accuracy and reduces the chances of fraud. It does this by requiring validation from all holders of blockchain keys. It makes fraud almost impossible as every stakeholder must approve any addition to or alteration of the blockchain.

Why do I need to know about blockchain?

Blockchain is the future. It has the potential to transform everything from how we send money to how communities grow. The potential uses of the blockchain being explored include Anti-MoneyLaundering (AML), trade surveillance, smart contracts,collateral management, settlement and clearing, as well as the ability to capture historical and current ownership of high-value items.

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 In this short guide, we will explain what blockchain is in simple terms.

Blockchain: the technology behind cryptocurrency

To put it simply, blockchain is an open-source database technology. Essentially, people are able to move digital information (money, personal data, etc) securely. It is a decentralised network where no one person owns it. The most popular use for blockchain in recent years is cryptocurrency.

Blockchain explained in 3 simple steps

If you study the infographic above, you will see that there are essentially 3 simple steps in a blockchain, as follows:

Step 1: Someone requests a transaction

Let us say you (a “node”) have a file of transactions on your laptop (a “ledger“). Two government accountants ( “miners”) have the same file on theirs (so it’s “distributed”). When you make a transaction, your laptop pings an email to each accountant notifying them.

Step 2: Transaction broadcast

Each accountant rushes to be the first to check whether you can afford it (and be paid their salary “Bitcoins”).

Step 3: Transaction validated

The first to check and validate hits ‘reply all’, attaching their logic for verifying the transaction (“Proof of Work“). If the other accountant agrees, everyone updates their file.

What is cryptocurrency?

Cryptocurrency is basically digital money that uses encryption to regulate the generation of currency and verify the transfer of funds, independent of a central bank. The most popular cryptocurrency is Bitcoin.

Why do cryptocurrencies exist?

Different cryptocurrencies are designed for different purposes, as follows:

Digital cash coins, such as Bitcoin, are a cash alternative that is free from government or central bank control and may offer greater anonymity than conventional payment systems.
Payment infrastructure tokens, such as Ripple or Utility Settlement Coin, support a payment system for conventional currencies but with advantages in cost, speed or reliability.
Securities tokens, such as RMG, support peer-to-peer trading in an ownership stake of an asset such as gold or art.
Utility tokens, such as Filecoin, support trading of goods or services such as data storage or computing power.
General platform tokens, such as Ether, support a platform for the use of decentralized electronic peer-to-peer transactions for a variety of other needs.

The benefits of blockchain

security & transparency

The fact that there is no central database server which can be manipulated by hackers makes the technology very secure. However, decentralized storage is just one aspect which guarantees the security and transparency of blockchain. The information is bundled together in blocks that are linked together like the pearls in a necklace. An individual block contains not only the checksum for the previous block but also the checksum for the entire chain. All previous transactions are therefore documented in the blockchain – and individual items cannot be changed without this being noticed. The decentralized system and the permanently available transaction history make blockchain a highly secure technology which automatically wins trust.

revolutionising numerous different sectors

From the financial world to the energy sector, blockchain technology is helping to revolutionize numerous different sectors. This is also demonstrated by the large number of start-ups that are developing blockchain-based applications.

versatility

The fact that blockchain technology is so versatile is without doubt one of the reasons why the outlook is so promising.

One example is the music industry. Spotify, the market leader for music streaming is looking to capitalize on the new technology and purchased a blockchain start-up in April 2017. This will give composers and copyright holders greater certainty: thanks to blockchain, they can see at any time who plays their music how often. The musicians will then receive any fees due straight from users – record companies, music agencies or banks are no longer needed.

Another example is the food industry. Nestlé, Unilever, Tyson Foods and the IBM technology have joined together to explore how the blockchain can help monitor the food supply chain and improve the safety of these consumer products.

What does the future hold?

Thefuture of blockchain looks promising. The three most important roles a blockchain performs are as follows:

recording transactions
establishing identity
establishing contracts.

That it can perform these three functions almost instantly with complete accuracy makes it revolutionary and its potential endless. The list of potential applications is long and varied – currency transfers, supply chain management and medical records are just a few examples.

However, while blockchain has huge potential, there is currently a gap between the theoretical and the practical. Blockchain could theoretically turn the energy industry on its head with the sale and trade of renewable energy by private citizens, however, that kind of storage capability is still in the embryonic stages. As the reality catches up with the imagined, the true value of blockchain will become apparent.

For more information, news and analysis about all things blockchain and cryptocurrency visit Planet Blockchain.