What You Need To Know To Understand Blockchain Technology Part 1

Blockchains as ledgers.

 

If you were to ask five experts in the blockchain field the question of “what is blockchain?,” you would most likely get five different answers. This is in part what makes understanding blockchains and cryptocurrencies so complex: if even technology experts do not seem to have one answer, how can a non-expert get a clear picture about what is going on?

For this reason, it is better to take a look at blockchain as a combination of standalone technologies and understand these technologies on their own.

This series of articles will introduce you to four of such technologies: cryptography, blockchains (or storing data on immutable ledgers), decentralized peer-to-peer networks, and consensus algorithms. None of the cryptocurrencies in the world today would exist without even one out of the four technologies from the sentence above.

 

Blockchain

In essence, blockchain is a way to store data. Before Satoshi Nakamoto launched the Bitcoin network live in 2009, software developers could not figure out how to prevent users transacting in digital money from spending the money several times. This is known as the problem of double spending. The problem of double spending is when a user on a digital currency network sends funds to several parties at the same time, yet acts as if there only one party receiving the funds.

In plain language, digital money is data about transactions. Before Nakamoto, nobody could figure out how to prevent users from copying this data, in a similar way to how a user can email a digital picture to several parties at once. If you send a digital image to three parties, then who has the original?

In the past, banks were able to solve this issue with relying on trusted third parties to create the money and verify the transactions. A government would issue funds in its currency. Then, it would distribute the funds to the banks. Then, the money would eventually find its way to end customers. It is banks who keep records about the money and it is the government who controls the issuance of the money and the compliance of the banks with the laws of a country. The process is long, complex, and, therefore, very expensive. Another issue with this process that, as history shows, a government may decide to print more money, essentially changing the rules of the game, and nobody is able to do anything about it, because the government is too big. The same happened during the financial crisis of 2007 and 2008, when governments all over the world decided either to bail out or nationalize the banks that made a lot of bad decisions prior to the beginning of the crisis: the governments deemed the banks, insurance companies and other organizations to be “too big to fail” and nobody could do anything about that.

Satoshi Nakamoto solved the problem in a very elegant way: he decided to record all the transactions in a ledger. The word “all” does, indeed, mean “all.” This way, when a user A sends funds to a user B, the transaction immediately becomes a part of the ledger. If the user A would try and send the funds to user C, it would not work because the ledger already has a record about user A sending money to user B, which means that the digital wallet of user A does not have enough funds to send.

A digital blockchain is similar to a ledger, with pages of the ledger being blocks of the blockchain.

Just like a person could keep a record of all his or her transactions in a paper ledger, blockchain cryptocurrencies keep records of all the transactions that occur with a particular currency on a blockchain. In this analogy, pages in the ledger are similar to blocks of the blockchain. Just like a person would fill up a page and then move to the next page, blockchains fill up a block and then start working on a new block.

The difference is that the main criterion for the creation of the blocks of blockchains is time. If it were something else, for example, a certain number of transactions, then, if there were not enough people transacting, the creation of a blockchain block could take way too long for people to stay motivated to transact using cryptocurrency.

With blocks created during specific fixed intervals of time, people have confidence about how long it would take for a blockchain to make a record about their transaction.

The Bitcoin blockchain, for example, aims to create a block of its blockchain every 10 minutes. You can see how close it is to this objective as you are reading this article by visiting https://blockchain.info/ and checking the “age” column in the table on the top of the page. This column will show you the time that has elapsed since the creation of the blocks in the table. For example, if the numbers you see are 15 minutes, 24 minutes, 36 minutes, then it means that the Bitcoin network created its last block 15 minutes ago. It took the network 9 minutes (24 – 15) to create the block before that and 12 minutes (36 – 24) the block before that. When the network does create a new block, it will add it to the top of the table and adjust the ages of the blocks.

The Ethereum network originally strived to create a block of its blockchain every 12 seconds. This number was then raised to 15 seconds. You can see the historical chart of how long it has been taking the Ethereum network to create a block by visiting https://etherscan.io/chart/blocktime