Blockchain: The Basics
Updated: Apr 26, 2020
Blockchain is currently one of the most commonly misused buzzwords in the technical community. Blockchain is consistently tied to cryptocurrency because it is the easiest application of this technology for most people to understand. However, my entire goal of this post is to bifurcate blockchain and cryptocurrency. Conceptually, blockchain is the underlying technology that makes cryptocurrency possible; better said, cryptocurrency wouldn’t be possible without the blockchain technology, but neither would many other technical solutions. So let’s back up a little bit, what exactly is this underlying technology called blockchain, and why do we even care about it?
Christian Catalini, an Assistant Professor at MIT defines blockchain as, “At a high level, blockchain technology allows a network of computers to agree at regular intervals on the true state of a distributed ledger”. Cool, so you get blockchain now, right? If I were a betting man, and I am, I would probably say you would like a slightly more in-depth explanation than the definition provided by Catalini.
Let’s dive right in, but before we do, I want to make a slight adjustment to the quote above: “…state of a distributed, immutable ledger”. This slight adjustment here will really solidify the definition provided by Catalini.
Now let’s take a trip down memory lane, back to school, where we are given five million definitions at one time, and we are expected to remember all of them:
Transaction - A transfer of any object, whether physical or virtual, from one entity to another entity
Immutable - Cannot be changed
Ledger - A historical record of transactions
Node (used below) - A node is an individual piece of a larger system. A node is typically a server or a supercomputer, but it is possible for a node to become a personal computer or a phone in the future.
Luckily for you, you aren’t actually in school, and bookmarking this page will lead to the same result as taking notes. Using the definitions above, let’s put this in layman’s terms…
Essentially, the blockchain records all of the transactions, which are distributed to an immutable ledger across every node in the entire system. This means every node on the network must have exactly the same transactions recorded in their respective ledgers, which will provide many benefits.
The best way to learn something is to think about how it translates into familiar concepts. Let’s look at its most common application today: cryptocurrency. Consider a system of nodes in which there are four separate nodes (or people in our case): Ada, Phil, Jasmine, and Zach. Ada gives Jasmine $1, which then is recorded by every node in the system, so Ada, Phil, Jasmine, and Zach all record that Ada gave Jasmine $1 and this transaction will be recorded for the entire duration that every node in this system is running. The distribution of the ledger may seem superfluous at first, but it actually provides two crucial benefits: permanence and security. Permanence is crucial in the financial world because the transactions that are recorded can vary from very small amounts to massive transactions across a network. Fun fact: there are large transactions that occur all of the time, in fact, there was one that went across the network for almost $150 million! With the size of that transaction, it seems realistic that the two entities involved will want to maintain a record for as long as this system exists.
Security is the second aspect where blockchain technology absolutely excels solely because of the constant agreement all ledgers must have throughout the distributed network. The blockchain is built to be considered a zero-trust system, or a trustless system. Essentially, as described by Forbes, the blockchain does not selectively trust anything that is passed to it, from any entity or node. Every single interaction with the system is regarded as though it is not trusted, and the entirety of the system must verify any addition to the ledger. Quoting the Forbes article, “A simple analogy is guards at the entrance of a building. The traditional model is to mount guards at the gate who will keep out infiltrators, but the zero-trust framework mounts guards at the entrance of every door in the building to checkmate threats.” Security is one of the reasons that many financial institutions are incredibly interested in this technology; however, as the number of nodes in the network increase, the performance of the system decreases since the system must verify the transaction with every single node in the network.
I could talk for hours about this, and I have many times. However, I am going to keep this concise because I don’t want to overload the readers with too many ideas on the first technical post! If you would like to hear more about any specific area of blockchain, including the areas that I left out of this post, please post it below and I will attempt to answer! Again, I’d love to leave you with something for you to think about:
“The blockchain does one thing: It replaces third-party trust with mathematical proof that something happened.” - Adam Draper