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It's rare for a day to go by without some bank, startup or financial firm jumping on board the blockchain hype train. Before we get too excited, however, we need to understand the basics of the blockchain.
A decentralized ledger
Bitcoin wiki defines a blockchain as, "a transaction database shared by all nodes participated in a system based on the bitcoin protocol."
If you were to look at the full copy of bitcoin's blockchain, you could see every transaction ever processed with the currency. This ensures that the network cannot be taken down easily. With nonblockchain servers, it is easy for one outage to affect the entire network. But with the blockchain, because anyone can copy all of the information onto a single node, the network can continue to run.
In the case of bitcoin, these transactions are confirmed and registered on the database by miners, who expend their processing power solving mathematical equations in order to confirm the transactions. These miners then gain bitcoin as a reward for being first to solve the equation. The more processing power, the more bitcoin earned.
A more secure solution
The blockchain essentially acts as a secure database that is managed by its users rather than by a single entity. This "distributed ledger" is a chronological system. Each block contains data from the block before it. This data is known as a hash.
The hash data means that, if someone wanted to try to double-spend bitcoins or virtual currency (or negate the transaction), they would need to modify a block contained that data and regenerate every block that was created after the transaction, a task made essentially impossible by the distributed ledger system.
Each blockchain has its own starting block known as the genesis block. Other blocks can branch out from the genesis block, if multiple transactions were to occur a split-seconds apart.
It is important to recognize that even though the blockchain is more secure than other databases, it is not inherently more private. For instance, with bitcoin, every block contains the bitcoin addresses of the users who made transactions on that block. This information can be used to trace individual blockchain participants.
Other blockchains on the market
Although bitcoin is the most widely known blockchain technology, other companies have crafted their own iterations of the blockchain for various purposes. According to the Ethereum website, that particular blockchain was designed specifically to:
create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (for instance, a will or a futures contract) and many other things that have not been invented yet, all without a middleman or counterparty risk.
Ethereum is often used to create smart contracts as it can automate this complex process and perform it more quickly.
The Enigma blockchain, a project by MIT alumni, combines secure multipart computation with blockchain technology. This platform is designed to keep data encrypted — even while it is in use — by employing a network of computers that store and process data without being able to see it.
Other blockchain projects deal with issues related to identity management, copyright, financial tools and more.
The core technology of bitcoin is taking off now as the next new and powerful technological tool in the fintech world and beyond. Are you ready for the ride?