What is Blockchain Technology?
Blockchain is quite a technical and complicated concept that allows people to still experience it as a topic to avoid. However, blockchain technology is a potentially revolutionary concept on which many or even all industries may run in about ten years, in short; it is useful to know how the technology actually works. Below an attempt is made to explain Blockchain as simply as possible.
The problem of digital money
Bitcoin was not the first digital money initiative. There have been several projects in the past to create a digital currency, but these have not proved successful. The major obstacle to be overcome turned out to be the so-called “double spending”, or the possibility to spend the same money again.
Imagine that the baker buys bread with a 2 euro coin. At the time of transfer, this coin disappears in the till. Now you cannot spend the same 2 euro coin again in another store. At the time of checkout, the cashier could immediately confirm that you had paid and you received a loaf of bread in exchange for your money.
However, Bitcoin is a digital currency and not cash. In short, Bitcoin transactions have the ability to be copied and re-spent.
In the example with the baker, you paid in cash, so the payment was immediately confirmed and verified by another person. Lack of this verification mechanism in the case of digital currencies such as Bitcoin can lead to double spend. Technically, anyone can then copy money digitally and spend it elsewhere.
This is exactly where the unique aspect of blockchain technology lies.
Bitcoin tackles the double spending problem by employing a confirmation mechanism and maintaining a universal ledger (called blockchain), similar to the traditional monetary system.
The Bitcoin blockchain maintains a chronologically ordered transaction book with timestamps from the very beginning of the operation in 2009.
A block (ie a group of transactions) is added to the ledger every 10 minutes. In addition, all nodes, also called “nodes”, on the Bitcoin network contain a copy of this ledger (the blockchain).
What would Bitcoin be without blockchain? Actually very little. The whole essence of Bitcoin as well as all other cryptocurrencies is decentralization, and the blockchain realizes this for the Bitcoin project. Decentralization means that transactions can take place without the intervention of a central authority such as a bank.
How does a blockchain work?
Imagine the following: Henk sends money to Anne, Anne in turn buys bread from Jan’s baker and sends the money to Jan to pay him.
To have a stable money system, it is necessary to keep track of where the money has gone and who has the money now. Within the conventional money system, a transaction goes from point A to point B with the intervention of a bank. The bank oversees and manages all transactions, as well as keeping all balance sheets.
What Satoshi Nakamoto (the founder of Bitcoin) has done to avoid the need for a central point is to organize the data on a blockchain that keeps decentralized records of where what amount is going to and who owns it now.
A blockchain works by collecting transactions. These collected transactions are then processed in a block with additional information (a so-called “hash” of both this block and the hash of the previous block, more on this later).
Then it is ensured that the new block refers to the previous block, which again contains transactions that have taken place just before in time.
When the new block refers to the previous block, and this is repeated with each successive block, you get a chain of blocks, or a blockchain. In this way it is ensured that you can see practically every transaction from the past in previous blocks. Yes, even the very first transaction ever to take place.
To go back to the example transaction from Anne to Jan:
The new block contains the payment for the bread from Anne to Jan. In the previous block, the same money is registered as a transaction from Henk to Anne.
In essence, a blockchain is a unique way of organizing data that tells us who sent money where and who now has the money without the intervention of a central authority such as a bank or other agency.