Blockchain Basics: The Technology And Mechanics Behind It

In a world of convenience and light speed efficiency, transactions occur every second. Consumers now have the convenience and power to make transactions with their tablets, phones, watches, and other forms of technology. Traditionally, when a transaction occurs, each participant has his own ledger, a book, or collection of other financial accounts. With an abundance of ledgers, risks arise such as error, fraud, lack of transparency, and other inefficiencies.

Technology solutions continue to evolve and become more secure, and traditional transaction methods are taking on a new life. Now systems such as blockchain paint a more transparent picture of transactions and reduce the potential liabilities associated with multiple ledgers. Blockchain technology is regarded as a modern game changer. Bob Greifield, Chief Executive of NASDAQ, believes, 'Blockchain technology continues to redefine not only how the exchange sector operates, but the global financial economy as a whole.'

But the question remains: What is blockchain?

Envision a spreadsheet of a continuously growing list of data records and transaction histories with highly structural security measures in place. The data is constantly being updated and monitored and it is spread out over a network of millions of computer, making it always readily accessible.

The blockchain system’s intrinsic qualities make it more secure than traditional databases because it is a single ledger. This is significant because when recording transactions, the history cannot be altered or misplaced and is stored all together. Additionally, the single ledger is able to accept transaction entries from all parties connected to the network.

When a transaction is made, a request is sent to the blockchain network, which is made up of a large number of computer servers. The technical terminology for a computer server connected to the blockchain network is a node. The node (computers connected to the blockchain network that receive, process, and record transactions) receives a copy of the transaction request, which must be validated before it is added to the ledger. All parties involved in the transaction must give their consent before it is validated and added to the ledger. The nodes use a series of algorithms to verify the status of both the transaction requester and receiver before validating the request.

Once the validation process is complete, the transaction request transforms into a verified transaction. The verified transaction creates a new block of data and is added to the blockchain ledger where it links to previous transactions (blocks). Each transaction entry is referred to as a block. As blocks are created and added to the ledger, all of the nodes (computers connected to the network) have the ability to see the stored transaction data history. The continuous additions of transaction entries link together and create a chain of entries: hence, the significance behind the technology’s name –blockchain.

Although this process may initially seem complex, it is highly streamlined and efficient because the servers in the system are programmed with algorithms that allow the validation processes to occur rapidly and accurately. Similar to operating a car or using the Internet, it is not necessary to understand the in-depth mechanics behind blockchain in order to use it. But, having a basic understanding of the technology will highlight why its properties are revolutionary and the reasons why so many industries are beginning to adopt it.

Additionally, the blockchain is transparent. Blockchain technology offers a strong source of security because the system is decentralized. The information held on a blockchain exists as a shared and continuously updated database. The blockchain database isn’t stored in any single location or on any single computer. The dispersion of data is significant because the records the blockchain stores are public and verifiable. The data is also accessible to anyone on the Internet because it is simultaneously hosted by millions of servers.There is not a designated central authority or control approving transactions and creating a system of rules. The database is also inherently secure because the records recorded are both immutable and irreversible. Posts to the ledger cannot be revised or altered – not even by the operators of the database, creating a more sophisticated standard of transparency.

More importantly, the system is trusted. The nature of the system distributes the network over a vast number of computer servers, which allows transactions to occur between unknown parties. Hackers do not have the ability to corrupt the system because no centralized version of this information exists to hack. Additionally, the algorithm coded into the nodes is written so that conflicting or double transactions cannot occur in the ledger. The blockchain system solves two major challenges for digital transactions: It simultaneously controls the information in a hyper-secure environment and avoids duplication.

Blockchain allows digital information to be distributed and accessed, but never replicated. The technology has created a more efficient, transparent solution to transactions, and the potential uses for the technology are vast and expansive. As the understanding of this system has grown over time, so has its adoption.