What is Blockchain?

What is a Blockchain? A blockchain is a concept that is difficult for many people to understand possibly because it is new concept and quite different to the way people understand databases, financial transactions and records (a ledger is a balanced record of transactions performed). Firstly a blockchain is a chain of blocks of data. The data is like a ledger but in computer language.

A good analogy of a blockchain is like a book with each block being a page. The pages run in sequence and are connected by the end and beginning words on each page. This makes up the book. One can liken each page to being a block on the chain with each block connected to the previous block by the end and beginning code in the block. Now the decentralization part is the genius of this. Whereas a book once printed is not updated and, importantly, not added to subsequently, a block chain can be. It’s like adding a page to the end of the book and this page added simultaneously to all the copies of the book all at once at the same time. That is basically how block chain works. The book just gets longer and longer each time a page is added and that is a permanent record with everyone’s copy of the book growing at the same time.

The decentralization part is the fact that there are untold copies of the book spread around but the important thing is that each time a ‘page’ is added to the book it is done immediately in every copy owned anywhere. With this in mind let’s look at the individual pages and their contents.

Each page, then, is a block. It contains a reference to the preceding block and a time stamp. It also contains data such as hashes. A hash, in computer terms, is like a number that represent something else. A hash is used to verify data and also reduce the amount of space used. Often data or a string of numbers or words takes up a lot of space and are duplicated many times. By using a hash one can reduce the space as well as verify the data. Hash is used a lot in a block. The time and date of each block is contained within the block. As it has been duplicated on millions of computers it is impossible to alter or change that time as if one did in that block it would be in conflict with the rest of the copies of that block and so would be rejected. This makes the blockchain secure and not subject to fraudulent interference. Records of Public keys are also contained within blocks. Blocks are of a certain size and when the capacity of the block is reached a new block is created with references to the previous block so adding to the chain with a block created about every ten minutes. Remember that every time a block is created it is simultaneously recorded on every copy of the blockchain.

One of the differences between the ledger system in block chain and banks is that when you pay money into your account or through the bank to another individual that actual money disappears into the bank system and you have simply a ledger record. If you go to the bank and pay in a twenty dollar note and the next day you went to the bank to withdraw a twenty dollar note you would not necessarily get that same twenty dollar note. Money is considered equal and you would, instead, get a different twenty dollar note. Not so in bitcoin. Every transaction considers a deposit as an input and a spend as an output.

Sometimes there is a fork. This is not something you eat with but is where the blockchain will split into two. That split is time stamped and so applies only from the moment of the split. Bitcoin has had a fork more than once. A fork is basically an agreed change in the software used to record the currency such as bitcoin. A fork can be temporary or permanent. The fork occurs from an agreed upon time and results in two different versions of the block chain from that moment on. There are two types of fork, hard and soft.

The hard fork is a software upgrade to the block that will introduce new rules or governance to the network but is not compatible with the earlier software. Doubling the size of the block is an example of this. Nodes (or computers) that continue to run the previous software version will see that new version as invalid so for all of the nodes to switch to the new chain there must be a consensus among the administrators or miners if you will, of the blockchain. Sometimes there can be disagreement among the miners where some might prefer to adhere to the original chain while others prefer the new chain. This results in a new currency and two separate block chains. Bitcoin Cash and Bitcoin Gold were created this way. The new currency is given a new name and goes its separate way and you effectively have another currency.

A soft fork is somewhat different in that it is backwards compatible. A change in the block size, for example is still seen by the nodes that have not upgraded and accepted, Any non-upgraded nodes however cannot create blocks acceptable by the upgraded nodes and will be rejected. This has the potential of creating orphan blockchains and this has happened in the past. Sometimes it can also splinter off like a hard fork, however soft forks are the preferred method of upgrading the blockchain as they represent a lesser risk of splitting the network. Some previous successful soft forks include software upgrades dealing with signature verification and bitcoin address formatting. Doubtless there will be others in the future.

A potential future activity in this arena is the User-activated soft fork. Generally speaking upgrades are initiated by administrators and developers of the network. In a user-activated soft fork someone else designs an upgrade that is not supported by the network. In this scenario the concept is that instead of waiting for miner’s approval, the power to start a soft fork goes to the exchanges, wallets and businesses that are running the network. However this would need the majority of exchanges to approve this before it could be written up and that plus the time it would take to write up the code means it could take years and so is somewhat unlikely due to the time and expense that would be required. In addition if the majority of the miners did not approve and rejected it that could result in a hard fork.

That gives you a basic outline of what a blockchain is. Technically it is a combination of some earlier technology plus some new technology that will result in a game change for the finance industry that seems very much here to stay.

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