What is Blockchain?
A blockchain is a database – a system of storing and retrieving information. Unlike other databases, though, this one does not have one or more all-powerful administrators. It is a community-run database, with participants collectively maintaining the integrity of its contents.
Blockchain is the technology on which Bitcoin and all other cryptocurrencies are built. You have likely seen it described as a ‘shared ledger’, or ‘distributed ledger technology’ (DLT), but there are few descriptions that get to the heart of it in a simple and accessible way. That’s partly because it’s extremely complicated under the surface – there’s a lot going on behind the scenes. But equally, you don’t need to know exactly how your computer works to use it to surf the web and do your accounts.
Ultimately, a blockchain is a database: an application for storing and retrieving information. (The phrase ‘The Blockchain’ is often used in the same was as ‘The Cloud’ is for cloud storage; there are many blockchains, each with their own currency and/or applications, just as there are many cloud services with their own data centres.) Specifically, it’s a community-run database. Unlike a regular database, of the kind used by web services like Facebook to store your information, or banks to keep your account details, a blockchain has no central administrator. Typically this person or group would have access to everyone’s information, and would be able to update or even delete accounts if they wanted to. That’s not the case with blockchain and cryptocurrency.
No single owner
With a blockchain, there is no administrator with rights over the whole database. Instead, each user has access to their own account, and only their own account, and can only add information to it – not delete anything. All of the community’s active members – the nodes who maintain the blockchain database – enforce this collectively. Every node keeps a full record of the blockchain, which includes every transaction ever made. These nodes can constantly check the state of other node’s records, to see whether their version of the database agrees with everyone else’s.
You can only update information to do with an account (or ‘address’, as they’re known) if you have the correct password. This ‘password’ in reality is a long string of characters known as a private key. It is so complex that it is impossible for even the most powerful computers in the world to guess it, even given billions of years. If you have the private key, you can submit an instruction to move funds to another address. That instruction is collectively policed by the whole network. If you genuinely have the funds, it will be approved. If you try to send more than you own, it will be ignored.
‘Mining’ is the name given to the process by which transactions are verified and the security of the blockchain maintained. It is the work of miners to guarantee that you and only you can move the funds registered to your address. They are, collectively and in their tens of thousands, the administrators of the database – and they need to agree in order approve or deny a request.
Miners are kept honest by means of powerful economic incentives. Miners all compete to receive a reward of new bitcoins that are created every time a set of new transactions (a ‘block’) is added to the blockchain. Miners dedicate huge processing power to this task of competing for rewards, carrying out trillions of complex mathematical operations per second. This entails significant costs in specialist hardware and electricity.
Assuming a miner acts honestly and seeks to uphold the integrity of the blockchain, then sooner or later they will receive a share of these rewards. But if they try to change the blockchain for their own benefit, for example by trying to add bitcoins to their own balance fraudulently, then all of the other miners in the network will see this and will jointly discard that fraudulent transaction – meaning the dishonest miner has not only passed up the rewards available to honest miners but wasted the resources spent trying to cheat the system.
Each individual miner is therefore kept honest by all the other miners. The only way one could successfully cheat is to have more processing power than the rest of the network put together – something known as a ‘51% attack’. In practice, for a network as large and active as Bitcoin’s, the costs of acquiring this processing power would be astronomically high and not worth the effort.
Because Bitcoin is open source and has no centralised administration, anyone can join the network, anyone can use it to send or receive bitcoins and anyone can become a miner.
Finally, because entries can only be added to the blockchain, not removed (even by the owner of the account), all information is permanently stored on the shared record. There is no central authority to block or cancel a transfer, so all cryptocurrency transactions are irreversible.