With so much information about Bitcoin and other digital currencies the word blockchain became well known around the world.
But this technology was not created exclusively to be used with the Bitcoin, it is the basis for all cryptocoins.
What is Blockchain
A blockchain is a technology that allows you to work with electronic transaction that are digitally signed to ensure authenticity and integrity, so the records can not be tampered.
What is NOT a Blockchain
Bitcoin or cryptocoins are not synonymous with blockchain.
These digital coins can use the technology of the blockchain but it is important not to make confusion with the terms.
Understanding the concepts
In this article I will talk about what blockchain is and how it works, but first it is necessary to understand a little of the theory of transactions that are performed by centralized institutions like banks.
So, read the article to the end to understand more about Blockchain
Traditional financial transaction
In a traditional money transfer transaction it is necessary to use an intermediary institution such as a bank that will generate a delay in the transfer and a reduction of the final value of money transferred due to the fees charged by the transaction.
It is very common to wait about 3 days for a oversea transfer to complete and is also necessary to pay transaction fees and taxes.
Transactions of this kind also involve rules that vary from bank to bank and has a total dependence on people and documentation.
A very important part in this process is the recording of the transactions in an electronic accounting book, also known as a ledger that is managed by a software that store information on a database.
In this traditional format the ledger is centralized by the banking, on a proprietary server and therefore the ledger is not publicly opened.
Ideal financial transaction
Now imagine a situation where the money can be directly transferred without an intermediary. Certainly this reduces the time of the transfer and the expenses involved with the transaction.
But wait, in these types of direct transactions where is the ledger? There's no accounting record of transactions between the parties?
Yes, there are transaction records, but they do not need to be centralized by an institution such as a bank, the ledger can use a distributed model where everyone has a copy of the information.
See in the example below, that the centralized ledger is no longer used.
This model takes control of the transactions and there's no intermediary, therefore, accelerating the process and reducing costs.
Possible problems with this model
OK, we have the distributed ledger now and there's no more centralization. But what are the possible problems of this model?
The blockchain technology as a solution
In the distributed model we have a chain of information, hence the name Blockchain which is the junction of two other words: "Block + Chain", the information is placed into blocks that are interconnected with each other forming the blockchain.
The idea of using this model is to include the blocks with the information inside the chain and each of these blocks must be verified and validated to be accepted as part of the blockchain.
Example of a transaction in the blockchain
As an example of using the blockchain, let's (A) wants to make a $10 transfer to (C).
The following events will occur:
Computers that validate transactions are called "miners" and for accomplish this validation task they earn a reward in Bitcoins.
* In this example I am assuming that the A, B, C, and D are miners who can participate in the competition process to validate the transaction and place it into the ledger.
Keep in mind that it is not necessary for everyone to be miners.
Validation of the transaction in the blockchain
As in our example the 4 participants are miners, any of them can earn the right to put the transaction into the ledger and win the reward in bitcoins, any of them just need to win the competition.
To win this competition two things must occur:
1. Validate the transaction
This means that it is necessary to find out if (A) has sufficient funds to make the transfer of $10 to (C)
2. Find the key
A special key (sequence of numbers) must be found to allow the "miner" to attach the new transaction to the previous one.
This process of finding the key demands a lot of processing and time because the search for it is random, and the computer should search for the number that matches the other part.
Updating the ledger in the blockchain
The "miner" that found the correct key and validated the transaction publishes the information on the network and all other miners will update the ledger.
Now everyone on the network has the ledger updated and they know everything about the transactions carried out inside the blockchain. So it is a totally transparent process because the information is publicly accessible.
On the website blockchain.info you can view the transactions in real time as shown in the image below, anyone can have access.
By visiting the site you may notice that there are thousands of transactions occurring daily, it is a really impressive number.
Peer to Peer connection (P2P)
The blockchain works with the concept of peer-to-peer communication, where each computer in the network (called the node) can communicate with the others forming an independent network.
New messages that enter the network are distributed between nodes and it is not known where they originate since they are encrypted and private.
Advantages of the blockchain
In this article I used examples of blockchain as a means to make financial transactions using digital currency which in turn uses ledgers to record the transactions.
The ledger that contains all the records is open and public, everyone can see what is happening, so there is no corruption.
Another interesting feature related to transparency is that the blockchain is an open technology that can be evaluated and improved by developers around the world.
Because it is a fully distributed system, there is no dependency on a centralized institution and therefore there are no bureaucratic ties.
A blockchain-based system is very safe because it is based on validations, encryption, and high distributed computing power.
Each new block that is added to the chain is digitally signed using a hash algorithm. The signature contains the number of the current block and the next block in addition to the date that was signed.
Due to the fact that there is a point-to-point communication between the different nodes of the network, the blockchain becomes totally redundant. If any of the computers (miners) fail, the others will continue the work of validating the information that enters the ledger.
Projects using blockchain
There are different projects that are using blockchain technology to implement ways of work with transactions, see examples:
This is the most interesting example of using blockchain technology. Bitcoin is a digital currency that was created in 2008 and implemented in 2009 with the intention of decentralization that aims to facilitate the financial transactions and payments without intermediary.
To learn more read the article: What is Bitcoin
An intelligent and decentralized platform created by Vitalik Buterin that allows the digital signature of contracts. Ethereum also uses blockchain technology for distributed and secure processing.
The future of the blockchain
This technology has caused a real revolution in the way financial transactions can be carried out and is being studied by banks and institutions that want to use the power of the blockchain.
Banks are likely to use a version of the blockchain to conduct financial transactions in a distributed and secure manner.
Blockchain is a technology that is revolutionizing the way transactions are processed allowing total decentralization.
Digital currencies (cryptocoins) and smart contracts are examples of technologies that use blockchain and every year new projects emerge that aim to take advantage of this power of processing and decentralization.
Bitcoin brought fame to the concept of blockchain technology however it should not be used as a synonym of blockchain.
Traditional financial institutions do not want to be left behind and are seriously studying a way to implement the blockchain in their payments and transfer systems.
Books and stuff about Bitcoin
There are books of experts in the area of cryptocurrency. If you want to understand more about bitcoin it is worth checking the links below: