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Blockchain Explained

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If you have spent time researching digital currency, you’ve come across the term “blockchain” more times than you can count. What exactly is a blockchain? Here are the ins and outs of blockchain technology; let’s see how it works and how safe it is.

What is a blockchain?

Established in 1991, blockchain technology only timestamped digital documents. In 2009 Satoshi Nakamoto adapted blockchain technology to create Bitcoin.  

As the name implies, a blockchain is a series of blocks containing information used as a distributed ledger by everyone. Three main components make up a block: data, a block hash, and the block hash of the previous block. The data stored in a block depends on the type of blockchain. For example, Bitcoin stores transaction details like the sender, receiver, and amount of coins.

How does blockchain technology work?

Calculating unique cryptographic codes; they detect any changes to a block, meaning the block will not be the same if the block hash changes. Each block also contains the hash of the previous block in the chain; this is what primarily makes a blockchain secure. 

As you see in the diagram above, the blockchain contains; data, its own block hash, and the block hash of the previous block. The “genesis block” is the first block and does not have a previous hash. How reliable is the supporting technology? 

How secure is blockchain technology? 

Hashes

Some key components ensure moving funds across a blockchain is safe. As mentioned before, the first component is hashes – cryptographic codes calculated for each block, and they help ensure safety. If someone tampers with one of the blocks and the hashes change, all the following blocks are no longer valid. As computers calculate hundreds of thousands of hashes a second, someone could hypothetically succeed at recalculating all the hashes of the other blocks and make them valid again. 

Proof-Of-Work

To avoid this from happening, the next layer of safety is proof-of-work. Proof-of-work is an implementation that slows down the development of new blocks, which means recalculating all the blocks is too time-consuming to go un-flagged by the peer-to-peer (P2P) network.

Peer-To-Peer Network

Distributing blockchains secure them. Instead of using a central entity, blockchains use a peer-to-peer (P2P) network and anyone is free to join. This means when someone joins the network, they get the full copy of the blockchain and this can be used to verify that everything is up to par. If a new block is added to the blockchain, each copy verifies the block to make sure it has not been tampered with and if it checks out it is added to the blockchain. This agreement creates consensus and any block that has been tampered with will be rejected by other copies. 

Smart Contracts

When it comes to moving funds between peers through the blockchain without being backed or tampered with, a smart contract can be applied. A smart contract is a guarantee that is immutable and distributed. This means once a contract is created, it can’t ever be changed and the output of a contract is validated by everyone in the network – therefore a single person can’t force the contract to release funds. 

To understand how a smart contract could be implemented, imagine a small business looking for investors. Applied to the blockchain are the terms and goals of the small business. If the goal is not met, funds can quickly be reimbursed to the investors. 

Staying Safe

Although the structure of a blockchain is as secure as it gets, it does not mean some people take advantage. As being part of a network that is open to anyone, be aware you could fall victim to scams or phishing. Keep your information private and never allow a stranger or unknown entity to access your wallet or offer you free crypto, whether it’s through surveys, airdrops, or token trades. 

Now that we have gone through the layers that guaranteeing to tamper with the blockchain is essentially impossible, you can rest assured that there is no threat when it comes to adopting and using cryptocurrencies regarding the structure and functionality of blockchain technology. 

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ForumPay does not disclose financial advice. Anything shared is strictly to inform, entertain, or share thoughts and ideas. Please seek a registered financial advisor if you are looking for financial advice.

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