What is a blockchain?
Blockchain technology was invented in 1991 to timestamp digital documents, but not much use came from it until it was adapted in 2009 by Satoshi Nakamoto to create Bitcoin.
As the name implies, a blockchain is a series of blocks containing information used as a distributed ledger by everyone. Each block is made up of three main components: 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?
Block hashes are calculated unique cryptographic codes used to identify a block and its contents. They are useful to detect any changes to a block, meaning the block will no longer be the same if the block hash is changed. 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 is made up of blocks containing data, its own block hash, and the block hash of the previous block. The first block does not have a previous hash, therefore it is known as the “genesis block”. Now that the structure of a blockchain is established, you may be wondering how reliable the supporting technology truly is.
How secure is blockchain technology?
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. In theory, if someone tampers with one of the blocks in a blockchain and the hashes change, this means all the following blocks are no longer valid.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.
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.
An additional way blockchains secure themselves is by being distributed. 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.
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. A smart contract can be applied to the blockchain stating the terms and goals of the small business. If the goal is not met, funds can quickly be reimbursed to the investors.
Although the structure and function of a blockchain are as secure as it gets, it does not mean some people use it to their advantage. As being part of a network that is open to anyone, be aware you could fall victim to scams or phishing. Much like with traditional currencies and credit cards, it is always advised to 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 guarantee tampering 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.