A blockchain is a decentralized ledger that records all transactions that are visible on a public network. A blockchain’s architecture allows these transactions to be autonomous and immutable while using cryptography and a decentralized network design for security. Every transaction is permanently recorded to the blockchain and cannot be altered in any way.
The name blockchain largely refers to the structure of the technology. Blocks contain data that represents transactions, and when a block is created or “mined,” all the data contained in the block (several transactions) is added to the chain. Permanently. All ledgers are updated to recognize this new consensus. Blocks are then linked together to form a chain and can be referred to at any time, hence the name blockchain. We’ll go over the mining process in an upcoming lesson.
The Bitcoin blockchain was created to allow a network to coordinate and reach “consensus” on shared data. Blockchains were created to solve the problem of coordinating data with people around the world, who don’t necessarily know or trust each other, but would still like to transact in some capacity.
The first thing to keep in mind here is that Bitcoin, like any other public blockchains, is a truly peer-to-peer network. There is no Bitcoin Corporation, no Bitcoin president, nor a Bitcoin CEO; there is no one entity in control. When trying to visualize this process, it is helpful to keep the picture of nodes (computers) on a shared network, all running the same or compatible software.
Because a blockchain is designed as a distributed ledger, many computers (nodes) are connected to form a network. As previously mentioned, this structure is referred to as a decentralized or a peer-to-peer (P2P) network. If someone wants to hack the network, they must hijack the entire consensus process. The chances of this occurring are extremely low, which is a testament to the security inherent to blockchain technology.
WHAT MAKES A BLOCKCHAIN?
Blockchains have two primary security mechanisms: network structure and cryptography. In blockchain technology, cryptography is used extensively to sign data in order to prove that a transaction was approved by the owner of the funds. The decentralized structure of network eliminates any central points of failure. To compromise an open blockchain network, a hacker would have to control a majority of the nodes at the same time. This makes a network attack very expensive and impractical.
All transactions on a public blockchain, like Bitcoin, are viewable to anyone with an internet connection. Each transaction is assigned its own unique ID known as a transaction hash. These identifiers can be used to look up a public record of the transaction, also known as a transaction receipt. A transaction receipt includes the addresses involved, the amount transferred, a timestamp, transfer fees and more. All computers on the network have access to all transactions records, ensuring a high level of transparency. Because of the transparency provided, many institutions, including nonprofits, can use blockchains to instill confidence in their financial practices.
Once a block is confirmed, the data recorded to the blockchain cannot be removed or edited. Each block is stacked upon the previous block. The next block must have the preceding block’s hash in order to be added to the chain. This assures that the blockchain stays in chronological order, effectively making it tamper-proof.
Each computer running the blockchain’s software has a copy of all the information contained in that blockchain. Information isn’t processed through a central server, but is transmitted and verified by nodes in parts of the network. The network functions based on a set of rules that every client must follow exactly; if blocks are broadcast to the network and do not follow the validity rules, the block will be rejected. A blockchain's network is distributed, allowing for an egalitarian, peer-based network that can self-check
Every node on the Bitcoin network contributes to consensus, the process by which the data is agreed upon and becomes the truth on the network. However, certain nodes called miners play a very important role in this process. Nodes work together to verify the information being transmitted by other nodes without relying on a central bookkeeper. Each consensus mechanism has its own set of rules; it might help to think of them like sealing an envelope. Once all the messages (transactions) are inside, there is a set of rules that dictate who may seal the envelope (block) and under what conditions.