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What Is Blockchain Technology? Basic Guide for Beginners

Alexandra is a long-time writer with a strong technology background and a genuine interest in bitcoin and blockchain technology.

A Brief History of the Blockchain

Even if you're not a crypto enthusiast you've probably heard the word "blockchain" at least once. Bitcoin was the first to employ blockchain technology starting with its launch in 2009.

Bitcoin is a cryptocurrency, in other words, a digital coin and the blockchain is the technology that powers it. Below, we'll discuss how Bitcoin and the blockchain work together which will, in turn, make it easy to understand how this technology can be applied in various real-world scenarios.

Back in 2009, Satoshi Nakamoto, an anonymous individual or group of people launched Bitcoin. They laid out the concept in a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System.”

Decentralized network

Decentralized network

What Is the Bitcoin Blockchain?

Bitcoin's blockchain is a public ledger that keeps a record of all transactions that have been performed. It is tamper-proof and for this reason, blockchain enthusiasts deem it safer than current transaction systems.

Bitcoin is decentralized, meaning there is no central authority controlling it. Right now, more than 17 million BTC are in circulation and the upper limit is 21 million (the max. amount of bitcoin to be created).

Interestingly, it is believed the first bitcoin transaction belonged to a programmer called Laszlo Hanyecz who ordered two Papa John's pizzas worth 10,000 bitcoin back in 2010.

As I already mentioned, Bitcoin's blockchain is "decentralized" which means there is no central authority controlling it. The currency is, in fact, maintained by a network of individuals, also called 'miners' or 'nodes'.

'Miners' are people running computers specifically built to solve complex mathematical equations required to validate transactions.

A Bitcoin transaction starts with the owner's wallet which is controlled by a "private key". The "private key" is a digital signature that offers mathematical proof that the transaction originated from the wallet's owner.

When multiple transactions occur on Bitcoin's network, they are grouped together into a block, sorted using strict cryptographic rules. The block is sent to bitcoin's network where the 'nodes' (aka. those hard-working computers) compete to solve complex mathematical puzzles to validate the transactions. The 'node' who solves the puzzle first is awarded in bitcoin. The validated block is added on top of the previous blocks creating a chain of blocks. That is what we call the blockchain.

“[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value…Lot’s of people will build businesses on top of that.”

— Eric Schmidt, Executive Chairman of Google

How Is the Blockchain Tamper-Proof?

The blockchain can't be tampered with, which ensures a high degree of security for all performed transactions but how is that achieved? Each block that gets added to the chain includes a hard, cryptographic reference to the preceding block.

In fact, that reference is part of the mathematical puzzle 'miners' need to solve in order to add the next block to the chain. Solving the puzzle also involves using a random number called the "nonce" (an arbitrary number that can be used only once). The nonce along with the rest of the data creates an encrypted digital fingerprint called the hash which secures the new block that will be added to the blockchain.

Each hash is one of a kind and must comply with specific cryptographic rules. If someone would theoretically want to tamper with this, they would need to re-mine the cryptographic puzzles for all previous blocks. Considering there are more than half a million blocks on Bitcoin's blockchain it's safe to say this is impossible.

Ripple cryptocurrency

Ripple cryptocurrency

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Examples of Other Blockchains

The Bitcoin blockchain might be the most popular one but it wasn't really designed to allow companies to develop apps and processes. However, there are other companies that developed blockchain platforms that would allow businesses to benefit from the technology with no need to build their own.

Ethereum and Ripple are some of the most notable examples. Ethereum's blockchain platform is specialized in smart contracts and ETH, the associated cryptocurrency is actually the second largest in the world by market cap, right after Bitcoin.

Just like Bitcoin, Ethereum's blockchain is public but it does something extra. It allows people and businesses to build apps using the platform, also known as "decentralized apps" (dapps). Smart contracts are also an important part of Ethereum's blockchain as they are scripts that execute automatically when a set of specific conditions is met from all involved parties. This dramatically reduces the risk of errors but also speeds up the process to a significant degree.

Ripple is another blockchain platform, one specifically designed for cross-border currency transactions. Using the current transaction systems, moving money between different countries has costly fees and long waiting times, mainly because multiple parties are involved. Ripple's blockchain system called xCurrent was designed to cut out some of these third-parties making it is possible to perform transactions in seconds and with much lower fees. Ripple's cryptocurrency XRP, is not mandatory to use its xCurrent product.

Who Is Trialing Blockchain Technology?

The banking industry has been particularly excited about the potential application of blockchain technology. In fact, several large banks have already begun to test it.

In the finance world, the blockchain could potentially lower costs and speed up various processes. You may see the blockchain called "distributed ledger technology" (DLT) in a financial context, to separate it from Bitcoin's blockchain.

Spanish bank BBVA tested the blockchain via a pilot project in which it issued a 75 million euro loan to a company called Indra using blockchain technology. Present loan issuing solutions involve multiple parties as well as contract versions and also require time. BBVA came up with their own blockchain-based solution that relies on smart contracts to reduce the required effort, cost, and time.

The loan was executed using an app developed by BBVA. Using the app, Indra would fill in all the details to request the loan. Then, BBVA would add their terms and so on, until both parties accepted all the parts of the loan agreement. Each step was registered on the blockchain, creating a ledger of activity. Once the loan agreement was suitable for both parties, the contract was executed and recorded on BBVA's private, internal blockchain.

Furthermore, BBVA also encrypted the contract and hosted it on Ethereum's blockchain even though it is not tied in any way to the ETH cryptocurrency.

Santander, a Spanish lending company launched a service called One Pay FX based on xCurrent, Ripple's blockchain product we discussed earlier.

Their service lets customers perform transactions between different currencies and countries such as Spain, Brazil, the U.K., and Poland. Banks communicate transaction data to one another through Ripple's xCurrent technology. Then, necessary verifications are performed in a pre-transaction phase. Finally, the funds are held across all banks and the transfer is performed.

The entire transaction is recorded on a distributed ledger system that allows the involved parties to verify all the details, including the customers.

Banks might consider blockchain technology as a potential answer to all their current transactional issues but there are other industries willing to give it a try.

For example, last year, Nasdaq in collaboration with Swedish bank SEB trialed a blockchain-based mutual fund trading platform. The giant stock exchange group also trialed blockchain to allow shareholders of listed Estonian firms to vote remotely.

Earlier this year, diamond producer De Beers started trialing blockchain technology to trace the stones from the mining location to delivering them to a jeweler. The blockchain can also be used to track ownership of high-value assets like property and fine art.

Final Words

Blockchain technology can be an amazing solution to secure transactions of all kinds, not just financial. However, it is also a secure and tamper-proof data recording system which means it can be applied to virtually any industry.

It will be exciting to see its future development and potential applications to solve critical real-world problems in key sectors such as health, finance, and, education among others.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2018 Alexandra Vasiliu

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