Trading Blog | 5 min read
What is Blockchain Technology? Everything you need to know about the Blockchain
When it comes to trading, it is essential that you understand as much about what you are trading as possible. If you want to trade Cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH) you need to undertsnad what the Blockchain is first.
Written by Starttrading.com
Ever since the 2017 Bitcoin craze, a large amount of new buzzwords have become popularised to the mainstream with one of them being Blockchain. This term is often confused as a synonym to Bitcoin, but today I am going make it clear to you as a reader exactly what Blockchain, better known as Blockchain Technology, truly is.
This article will start off with a very brief history on blockchain technology and then discuss broadly what Blockchain is and the main, but vast, benefits to society.
Brief History of Blockchain Technology
In order to fully understand the history of Blockchain I need to discuss the history of Accounting, Cryptography as well as Bitcoin. This might sound strange, but it will all make sense soon.
Starting with cryptography combined with accounting, which branched into distributed systems, electronic cash or most widely known today as digital assets has come into existence.
Without Accounting there is no commerce, trade or business as we know it today, thus there would be no use for blockchain technologies. Without cryptography, the solutions to our accounting problems via blockchain would not be possible.
1976, a paper by Diffie Whitfield and Martin E. Hellman was written and released named “New Directions in Cryptography”. This paper discussed the concept of a distributed ledger, which is a database that is consensually shared and synchronized across multiple global sites and international systems. The paper also discussed the concepts of Public-key cryptography introducing the concept of public and private keys, which is found everywhere in the blockchain world today.
As cryptography enhanced over the years, another paper titled “How to Time-Stamp a Digital Document” by Stuart Haber and Scott Stornetta was released in 1991. This paper laid out the concept to timestamp data and secure its authentic origin and history throughout time.
Scott and Stuart later established the Hash and Sign solution for verifying and authenticating the latter data and later based it on social consensus as it is today.
All of these methods are found in modern day blockchains such as Bitcoin.
While cryptography was enhancing, the field of accounting also had major growth in its methods independently, until these two fields met and merged in 1989, where Yuji Ijiri, the president of the American Accounting Association at that time, wrote a monograph called “Momentum accounting and triple-entry bookkeeping”. This monograph describes an alternative accountancy where all accounting entries involving outside parties are cryptographically sealed by a third entry. This system would later be used on one of the first blockchains namely Bitcoin.
All the above-mentioned discoveries have led to the invention of a particular blockchain called Bitcoin. By knowing how Bitcoin works, you will clearly see how accounting and cryptography has combined and let to creation of the blockchain called Bitcoin. If you would like to know more, read our article on “How does Bitcoin work”.
Bitcoin is the reason for the popularization and adoption of Blockchain technology.
In 2008, an unidentified person or group which operates under the name “Satoshi Nakamoto”, published a paper on a new concept called Bitcoin, the first cryptocurrency to be created. The paper is titled “Bitcoin: A Peer-to-Peer Electronic Cash System” and described an electronic payment method based on the concept of cryptography. The paper describes how Bitcoin will be used for direct online payments from one source to another source without relying on a third-party source. It also included the concept of a digital ledger system, where all transaction which took place using Bitcoin can be traced and confirmed whether the coin has been spent before.
We can see how everything we spoke about earlier in this article, comes together here with the formation of Bitcoin and it’s Blockchain.
So, what is Blockchain Technology?
Following is broad overview of what Blockchain really is.
As the name indicates, a Blockchain is a chain of past information stored in a batch-like structure we call blocks. We thus see the Blockchain as a distributed ledger that is completely open to anyone. Once data is registered onto a blockchain it becomes almost impossible to change and its transparent nature declares the existence of this data on the blockchain forever. This idea originated directly from Haber and Stornetta’s paper discussed earlier.
How does the Blockchain work?
Each block of transactions discussed above contains the following:
- A variety of transaction data
- A Hash of the particular block
- A Hash of the previous block
(Note: For those not familiar with the term hash, see it as a unique address allocated to the block with its specific transactions. If any data is changed inside a block, that block’s hash changes.)
Thus, imagine a chain of Blocks, with each block containing these three attributes above. Remember each block stores the hash of the previous block connected to it on the chain. Also remember that if any single change is made inside a block, that block’s hash changes. Thus, if any data is changed within a block, its hash will change and any block in the chain which follows that block will have an invalid hash due to the next block in the chain not storing a valid hash of the previous block which was tampered with. Changing a single block will make all the following blocks invalid.
So then, how is a Blockchain kept valid?
The way that a Blockchain confirms that a transaction is valid is by using a peer to peer network, where multiple people around the world, called nodes, has a full copy of the blockchain and all of its blocks. When a new block is created, everyone on the blockchain network gets a copy of that block. Each node then verifies that block through concepts such as proof of work that is discussed in another article, and make sure it has not been tampered with. That block is then added to the blockchain which every peer also has a copy of. This results in complete consensus between all peers with everyone having the same blockchain. Thus, we can see if a single node manipulates a block, that node will have a different blockchain as the rest of the nodes, and any transactions following that node will be invalid and not verified by the other nodes and consequently not added to the blockchain.
Some Advantages of the Blockchain
- Blockchain makes it possible to verify transactions without having to be dependent on third parties such as banks.
- The data in a blockchain cannot be altered or deleted.
- There is a consensus across the whole blockchain through the nodes.
- Each transaction on the Blockchain is recorded in chronological order. Thus, all the blocks in the blockchain are time stamped and any transaction can be tracked back to its origin.
- The Blockchain is completely decentralized, thus there is no possibility that the data if lost cannot be recovered. This also leads to transparent data and the individuals who are provided authority can view the transaction.
- Various consensus protocols are used to validate the data entries, thus removing the risk of duplicate entry or fraud.
So, where does Bitcoin and Cryptocurrencies come into the picture?
When Satoshi Nakomoto had this idea of a Blockchain called Bitcoin, he needed a way to incentivise people to help with the consensus across the Blockchain. He then created a currency alongside this blockchain called Bitcoin. The currency was named Bitcoin due to it being ran on the Bitcoin Blockchain. Thus, nodes that confirms transactions and keeps consensus across the blockchain was incentivised with Bitcoin, these people are thus called miners, mining a digital gold by performing “digital labour”.
As we know today there is various blockchains in existence alongside their own incentives.
Hopefully after this article, you as reader have a clear understanding on what Blockchain Technology actually is and its relationship with Bitcoin. The very brief history of Accounting and Cryptography has hopefully given you a broader understanding of where Blockchain came from and the different fields it encompasses.
Blockchain Technology is here to stay, and we are excited to be early adopters in this new era.
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