Pinmo is starting to use blockchain technology as a key part of its transaction verification and payment processing infrastructure, so obviously our content will involve the word “blockchain” and other key terms related to it. But what if you’re a complete newbie to the world of cryptocurrencies and the only
Well, this basic introductory guide is for you. We’re going to lay out exactly what blockchain technology is at its most basic, how it applies to cryptocurrencies like Bitcoin (and others) and why it’s so important for other things like business and digital transactions.
The word “blockchain” itself describes the essence of what a blockchain is. In digitally metaphorical terms, it’s a chain of information bundles called blocks, each of them tied to previous and successive blocks by something called a hash. Each block contains a sequence of digital information (also known as transactions) that has been encoded in such a way so that it’s condensed into a sequence of mathematically generated cryptographic characters called a hash. This hash terminates that block and carries over into the next block in a way that creates a chain of connections between all blocks in a blockchain. In other words, a blockchain is a cryptographically segmented ledger of information.
To clarify this further, if Block 1 in a blockchain contains transactions A, B, C, and D, then its hash could be abcd1. Then when block 2 is generated, with transactions E,F,G,H, the hash from block 2 would be created for EFGH but with the summary from Block 1 included as well, thus creating a hash that looks like this:
Previous block hash: ABCD1
Block 2: EFGH2.
(These are just basic examples, real hashes are much more complex).
How Blockchains Create Security
Now comes a second important part to the power of a blockchain: As you can see with the above, each new block contains its own hash of all transactions in that block and a summary of the previous block’s hash. This means that somebody trying to tamper with Block 1 might be able to change its hash but the original authentic hash summary of it in Block 2 will still be registered there, making the falsification of Block 1 obvious. This is a crucial cryptographic security feature of the blockchain.
However, you might ask what happens if someone just tampers with the first block and then also changes all successive blocks to reflect the fraud? Well, this is where a second huge security feature of the blockchain comes into play: The data contained in these blocks and in the blockchain as a whole, is not just stored on one server or computer. Instead, it’s copied across a whole network of other computers, called “nodes”. Thus if anyone modifies a whole sequence of blocks on one computer or even multiple computers, the majority of blocks will still register the original transaction hashes for each block and what that majority shows will be what’s valid. This last aspect of the blockchain is what turns it from simply being a cryptographically secured ledger of information and converts it into a DISTRIBUTED cryptographically secured ledger of information.
This combination of sequential cryptographic hashing between blocks and distribution across a network of nodes is the basic thing that makes blockchains immutable and highly secure for securing information that can’t be tampered with.
There are of course many blockchain types in existence today and they all have their variations. However, the essential design described above applies to most of them and definitely to the important ones that would be used for public financial transactions or record keeping.
These commercially used blockchains can be divided into two basic user configurations: Public blockchains, and permissioned blockchains. A public blockchain would be something like the one behind Bitcoin or Ether tokens – anyone can download it, anyone can examine it and anyone can generate new blocks for them (as long as they have the right computing hardware to do so). A permissioned blockchain would be one in which only certified users with permission can access it to read blocks or generate new transactions and blocks.
One other fundamental part of any blockchain is the concept of digital identity. Each user on the chain, generating blocks of transactions, has their own unique digital signature for the transactions they’re responsible for. These are also encoded into individual blocks of transactions and a crucial ingredient to verifying which transactions belong to which person or entity inside a given blockchain. In a closed chain such as that used by a business to handle payments and information transactions for its users and clients, these identities are what allow all users to see who did what and when they did it. The “what” in this case could consist of specific transactions, specific activities or payments in digital tokens.
Blockchains for Everything
On a final note for the basics of how a blockchain works, we need to mention that the word “transaction” as we’ve described so far could consist of any sort of digital information. This means a blockchain could be used to store and transfer almost anything digital at all. These pieces of information could include information about activities, digital currency (cryptocurrency like Bitcoin) ownership records or records of ownership for any other sort of digital asset.
In other words “transaction” simply refers to information being exchanged across the blockchain and noted down in its blocks. A company or organization that uses a blockchain could use it for any kind of information at all. Some blockchains can be used for multiple things at the same time. One example of this is the Ethereum Network, which can host a third party’s code so they don’t need to build their own blockchain from scratch. Through this Ethereum-based blockchain, a company can create its own cryptocurrency for internal use and also track user/client activities of any kind on the same chain across their own network of nodes.