We all know the term blockchain, especially in connection with cryptocurrencies. Because of the first cryptocurrency the Bitcoin, the blockchain technology became known. But what exactly is blockchain technology and how does it work? These questions are answered in this blog entry.
What is Blockchain?
The theory for blockchain has been around since 1997. A blockchain makes it possible to transmit information with the help of a decentralized database for forgery-proof transmission, so that copies and manipulations are excluded. A decentralized database is a database used by many participants.
The database is also called Distributed Ledger. It is stored on many computers and mostly in a peer-to-peer network.
A blockchain can be imagined as a chain consisting of many individual blocks. If something is changed in this chain (= data record), a new block must be appended which contains the complete history plus new information. Every blockchain is a chronological sequence of data blocks. The modification of a single transaction record would require the modification of all subsequent records & thus the consent of the entire network.
How does a Blockchain work?
Someone starts a process by generating a record (block) which is verified & stored by thousands to millions of computers in the network. The verified block is cryptographically encrypted and attached to the blockchain, creating many unique records with their own traceable history.
Blockchains are thus secure and always up-to-date directories in which digital transactions are documented securely and comprehensibly. The blockchain is constantly being expanded chronologically & linearly. Furthermore, all participating computers of the network are permanently integrated. Thus, non-manipulatable transactions in the network are possible. A copy of the data status is available on each node of the network.
Blockchain technology is a combination of peer-to-peer, hashing and cryptographic encryption.
Peer-to-peer networks (P2P)
P2P is a network structure where all connected computer nodes are equal and can perform the same function. P2P do not have central administration.
Peer-to-peer is the basis for transparent management of data transactions.
The stored data blocks of a blockchain are connected with each other using hash values. Each block contains the data of several transactions in anonymous form. The chaining is carried out by hash values, which are derived from the transaction data by means of hash functions.
Hash value = fingerprint of the source data.
When expanding by a block, the hash value of the previous block is combined with the recalculated hash value of the new block. This mechanism is based on a consensus procedure known as proof-of-work.
The first practical application of blockchain was the cryptocurrency Bitcoin.
Further, Decentralized apps (dApps) and decentralized organization of contracts (Smart Contracts) are based on blockchain technology.
Advantages & Disadvantages of Blockchain
Every transaction is securely documented and transparent for all network members
Security: Every new transaction must be verified & saved by. The information is not stored on a single server but in a network of computers.
Traceability: Because the history of each transaction is accurately recorded, the authenticity of products is easy to verify
Third parties are no longer necessary
Cost-effective because no more third parties
Enormous memory expenditure, as the blockchain grows by one block with each transaction and the entire history is always copied to the next block
Blockchain is not easy to integrate into existing IT systems
Blockchain can split if there is no consensus in the peer-to-peer network. So there are two different blockchains with the same history up to the time of the split-off
Performance is often worse than with a central database
Blockchain technology makes it possible to open up new fields of application and to improve and simplify already known technologies and processes.
As a result, users are no longer dependent on third parties and decentralized processes can be implemented safely and transparently.