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An introductory guide to Blockchain technology

Blockchain technology is no longer fringe technology - it is everywhere. But what is blockchain technology, how does it work, and why is it useful? We’ve produced this introductory guide to blockchain technology to answer your questions!

An introductory guide to Blockchain technology
Sam Jeans
· 14 min read

Blockchain technology: Your questions answered

  • What is blockchain technology?

    Blockchain technology is best described a decentralised and distributed ledger that records the provenance of a digital asset. Bitcoin is perhaps the best known example of blockchain technology, while various other cryptocurrencies and other processes, such as smart contracts, rely on blockchain technology.

  • What is blockchain good for?

    Blockchain is great for allowing processes to operate without the need for a central authority, such as a bank. This is one of the key benefits of cryptocurrencies such as Bitcoin, while blockchain can also be used to automate processes, such as self-executing contracts.

  • What are the disadvantages of blockchain technology?

    The most commonly cited disadvantage of blockchain technology is the energy consumption needed to mine cryptocurrency, although this isn’t necessarily applicable in cases where blockchain is used in other contexts. Other potential issues, especially in a business sense, is that blockchain potentially has scalability issues, and in some cases, they may also be inefficient.

You've likely heard the term "blockchain" in recent years, with news stories primarily covering the world's most eminently popular cryptocurrency, Bitcoin.

Blockchain is a true 21st-century concept, but its origins reside in a 1991 document published in the Journal of Cryptography. This paper explored a means to timestamp digital documents to certify their origin, authenticity and date of creation using cryptographic techniques. 

These cryptographic techniques sought to guarantee the authenticity of a document using data that cannot be edited or altered by a central timestamping authority.

The present-day blockchain serves a similar purpose; transactions in the blockchain are guaranteed by the technology, not by individual actors like banks. 

One of the most important concepts here is decentralisation. Blockchain maintains its network via the actions and outputs of a distributed network, spread over thousands - if not millions - of computers worldwide.

Blockchains are removed from the control of banks or other centralised entities - transaction data is visible to everyone in the blockchain network (though personal identities are secure and confidential). This results in a transparent system maintained by its community network. 

It's worth noting that whilst blockchain technology typically evokes monetary currency, this isn't its sole use.

We can also use blockchain to support non-financial information. This ranges from land titles to public health records, documents and pretty much any data that benefits from being placed on a highly secure, mobile, and dynamic peer-to-peer network protected by cryptography.

A blockchain analogy

Here’s a simple analogy to help visualise blockchain technology:

Imagine transactions in the case of a high-street bank that uses standard fiat currency like pounds or dollars. 

The bank maintains its own ledger - a central spreadsheet of transactions. 

When payments are made to and from the ledger, the bank updates this spreadsheet. No one outside of the bank can see into the ledger and verify its information.

This is not usually a problem. We rarely think about the potential issues of centralised currency until financial crises or instability strikes and banks begin to manipulate transactions to protect investments and avoid bankruptcy.

This is where blockchain currency presents a distinct advantage that guarantees its usefulness.

Blockchain technology in the Cyprus banking crisis

Take the 2013 Cyprus banking crisis, a crucial event that saw the value of Bitcoin more than double in value in the space of a few weeks. 

The ballooning debts of the Greek government collapsed the Cypriot banking network; people were unable to withdraw their money from cashpoints or access their savings.

In this uncertain financial context, Bitcoin provided a solution - a temporary safe haven investment, similar to gold but accessible to anyone with an internet connection. In the longer term, cryptocurrencies are not really safe-haven assets due to their unique susceptibility to volatility, but in the case of a mass buy-up like what happened in Cyprus, Bitcoin's value would only increase.

Cypriot people started buying Bitcoin, which is protected from central manipulation, unlike money stored in a central bank. 

Gold is well known to hold its value in a financial crisis - its value is well-protected from internal economic manipulation. Bitcoin is similar in this respect. 

However, gold lacks some of the six characteristics deemed to make a good overall currency:

  • Scarcity
  • Divisibility
  • Utility
  • Transportability
  • Durability
  • Counterfeitability (protection against counterfeiting)

Bitcoin, on the other hand, ticks all of these boxes. This is why Bitcoin and other cryptocurrencies have value. Not only can they be used to make purchases, but they’re also secure, robust, portable and scarce. 

In fact, the value of Bitcoin rose from $45 to $95 in a month throughout the Cypriot banking crisis. At the time of writing, Bitcoin is worth around $35,820 - any Cypriots that saved their Bitcoin are now much richer than they were 8/9 years ago!

“As an alternative to taking money out of the bank and stuffing it under the mattress (not necessarily a low-risk strategy), it seems that Europeans at least are maybe taking a more radical approach to protecting their money and removing it from the clutches of bankers and governments.” - The Conversation, 2013.

In the case of Bitcoin and other public blockchain cryptocurrencies, instead of that financial ledger being maintained and controlled privately by the bank itself, it’s maintained by everyone who participates in the network. 

In essence, the people own the network. 

To summarise: 

  • Standard financial ledgers (i.e. in the case of centralised banks) are private, centralised and subject to manipulation - we cannot verify the status of our money; we have to take it on trust. 
  • The blockchain ledger is visible to everyone; you can see it here on the Blockchain Explorer. Millions of computers work together to verify and transfer blockchain transactions; they are immutable, secure and protected from internal manipulation. The blockchain ledger is sometimes referred to as the “spreadsheet in the sky” - it’s decentralised and protected from internal manipulation (in the case of public blockchains like Bitcoin). 

Who invented blockchain technology?

Blockchain technology - a series of timestamped blocks of data - has been conceptualised in some form since the early 90s. However, the origins of modern blockchain technology lie in the development of Bitcoin - the father of cryptocurrencies.

The invention of blockchain is widely credited to Satoshi Nakamoto, who published the paper  “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2009. 

At the time of this paper, 'blockchain' and 'bitcoin' were synonymous. Since then, blockchain has evolved as an individual concept alongside the proliferation of other types of blockchain technologies and cryptocurrencies.

The true identity of Satoshi Nakamoto is a mystery in itself - the name is presumed to be a pseudonym for a person or group of people. Nakamoto has never been formally or officially identified. The last communication from this pseudonym was back in 2011, two years after Bitcoin went live.

There are three prime candidates for the true identity of Nakamoto, but his/her/their true identity is pure speculation and conjecture:

  • Dorian Nakamoto 
  • Craig Wright 
  • Nick Szabo

After all, you’d expect the inventor of the world’s most grandiose cryptographic network to remain anonymous if that’s what they desire. Some speculate that Nakamoto is not even alive today. 

If he is, he would be a billionaire, if not one of the wealthiest individuals in the world.

What is blockchain technology? A simple technical explanation 

Blockchain technology appears to be very complex, but on a superficial level, it's reasonably straightforward.

A blockchain is a database, much the same as a spreadsheet. Data is stored, retrieved and accessed from a database. That data can be anything, including transaction data. 

A blockchain differs from a standard database, like a spreadsheet or hard drive, in its structure.

Blockchains collect and store information in blocks that are chained together in a time sequence. These blocks have finite storage capacity - each one has to be filled before the creation of a new one. These blocks are timestamped using cryptographic techniques. 

New information entered into the blockchain will eventually create another block. This creates an irreversible timeline - blocks cannot be retrospectively changed - doing so would mean reversing time. 

Another aspect of blockchain is its decentralisation. Computer power is needed to create and process these blocks. In a central bank, these computers will be housed - and controlled - under the same roof. 

With blockchain (at least a public blockchain), these computers can be positioned anywhere worldwide. This is called peer-to-peer technology. Each computer in the network is called a node - they communicate with each other across the distributed network. 

Each node contains a record of all data in the blockchain network - they work together to verify that each mathematical component of the blockchain is correct. No one node can alter information in the blockchain because many computers are working with the same data. 

Where blockchain can get confusing is in the precise mathematical and cryptographic techniques used to process transactions and create new blocks in the chain.  

In the case of Bitcoin, this process is called mining. 

What is Bitcoin mining?

Bitcoin mining is the process of verifying the hash assigned to a block. 

When a transaction is created in the blockchain, it’s assigned a hash.

Say someone makes a payment for £5,000 using Bitcoin; how is that payment verified as legit and not counterfeit? They have to verify the hash - the stamp placed on a transaction by the ledger. 

Bitcoin miners verify the hash assigned by the network. Miners are a specific type of node that both compete and work together to verify the hash.

In essence, miners act as a voting system. There is a near-limitless combination of potential hashes that could be assigned to a transaction, but only one is correct. Miners have to locate the 'winning ticket' and vote on its authenticity. Once there is a consensus that a transaction is legitimate, the block is created and disseminated through the ledger. 

Mining is highly CPU intensive; it requires enormous computing power and energy to execute. This is because there are just so many combinations - around 2.7 Quadrillion hashes are calculated to generate a Bitcoin!

In reward for mining, the miners receive some Bitcoin. This reward incentivises nodes to act as miners. Bitcoin mining can be lucrative, but it requires computer power far above what a commercial system can deliver.

This year, Bitcoin was said to require more energy than the total energy consumption of Argentina

The three types of blockchain

There are three types of blockchain networks. Not all of them share the same characteristics but operate via similar fundamental cryptographic and mathematical principles. 

Public blockchains 

Public blockchains are universally accessible by anyone with an internet connection. Bitcoin is the biggest example of a public blockchain, while Ethereum is another public blockchain.

Anyone can participate in a public blockchain validation process. Public blockchains are fully transparent, and the community/network works together to support and maintain the network and its ledger. 

Permissioned blockchains

Permissioned blockchains involve varying permissions. They're not wholly publicly accessible. One must be invited or otherwise permitted to join and access the network. Core roles within the blockchain are controlled. 

Ripple is an example of a permissioned blockchain.

Private blockchains 

Private blockchains are more closely controlled than permissioned blockchains. They’re often used for private organisation’s internal operations. These are centrally controlled - they use blockchain technology without the tenets of decentralisation or immutability.

There are also hybrid blockchains that have a combination of public and private components.

The pros and cons of blockchain 

Pros of blockchain technology

Accuracy and security 

Blockchain transactions rely on many computers to verify their information. This automated process ensures accuracy through a rigorous mathematical process. 

For an error to be made in the blockchain, over 51% of the network's computers would have to 'agree' on the false data, which is a near impossibility. Since the network's security is also distributed and guaranteed by cross-consensus, theft or tampering is extremely difficult. This reduces the potential of data theft and fraud.

Portability and speed

Cryptocurrencies are highly portable and frictionless to trade with. There are no transaction fees associated with most cryptocurrency transactions, unlike with a 3rd party verification service that processes regular bank payments. 

Blockchain transactions are usually processed in some 10 minutes or so, much quicker than the transaction times of some regular bank and card payments. The speed of transactions is not affected by public holidays or time zones.

Decentralisation 

Since blockchains are distributed systems spread across a broad and diverse network, there is no central control (in the case of public blockchains like Bitcoin). This ensures transactions are protected from tampering and other exterior or interior manipulation designed to sabotage or adversely affect the blockchain. 

This is of particular importance when traditional financial institutions are facing economic instability. Anyone with an internet connection can access blockchains. 

Private 

A public blockchain only contains information about payments; there are no identifiers for people in the network. Most blockchain transactions are not 100% anonymous. Payments can be tracked via someone’s public key, but this will not reveal any personal information. 

Cons of blockchain technology 

Energy consumption 

The energy required to sustain blockchain mining is very concerning. Since the process requires enormous computational power, the electricity consumption of blockchain networks is quite phenomenal. It has even led to power grid outages and blackouts, most recently in Iran. This is not particularly compatible with environmentalism and global green or sustainable energy initiatives.

Illegal activity

The security and confidentiality of blockchain technology also leave it open to fraud and other cybercrime, and illegal transactions for physical goods. Cryptocurrencies have helped facilitate drug marketplaces on the so-called darknet; the confidentiality of buyers and sellers makes it difficult for law enforcement to tackle criminal activity.

Regulation 

Blockchain technology is tough to regulate, but governments now realise its practical benefits. So how are governments using blockchain technology? Primarily for storing and transferring sensitive documents and tracking government transactions. This can reduce investment in traditional database security and data protection, shielding from cybercrime and hacking attempts.

Volatility 

Immense interest in cryptocurrency has made it highly volatile to trade. This is why it generally fails as a long-term safe-haven asset - its value is too strongly linked to speculation. 

The price of Bitcoin has risen hugely over the last 7 or 8 years, but there are no guarantees that it can maintain its high value. Cryptocurrency investment and trading are generally quite esoteric and inaccessible. Despite its evident advantages, many cryptocurrencies still face an uncertain future.

Blockchain technology

Blockchain technology has been hailed as one of the most critical and exciting technological developments since the internet.

A true 21st-century concept, blockchain enables data, such as transaction data, to be processed using the cross-consensus of a distributed network. This removes currency from the clutches of financial institutions and places the burden of responsibility on a community that works together on maintaining the network via a complex cryptographic process. 

Blockchain technology is sure to become more widespread and influential in the years to come, especially now financial institutions and governments are beginning to harness its practical benefits. 

Sam Jeans
Sam Jeans
Sam is an experienced writer and audio producer with a passion for health, science, music and playing the drums. When he's not writing, he can often be found digging through history textbooks, scientific journals and boxes of vinyl records.