Blockchain Technology Explained

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What is a Blockchain?

A blockchain is a means of recording information in a way that makes it very difficult or even impossible to alter, hack, or otherwise cheat the system.

A blockchain works as a digital accounting ledger of transactions that is duplicated and distributed across the network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s digital ledger. The non-centralised database shared by multiple participants is called Distributed Ledger Technology (DLT).

Blockchain is one type of DLT in which transactions are stored with an uneditable signature called a hash.

This means if one block in one chain was changed, it would be immediately obvious it had been tampered with. If hackers wanted to successfully hack a blockchain system, they would have to change every block in the chain, and on every computer linked to the system around the world.

Blockchains, such as the ones used by Bitcoin and Ethereum, are constantly growing as blocks are being added to the chain, which significantly adds to the total security of the digital ledger.

Why is there so much Interest in Blockchain Technology?

In the past, there have been several attempts to create a digital currency, but they have always failed.

The biggest issue to digital currency is trust. If someone creates a new currency called the ABC Dollars, how can we trust that they won’t give themselves a billion ABC Dollars, or steal your own ABC Dollars?

With most normal databases, such as an SQL database or MS Access database, there is a database administrator who can change the entries at all (potentially give themselves a fortune in digital currency). A blockchain is different because nobody is in charge, it’s run by the people who use it. In addition to this, the currency stored in a blockchain can’t be faked, hacked or double spent, so users can be assured that their currency is legitimately theirs.

How do Transactions get Added to a Blockchain?

There is a specific procedure that a transaction must go through before it is added to the blockchain. The steps will be described below.

Authentication

The blockchain was designed to operate without a central authority this means that there isn’t a bank or regulator managing the transactions. However, the transactions still need to be authenticated to ensure that they are legitimate.

This is done using cryptographic keys (similar to a password) that identifies a user and gives access to their ‘account’ on the system.

Each user has their own unique private key and a public key that everyone can see. Using them together creates a secure digital identity to authenticate the user via digital signatures, and to grant access to the transaction they want to perform.

Authorization

Once the transaction is authenticated between the users, it needs to be authorised, before it is added to the blockchain.

For a public blockchain, the decision to add a transaction to the chain is made by a majority consensus. This means that the majority of computers in the blockchain network (also known as nodes) must agree that the transaction is valid. The people who own the computers in the network are incentivised through rewards to verify these transactions. This process is known as ‘proof of work’.

Proof of Work

Proof of Work requires the people who own the computers in the network to solve a complicated mathematical problem to be able to add a block to the chain. Solving the problem is known as mining, and miners are rewarded for their work in cryptocurrency.

While mining is simple in principle, the mathematical problem can only be solved by trial and error and the odds of solving the problem are approximately 1 in 5.9 trillion. It requires substantial computing power which uses considerable amounts of energy to solve the problem. Therefore, the rewards for undertaking the mining must outweigh the cost of the computers and the electricity cost of running them, as one computer alone would take years to find a solution to the mathematical problem.

Many “bitcoin miners” even use mining rigs to mine or acquire bitcoin, most of them even use remote desktop software and virtual private networks (VPN) in order to control and acquire bitcoins since they would need many components in order to solve the mathematical problem as fast as possible

Energy Consumption of Currency Mining

The Cambridge Bitcoin Electricity Consumption Index estimates the bitcoin mining network consumes almost 70 terawatt-hours (TWh) of electricity per year, ranking it the 40th largest consumer of electricity by ‘country’. To compare, the country of Ireland (ranked 68th) uses just over a third of Bitcoin’s consumption, or 25 TWh.

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