What is Blockchain Technology?

About Blockchain Technology

The Problem with Centralized Infrastructure

Today on the Internet, we must constantly trust one another with sensitive data, transactions, and records. Most of our interactions on the Internet run on centralized web servers, and massive amounts of user data often exist in a single database. Current databases are designed to be controlled by “trusted” admins who can read, alter, block, and even delete data. The centralized architecture of the Internet today is not only inefficient but vulnerable to censorship and targeted attacks by both hackers and internal bad actors.  

The Trust Revolution: The First Blockchain

In 2009, Satoshi Nakamoto, an anonymous individual or group of individuals, developed and released the first blockchain. Interestingly, they never actually used the word “blockchain.” Only block and chain.

The puzzle for Satoshi was Internet commerce––how to securely facilitate digital transactions without third-party payment processors. Today, when someone swipes a credit card, their personal identifying information often passes through as many as five different entities––card associations, payment processors, clearinghouses––that demand transaction fees and that require users to trust the integrity of their systems. “We need a system,” Satoshi explained, “for participants to agree on a single history of the order in which [transactions] were received.”

Satoshi’s system was quite simple, but elegant in its simplicity. A network of users could chain blocks of transactions together using fairly common cryptographic functions and structures––hashes, Merkle trees, a secure hash algorithm, timestamping––and a lightweight network design. The network was decentralized and open source––that is, it was publicly available.

The “block” in a blockchain refers to a block of transactions that has been broadcast to the network. The “chain” refers to a string of these blocks. When a new block of transactions is validated by the network, it is attached to the end of an existing chain. This chain of blocks is an ever-growing list, or ledger, of transactions that the network has validated. We call this single, agreed-upon history of transactions a blockchain.

The actual data structure of a blockchain isn’t all that new, but the consensus protocol is: users can cooperate to build the chain globally, and all on their own. For this reason, many liken a blockchain to “a spreadsheet anyone can access” (Blockchain Basics). And the cooperation is automatic, behind-the-scenes, and running on CPUs on computers around the world.

The who, the what, and the where of the system is relatively straight-forward. The who is humans, the what is letting machines run, and the where––the shared chain of validated transactions––is just software. And the why? To build networks we can trust.

Beyond Bitcoin: The Ethereum Blockchain

The Bitcoin blockchain that Satoshi Nakamoto developed and released to the world in 2009 had a very specific application: electronic cash. Electronic cash that is underpinned by blockchain technology is called “cryptocurrency,” because it uses cryptography to secure financial transactions. Currently, there are nearly 2,000 different cryptocurrencies. Blockchain is the fundamental technology that underlies Bitcoin, but its potential extends far beyond cryptocurrency.

In 2015, Ethereum launched as a much more versatile version of the Bitcoin payment system’s underlying blockchain technology. The value of a blockchain is the certainty of the network: participants can establish a trusted and immutable record of transactions without the need for intermediaries. The power of the Ethereum blockchain is its programmability: agreements are embedded in the code so that transactions automatically execute. These digital agreements, or “smart contracts,” can have limitless formats, conditions, and even call on other contracts, making Ethereum useful not just for payment settlement, but for a wide range of industries, from banking and finance to energy.

Peer-to-Peer Networks and Blockchain Technology

Peer-to-peer networks have existed for decades. One of the most famous early peer-to-peer networks was Napster, a file-sharing application created by Sean Parker, who would later become one of Facebook’s earliest executives. A blockchain-based peer-to-peer network presents a significant advancement over these earlier systems by allowing large groups of individuals or organizations to transact without relying on any single authority to record and validate those transactions.

Distributed Ledger Technology (DLT)

Blockchains are a subcategory of distributed ledger technology. The key difference between a blockchain and the transaction records of the past is that blockchains are applied uses of distributed ledgers. Where a standard ledger exists on one computer or server, a distributed ledger exists and is updated simultaneously on every computer in the network (every individual and organization that uses the ledger). A blockchain is, therefore, a type of decentralized ledger, which operates on a peer-to-peer network. There are distributed ledgers that do not operate on blockchains, but they are not as common and are typically deployed to solve narrower database-related problems.

The Value of Decentralization

The decentralized architecture of a blockchain — a global network of computers simultaneously running the software and validating the chain of transactions — is what ensures that the transaction record is never compromised. Decentralization is critical as an architectural principle. It makes a blockchain network less likely to fail, harder to attack, and harder for bad actors to game the system. In Mastering Ethereum, Andreas Antonopoulus and Gavin Wood call on their readers to look closely at a given blockchain and evaluate a range of properties, including decentralization:

“Today, however, there are a huge variety of blockchains with different properties. We need qualifiers to help us understand the characteristics of the blockchain in question, such as open, public, global, decentralized, neutral, censorship-resistant. Not all blockchains are created equal. When someone tells you that something is a blockchain, you have not received an answer; rather, you need to start asking a lot of questions to clarify what they mean when they use the word “blockchain.”

At ConsenSys, our goal is to help users, developers, and organizations start asking the right questions about blockchain technology, so we can all build and benefit from networks that we can trust.