A blockchain is an electronic ledger of digital records, events, or transactions that are cryptographically hashed, authenticated, and maintained through a “distributed” or “shared” network of participants using a group consensus protocol. Much like a checkbook is a ledger of one’s personal financial transactions, with each entry indicating the details of a particular transaction (withdrawal or deposit, recipient and sender, amount, date, etc.), the blockchain is a complete listing of all transactions, whether financial or otherwise. However, unlike a checkbook, the blockchain is distributed among thousands of computers or “nodes” with a process for validating transactions that utilizes a group consensus protocol. Making an addition to a blockchain ledger requires the approval of the network at large making retrospective changes essentially impossible.
Blockchain technology’s most disruptive aspect is its ability to eliminate the need for third-party intermediaries in some transactions. The technology is, in the words of its creator, a “system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” Because many industries rely upon guarantors, authenticators, and “trusted third parties” (in fact, they are often industries themselves), blockchain technology is likely to be extremely disruptive.
Distributed ledger technology can be applied to a variety of purposes other than the transfer of digitally stored value. The same principles that allow the Blockchain to be a functional means of creating, verifying and transferring value can be applied to information or even to exercisable rights (e.g., smart contracts or voting systems). The first core use case of Blockchain technology has, however, been as a payment system.
What elements are common to all blockchains?
- It is digitally distributed across a number of computers in almost real-time: the blockchain is decentralised, and a copy of the entire record is available to all users and participants of a peer-to -peer network.
- It uses many participants in the network to reach consensus: the participants use their computers to authenticate and verify each new block- for example, to ensure that the same transaction does not occur more than once.
- It uses cryptography and digital signatures to prove identity: transactions can be traced back to cryptographic identities, which are theoretically anonymous, but can be tied back to real-time identities with some reverse engineering.
- It has mechanism to make it hard to change historical records: even though all data can be read and new data can be read and new data can be written, data that exists earlier in blockchain cannot in theory be altered except where the rules embedded within the protocol allow such changes- for instance, by requiring more than 50 per cent of the network to agree on a change.
- It is time-stamped: transactions on the blockchain are time-stamped, making it useful for tracking and verifying information.