You’ve probably heard about the rise of blockchain technology globally and the many ways it’s changing how people do business, but do you really know how it works? The truth is that while blockchain technology is increasingly commonplace, most people still have no idea how it works or why it matters.
Blockchain may be a revolutionary innovation but understanding it doesn’t require a revolutionary intellect. Here’s a basic rundown of what blockchain technology is, how it works, and why it matters.
What is blockchain technology?
Blockchain is a secure way to store digital information, in which unique ‘blocks’, or segments of time-stamped data are strung together across a network of computers. This information is distributed but cannot be duplicated or forged. The result is a publicly available record of transcribed activity without a central governing authority, that is reliable, accessible and secure.
Blockchain technology wasn’t invented overnight. In fact, it evolved over years of efforts to encrypt and decentralise digital information dating back as early as 1991. The blockchain as we understand it today came into being in 2008 when Satoshi Nakamoto conceptualised an innovative new way to timestamp blocks of information, ahead of their rollout of Bitcoin less than a year later.
How does blockchain technology work?
Understanding how blockchain technology works requires a working knowledge of a whole glossary of terminology, from shared ledgers and private keys to nonces and nodes. While the specifics of blockchain might be confusing, its essence is simple and elegant.
Information in the blockchain is collected in blocks, which are segments of digital information. When one block reaches its data capacity, a new block is created, forming a chain. Additionally, this new block is stored on a different computer, called a node. This is what people are referring to when they explain that blockchain technology is decentralised.
In the case of digital currencies, the stored information is a record of transactions for a single digital coin. In order to complete another transaction, or add to the chain of data, it must first be checked against all the data in the chain, spanning numerous blocks and nodes. Because the encryption of data in any block is impacted by all the data in previous blocks in the chain, this information is virtually impossible to counterfeit. If most of the blocks in the chain cannot validate the information in a new transaction, that transaction is not approved.
Why Blockchain Matters
The transparency and security of blockchain technology makes it a cyber security dream come true, which is why it has become such an attractive arena for financial transactions. Blockchain currencies are secure and immutable. Because these currencies require less paperwork and time spent, they are also a more efficient financial tool for small businesses in the retail and service industries, reducing operational costs and points of contact.
Businesses also reduce their risk of fraud thanks to the transparency of its transaction records, reducing the risk of fraud and protecting businesses against bad actors.