A Beginner’s Guide to Understanding the Blockchain (Part 1: Introduction to Blockchain Technology)

In the spirit of understanding what you (want to) invest in before doing so, I will now attempt to help you better understand what blockchains really are about in a very beginner-friendly way.

An Overview of Blockchains

In very simple terms, the blockchain is a data structure where transactions or data are stored. Each block in the chain contains a unique piece of data or information. These blocks combine into a complete chain, and work like a giant digital ledger (collection of accounts in which transactions are recorded).

At a higher-level, blockchains are made up of a network of computers (or nodes, as we call them) that are essentially public databases of transactions where everyone can add to, or view, at any time. Instead of the data residing on a single centralized server, the data is copied across thousands and thousands of nodes worldwide, allowing each node access to this database of transactions.

This is essentially what gives blockchains their decentralized nature.

At a lower-level, and within each blockchain, transactions are compiled into data-holding vehicles known as “blocks”. The consecutive string of every block ever executed makes up a blockchain: a distributed database of chronologically ordered transactions.

If you are very confused at this point, don’t give up just yet — I will draw some parallels to the real world in the next paragraphs to help you better understand what the blockchain really is, so read on!

Demystifying the Blockchain

To help you better understand what a blockchain really is all about, think of the blockchain as a giant and shared Google Excel Sheet (think of all the collaborative projects that you have worked on in Google Sheets!) that everyone and anyone can gain read-access to. This means that anyone and everyone on the Internet can view all the transactions recorded on this sheet because it has no access requirements for read-access.

For edit-access to the document (if you want to add transactions onto the document, and not just view), however, a more complicated process would be required. Because everyone and anyone can gain access to this document, it will not be safe for all of them to get edit-access without a proper system in place to discourage malicious actors.

If this were the case, anyone can just edit the document in their favor for personal gain, and/or to cause chaos and confusion, since any given change will be reflected across all the computers that are connected to this document.

So how do we foster trust within a system where users can’t trust each other because of how accessible it is to anyone and everyone?

Any transaction that is added onto the Google sheet has to be agreed upon by all the users in the network (on the document) first. In other words, the whole network of users must first come to a consensus, before any transactions can be added to the document. Only after everyone on the network has first checked through all the proposed new transactions, can they be added to the document, if approved by everyone of course.

So now you may be wondering — how on earth do we do this without a central, or intermediary, party to negotiate and liaise between users in the network?

This is done via something called a consensus mechanism, that all blockchains will have. This ‘consensus mechanism’ is something that I will go through in-depth in the next article (you can check it out here), so having a general understanding of this concept will suffice for now: that there is a mechanism in-built into all blockchains to help their network of users verify, and come to consensus (through voting) on, the new transactions being added onto the document.

Characteristics of Blockchains

From all the above, we realise that there is also no need for a central entity to help with anything , because blockchains are self-sufficient in their functionalities, thanks in large part to consensus mechanisms.

We also realise that there is no one singular party that can control this Google sheet or censor it , because no one will be able to delete this shared document off every single computer that has access to this sheet — there will simply be too many to track.

Let’s say someone successfully deletes this excel sheet from 1000 computers, there will be 1000 more that still have access to it! It is practically impossible to delete this document, control this document in the way you want to, or stop people from getting access to it in one way or another.

Therefore, blockchains can be construed as decentralized or distributed ledgers, where power is distributed and diffused across various entities, and is not focused in the hands of a few. Concomitantly, they also become censor-proof.

The Google Sheet also ensures that no one can tamper with the transaction histories without others knowing, because once again — everyone having access to this same document will mean full transparency. If someone changes a certain number on the sheet, everyone will be able to see. If that change is in the spirit of maliciousness, everyone else can reject that change by doing a simple control-Z on it.

Extrapolated to the idea of a blockchain, this reveals two key characteristics of the blockchain: tamper-evident and immutability (you can’t change things on it as and when you please because other people will know, and they will likely reject it).

From all the above — we learn that most blockchains will have 5 key properties that prevent them from being controlled or abused by a central point of power. They are:

Decentralized
Censor-proof
Transparent
Tamper-evident
Immutable

Why the need for Blockchains (or Distributed Systems)?

A decentralized Google Sheet (Blockchain) stands in direct contrast to a centralized Google Sheet that only one central entity has access to.

For example, all banks also have a ledger, or Google Sheet, on which they track and record transactions. The difference here is that the banks are the only parties who have edit-access to the excel sheet. No one else will have access to this Google Sheet document at all — not even ‘view’ or ‘edit’ access (minus view access for your own transactions, which represent a minute portion of the entire document)!

Let’s take a look at how such a centralized system may play out, by following the story of two hardworking wage-earners, Alice and Bob.

If Alice wants to send Bob some money through the bank, the bank is the only one taking the money from Alice’s account, sending it into Bob’s account, then updating the excel sheet. We are also unable to see the whole excel sheet, only a small part of it that concerns us (our own bank account).

If the bank wants to do anything malicious like cheat Alice and Bob’s hard-earned money by routing the money from Alice to themselves instead, no one will be able to stop them from doing so. Heck, no one may even know about the malicious act, or be able to prove it!

Or, let’s say the bank doesn’t like Bob for some reason. They want to stop the money from reaching him. They could — by whatever justifications they are able to come up with — freeze this transaction such that it doesn’t reach Bob’s account. No one will be able to have a bigger say with regard to this, than the bank! Only they have the ultimate veto power.

They could even freeze Bob’s entire account if they wanted to, so that Bob can’t even access the rest of his funds. This is the problem with centralized systems, and is what blockchains are trying to counteract and subvert.

Cryptocurrencies

To recap from the previous article (if you haven’t read it, you can access it here)): cryptocurrencies, on the other hand, refer to digital stores of value that can be used to buy and sell goods, services, or property — just like what you do with real world currency! Think of them like your SGD, USD etc., just a digital and unregulated version of them.

For example, when you want to buy a cup of coffee from a store, you will use your SGD or USD to exchange for it. You will take out your notes or coins (currency), and pass them to the cashier at the counter, in order to trade for your cup of coffee. This is the function of currencies — stores of value that can be exchanged for things that you want to get or consume.

This is exactly what cryptocurrencies are too, just that now, this currency no longer has a physical manifestation. There are no more physical notes and coins; cryptocurrencies are purely digital, and exist only in the virtual world where you will have to use applications to exchange them for a good or service. Their main purpose as a store of value, however, has not changed.

These digital currencies are cryptographically secured (I will elaborate on this further in future articles) against fraudulent practices, and often are not issued or controlled by any centralized authority because of the ultimate goal of decentralization, privacy and security within the cryptocurrency world.

In sum, cryptocurrencies have 3 key properties that differentiates them from the normal currencies we are so used to. Cryptocurrencies are:

Decentralized
Private (pseudonymous)
Secure

Blockchain VS Cryptocurrencies

At this juncture, the differences in nature between cryptocurrencies and blockchains should be pretty stark to you, and intuitively so.

If they are not, think about it this way: blockchains are the federal bank of America, whilst cryptocurrencies are the US dollars.

They are vastly different entities, and should never be conflated as the same thing!

Blockchains are the underlying technology that allows for Cryptocurrencies to be decentralized, private (pseudonymous) and secure, and both exist on very different layers of the ecosystem (think of blockchain as a bed of sorts for cryptocurrencies).

Of course, there is still much more to learn about blockchains, and why people would even want to invest in them, so do read on to find out more!

Prev: A Beginner’s Guide to Crypto: What on earth is ‘Crypto’

Next: A Beginner’s Guide to Understanding the Blockchain (Part 2: Blockchain Consensus Mechanisms)