Blockchain is a technology that has a role in every industry from finance to medical research. In recent years, the term has been thrown around freely, especially among entrepreneurs and investors, but not everyone understands what blockchain is, nor uses the term correctly. Getting a grip on the basics of blockchain can help investors understand the potential of the technology and make good decisions about the companies they support. Many people mistakenly assume blockchain is the same thing as bitcoin, but the technology has many more applications beyond cryptocurrency. The first thing investors need to understand about blockchain is that, in essence, it’s a means of storing data. Blockchain is a coding format that helps build secure, immutable databases that are decentralized across several systems. A traditional database stores all information on a primary server that can be backed up to different locations. However, the database is still defined by the primary server, which makes the data vulnerable to attack from people who want to steal or manipulate it. This traditional approach also makes data private because owners of the server have tight control over who can access the data. Blockchain takes a different approach to data storage. The Basics of Blockchain: Hashes and LedgersIn blockchain, the basic form of data storage is the hash. Consider a simple ledger with three pieces of data. Each of these three lines of data is translated to a hash, a series of letters and numbers based on a complex mathematical formula that represents the original information. Creating this hash demands significant processing power. With each additional line of information, the hash from the prior line is added to link each data point. Now imagine that someone goes back and changes the first line. The hash for that line will change. However, the second line will contain the original hash from the first line, which now will not match the altered first line. This makes it easy to tell that the information was changed. Someone would need to change each line to avoid suspicion, but this would be extremely difficult and require an enormous amount of computing power. While the hash system is a powerful deterrent to hackers, they may still attempt to break in and change the code if they are after something very valuable. To prevent this, blockchain creates a public ledger. The database is duplicated on computers across the world, all of which are linked. Each computer is referred to as a node, and together they comprise the ledger. Whenever data on a public ledger is altered, the nodes check the information against each other. When one node does not match the records on others, it is changed to match the consensus. Thus, successfully changing the ledger would require hacking more than half of the computers on the ledger at the same time, to convince the system that the alteration is legitimate. Doing so is virtually impossible. Diving Deeper: Keys, Blocks, and ChainsNaturally, a database is not valuable if it cannot be edited at all. To make changes to the ledger, individuals need a cryptographic key, which makes it possible to add new records to the database as necessary. Nodes on a network update as needed, provided that changes were made with the proper key. However, it is important to note that the key allows the addition of data, not alteration. The key makes it possible to create a new entry that updates an older one, but the old one can never be deleted. This rule is crucial because it means that the record gives a full and unchangeable account of the history of the database. Because of this, blockchain is extremely transparent, which helps in tracking products or verifying ownership. The other major component of blockchain is its namesake. A database can quickly become unwieldy if it contains too much information. To keep better track of transactions, blocks are created. In simplest terms, a block contains a set number of discreet pieces of data. A hash is then assigned to each block, rather than each individual piece of data. This speeds up the process of finding a specific record, since the mathematical formula used for hashes is checked only every set number of data points rather than for each one. Blocks are chained together through the hashes. The chain goes back to the very first entry in the dataset. It’s this chain of blocks that has given us the name blockchain. Why Blockchain Is Such a Valuable ToolThe value of blockchain lies in its ability to create unique ownership of digital property. Blockchain can only record forward, not back. In other words, the technology can keep track of each owner of a particular set of data from the initial owner onward. Moreover, blockchain is designed to be copied. No matter how many times a particular piece of data is copied, it will always reflect the current owner, since the data cannot be changed or deleted. Thus, while the data may exist across many computers on a network, only one person is identified as the actual owner. This makes it possible to have ownership of data like a digital copy of a movie.
Of course, this explanation of the basic components of blockchain applies to a single application of the technology—blockchain can be used in a number of different ways. Novel applications of blockchain will be an important investment opportunity moving forward. Comments are closed.
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