Although ‘blockchain’ is a seemingly esoteric term that’s bandied around in financial-sector bluster, its core principle is easy to understand. Essentially, blocks are digital information, and the chain is the public database where they’re stored.
The intention of the blockchain is to provide a neutral, decentralised ledger that keeps track of digital transactions globally, securely, and publicly.
What are the blocks in blockchains?
Blocks store information. Each block is completely unique, like a data fingerprint. Blocks commonly hold around 1MB of data, and consist of three parts:
- Timestamp content. Blocks will store the time, date, and dollar amount of transactions.
- Personal information. This would be the buyer and seller details, but a privacy-protecting, auto-generated digital signature instead of your actual name. Blocks can store thousands of transactions between a seller and multiple buyers.
- A ‘hash’. A hash is like a name for a block. These identifying names are generated by algorithms, so each block can be distinguished from the next, even if purchases or transactions are repeat or identical.
What is the chain in blockchains?
Think of the ‘chain’ part of blockchain like a digital ledger, and the blocks are entries. The point at which a block gets added to the chain is when these 4 actions have been completed:
- The transaction has occurred
- The transaction has been verified
- The transaction is stored into a block once verification is complete
- The block is given its unique code, a hash.
At this point, the block is added chronologically to the end of the blockchain. This chronology is important, and it’s what makes blockchains so difficult to hack.
How secure is blockchain?
The unique hash of a block is generated off the last established block. If a block is edited or manipulated, the hash is altered. So in order to edit a block, a hacker would have to edit the one after it, and the one after that, in a kind of manual, butterfly-effect manipulation that would need to span thousands of transactions and take vast computing power (so vast that it wouldn’t be worth the time).
Another reason blockchain is so reliably private is that when a user chooses to connect their personal computer to the blockchain network as ‘nodes’, they receive a copy of the blockchain that will be updated automatically whenever a new block is added. This means that in order to interfere with the blockchain, a hacker would have to manipulate not just every block on the chain, but every single copy on every single node in the network, of which there are millions.
It’s not impossible for blockchains to be hacked. There have been several incidents within the last few years, generally conducted via a blockchain application, such as Bitcoin. Smaller blockchains tend to be more susceptible to hacks due to fewer users storing them on their personal computers. Fewer ‘nodes’ or copies of a blockchain make it easier for hackers to gain majority control of nodes, which is how they could theoretically take over the network. As blockchains increase in presence and popularity, the likelihood of hackers being able to commandeer them gets lower.
What’s the relation of a blockchain to a cryptocurrency?
Most (but not all) cryptocurrencies, like Bitcoin, Ethereum and Litecoin, operate on their own blockchains. The cryptocurrency is the mechanism by which you participate in a public blockchain network. In some cases, a cryptocurrency operates on a distributed ledger, which is a similar technology, but not a blockchain per se. Ripple is an example of this.
Public vs. private blockchains
Public blockchain ledgers are peer-to-peer (P2P) networks that are built on a time-stamping server. There is no need for administrators, because administration is done automatically when the blockchain users make transactions. In the case of private blockchains, a company can adopt the blockchain model to administer their own network. These can be used internally, or in transactions with other businesses or partners.
How do I invest in blockchain?
A huge benefit driving investors to allocate some of their portfolios to blockchain and cryptocurrency technology is its ability to reduce the cost of transferring funds. Transactions across blockchains are democratised - there is no third party taking their cut.
There are a few ways you can enter into the world of blockchain investing - stockpiling Bitcoin, trading blockchain penny stocks, or investing in startups or crowdfunding campaigns across borders using cryptocurrency.
At STAX, you can invest using digital currencies or FIAT currencies. Click here to see our current live offers.