What Is a Blockchain and Why Should You Care

If you are involved with or curious about cryptocurrencies, chances are that you have heard of the term “blockchain.” For most people, a blockchain is perceived as an abstract. It is something that they know that exists but that they cannot explain.

Mind you, in order to use or invest in cryptocurrencies — such as Bitcoin — you do not necessarily need to understand the intricacies of the blockchain. When people use or invest traditional cash, very few know about the complex systems that are involved. How many really know what is involved when governments print fiat currencies? How central banks regulate the money supply and interest rates? How private banking systems process checks and credit card payments? Most people are blind to all of this, yet they use cash every day.

Cryptocurrencies, being so new, have yet to benefit from this type of cultural legacy of trust. In other words, it’s not like you grew up with Bitcoins. You didn’t get your allowance in Bitcoins. You didn’t buy your first car with Bitcoins. Your grandma never transferred five dollars worth of Bitcoins to your Bitcoin wallet on your eighth birthday.

This lack of legacy of trust can sometimes make cryptocurrencies seem more mysterious than they should be. This is why knowing what the blockchain is all about is so important. Understanding the blockchain will open your eyes to why Bitcoin and other cryptocurrencies are the future. You will be able to grasp how a digital currency can, in fact, be anonymous and unregulated while also being safe and practical.

— The Basics —

The etymology of the word “blockchain” (“block” + “chain”) provides you with a basic idea of what it is — a chain of blocks. These blocks exist in digital form and contain data specific to a transaction. A good way to visualize this data is by seeing it as entries in a ledger. Imagine this data being line entries in your checkbook or individual transactions on your credit card statement. The data identifies who paid whom and how much.

— Keeping It Confidential —

Obviously, when data involves financial transactions, the need for privacy and security is essential. This is why the data in each block of the blockchain is encrypted — to be more specific, it is hashed.

Hashing means that the data that is encrypted generates a hash value that can be used to verify the integrity of the data without having to reveal it. A hash is nothing more than a unique identifier. Much as you have unique fingerprints and unique DNA, so too do blocks in a blockchain have unique hashes. No two blocks can ever have the same hash. If the data is tampered with, the hash changes. You’ll see why this is important in a moment.

This is where many people zone out and end their attempt at understanding the blockchain. When they read words like “encryption” and “hashes” — they become overwhelmed by unfamiliar jargon.

Keep it simple. At this stage, simply visualize each block as a secure container of data with its own unique identifier called a “hash.”

— Preventing any Monkey Business —

If the thousands of years of using paper- and coin-based money has taught us anything, it is that some people will eventually try to steal or defraud others when engaging in transactions. When it comes to cryptocurrency, one of the biggest concerns for the average person is precisely a fear of being defrauded in a transaction.

Fortunately, the main purpose of the blockchain is specifically to eliminate these sorts of risks. Now that you have a clear and basic idea of what an individual block is, it is now time to understand how they are put together into a blockchain. This will make you aware of what makes them impregnable to alteration or any other sort of financial monkey business. In short, you will see how they are more resolute and safer in this regard than traditional cash.

When you see a brick wall you can tell that it is the mortar that binds the individual bricks together converting them into a solid and strong wall. With the blockchain, each block is held together securely to the block that precedes it with a “digital mortar.” This mortar involves the hashes.

You see, each block not only carries its own unique hash, but it also carries the hash of the block immediately preceding it. This means that if at any point anyone tries to change the data in a specific block — since that would also change its hash — the block following it would detect it. This makes it unrealistic to target a specific block for a successful attack on its data. Much as all the chickens in a henhouse would start hollering and clucking if a fox entered the coop, if a nefarious hacker tries to attack one block, the other blocks in the blockchain would detect and invalidate the attack.

— Strength Through Decentralization —

The other key element of the blockchain is decentralization. All of the computing power that is required to process the blocks and the hashes need to come from somewhere. If this processing power came from one centralized entity, you could see how that could undermine the security and trust of the cryptocurrency’s ecosystem.

This is why the blockchain is handled through a decentralized network. It uses a peer-to-peer networking system. There is no central hub, no processing center, no head honcho. It is open to everyone. Not only does this make the blockchain’s ecosystem resilient against outages, but it also makes it infinitely more secure.

Imagine that the blockchain was this massive and eternally accurate ledger that was constantly being updated. Think of it as a”distributed ledger” — a ledger that is spread out across multiple computers worldwide.

Further imagine that there wasn’t just one “keeper of the ledger.” Imagine that there were tens of thousands, or even hundreds of thousands, of keepers. Each one with the exact updated copy of the ledger at all times.

Unlike with a centralized system where if one or two keepers of the ledger were to collude they could conceivably abscond the system — in a decentralized system, it would be impossible for anybody to attempt to coerce the blockchain without the multitude of other keepers discovering the action and invalidating their attacks.

This sort of decentralized collaboration is what makes the blockchain secure without the need of interference from governments or financial institutions. It is also what ensures the privacy of the transactions that flow through it.

— Wrap-Up —

You can now see how the blockchain is not some mystical entity meant to be understood solely by cryptographers, techies, and financial experts. You can appreciate how it forms the backbone of any cryptocurrency. You can understand how the tenets of security, trust, privacy, and decentralization come together in the blockchain.

By understanding the blockchain, it should also put you in a more informed position when it comes to trusting and using cryptocurrencies. It should also make identifying investment opportunities in cryptocurrencies easier when they arise.