Blockchain has been a hot buzzword for a few years. That's been driven by the wildly fluctuating cryptocurrency market, due largely to Bitcoin's meteoric rise and fall. So with all the attention on blockchain, there are lots of terms thrown around to explain how it works...that don't really make a lot of sense. Sure, a blockchain is an immutable, distributed ledger, but what does that actually mean? Let's break it down.
A System of Records
Blockchain is essentially a newer way to record and store data. The major departure from other data storage methods is in how and where the data is stored. Traditionally, the keeping of records has been left to major, centralized parties. A centralized party in this case refers to institutions like governments, banks, companies -- any group with the authority to hold and maintain data.
While these institutions were given the authority to store this data by the people who trust them to keep it safe, there are still flaws with this system. When data is centralized, the power to alter, remove or invalidate that data rests with the party that keeps it -- in this case, a centralized party like a bank that keeps records of how much money you have.
Pitfalls of Centralized Record Keeping
Although uncommon, that leaves the data open to corruption, theft and loss. There are federal protections of course, but basically if a bank loses all of its records overnight, the records of everyone who has money there is also lost.
There is a lot of talk about "decentralized ledgers" in blockchain. A ledger is just a way of keeping records, often financial, that hold all transactions that allow a person to see what has been spent and how much is left. Ledgers have long been the purview of accountants, bankers and other financiers who were in control of them.
A decentralized ledger does the exact same thing -- keeps records of all transactions. The difference is that each party that is privy to a blockchain has an instantly updated version of that ledger, much like working in Google
docs. When someone makes a change, everyone sees the update instantly.
Shared Record Keeping
That means that everyone has the same records as everyone else, rather than relying on a single person or institution to store and protect the data. In this case, if someone's data ledger was lost, corrupted or stolen, everyone one else has a backup of the records so that no data is lost and no one is left out in the cold.
Blockchain technology works with all these decentralized -- or distributed -- ledgers to ensure that the data is accurate. If someone decided to hack into their ledger and change the data to appear as if they have more money, the blockchain instantly compares that difference to every other distributed ledger and notices the anomaly of the fraudulent ledger. Because there is the data from every other ledger available, the blockchain can, with certainty, disregard the bad data and continue to protect everyone else's.
Block + Chain = Blockchain
When a blockchain stores information, it creates a block of data. When that data block is "full", it is encrypted to a small, manageable string of letters and numbers known as a hash. That hash has information in it which references the block that came before it with specific pieces of data that it has.
In traditional accounting, with a paper ledger, someone could remove page 15 and replace it with different information and page 16 would still look the same. Because a blockchain references each block of data before it, altering one block is impossible because the following block would no longer match the inputted data. As each block is added to the system, they form a chain of self-reference, which is where the term blockchain came from.
Years to Go
Blockchain technology is still very young. While there are lots of startups working to create new opportunities for the tech, it may be several years before true blockchain disruption occurs.