What Is Blockchain Technology?
To put it simply, a blockchain is a form of distributed ledger technology. (Distributed ledgers are databases that are maintained by multiple parties rather than one.)
The data that blockchains store are organised into ‘blocks’. Blocks are linked together using cryptographic hashes. This creates a ‘chain’ of blocks. Because blocks are ordered in a specific way, the data stored in them is immutable. (If something is ‘immutable’, it means it cannot be changed.)
It’s worth pointing out that blockchain technology isn’t the same thing as cryptocurrencies. A cryptocurrency is a digital asset or digital form of money. Cryptocurrencies run on blockchains and other forms of distributed ledger technology.
For example, the bitcoin (BTC) cryptocurrency runs on the Bitcoin blockchain network. Another well-known blockchain, Ethereum, has a native cryptocurrency called ether (ETH).
Read: What Is Cryptocurrency?
The Big Deal with Blockchain
Blockchains are decentralised in nature, meaning no single actor controls the network. This is totally different from the centralised databases we see used today by banks and social media platforms, for example.
Operating on a centralised system is problematic for many reasons. One big reason is security. If a central database gets hacked, everything stored on it becomes vulnerable. Another reason is data ownership. In today’s world, you rarely own your data. Worse still, your data is often monetised by the very networks you trusted it with.
This brings us to another major issue with centralised databases: transparency, It’s virtually almost impossible to verify how centralised network operators use your data.
Blockchains & Consensus
Each node participating in a blockchain network has its own version of the truth. (A node is simply a participant in a blockchain network. Nodes communicate with other nodes to ensure the blockchain’s security and integrity.)
Remember, blockchains are decentralised. And so, you may be wondering: how on earth do all nodes agree on a unified transaction ledger without the help of a central authority?
This all has to do with what we call blockchain consensus protocols. Think of these as the set of rules that define how nodes achieve consensus on a single state of the blockchain ledger. (‘Achieving consensus’ is just another way of saying ‘reaching an agreement’.)
Often misunderstood, there are multiple key components to any given blockchain consensus protocol. Take Bitcoin for example. It uses the Nakamoto consensus protocol, which features a block-proposing scheme called proof of work (PoW).