What is a blockchain?

Watch Video
2:19 minutes
Watch Video
2:19 minutes

What is a blockchain?

As the name suggests, a blockchain is a chain of blocks. The part that may not be so obvious is that blockchains are used to store information about transactions and keep a perfect record of the past. Blockchains are also known as Distributed Ledger Technology (DLT) because blockchain ledgers are distributed amongst all computers that elect to run their software.

Where is a blockchain located?

Every single computer that runs the code for a given blockchain possesses data containing all transactions that have ever taken place on that blockchain. Since the record of all transactions is available for anyone that wishes to see it, there is no need for a  centralized authority - like a bank. Essentially, a blockchain is located on every computer that downloads its software.

What was the first platform that used a blockchain?

Bitcoin, the first working platform built using blockchain technology, was invented in order to reduce our dependence on banks. Its launch in 2009 immediately following the 2007/2008 financial collapse caused by banks was no coincidence. Satoshi Nakamoto, the creator of Bitcoin, saw it as an opportunity to take economic control from centralized authorities and give it back to the people.

What are “blocks” on a blockchain?

Blocks are groups of transaction data that are encoded into a blockchain. New blocks on a blockchain are written - or mined - when new transactions take place. Typically, voluntary miners work on blockchains to verify new transactions, ensuring that all of the value is in the right place. Miners ensure the legitimacy of distributed ledgers. Once blocks of transactions are written onto a blockchain, it is virtually impossible for the records to be changed or erased.

We should also note that as blockchain technology is being used and adapted by more projects over time, the definition of "blockchain" is changing and not all blockchains work exactly the same. However, the information we provide in this course will give you an excellent background for understanding this technology. As you start to learn about the cryptocurrencies being developed, you'll see for yourself the nuances that make each coin different.

Why blockchains?

Watch Video
5:15 minutes
Watch Video
5:15 minutes

Why are blockchains used?

The primary reason that blockchains are useful is their ability to store, verify, distribute, and permanently record large amounts of data. Storing data on third-party platforms (such as the Cloud) is effective, but if the goal is to store sensitive data without any possibility of data corruption, no alternative is as efficient or as powerful as blockchain technology.

What problems do blockchains solve?

It's important to understand that by acting as distributed ledgers of all transactions, blockchains solve a key problem of digital currencies called "double-spending." Digital currencies are essentially just files. Before blockchain technology, these digital tokens could be duplicated or counterfeited. Now, with distributed ledgers that are continuously being verified, the problem of double-spending has been solved.

What is decentralization and why is it important?

One aspect of blockchains that is necessary to understand is decentralization. By distributing their ledgers across all computers that run their code, blockchains remove the need for centralized authorities and third parties. Without the middlemen (central authorities and third parties), users can interact with each other directly without needing to trust or compensate anyone for allowing them to do business.

What types of new abilities do blockchains give their users?

Unlike banks, blockchains give individuals the capability to carry out transactions anonymously and use their money in any way they see fit. One notable example of a banking failure is the Wikileaks example. Individuals that wanted to donate to Wikileaks (a bold non-profit journalistic organization) in 2010 using traditional banks found their funds frozen. However, Bitcoin provided an alternative that allowed these same individuals to make donations to Wikileaks without issue.

As the first platform utilizing a blockchain, Bitcoin serves two main purposes. It is both a way to store value and a method to transfer value between parties. Since Bitcoin's launch, blockchain technology has been adapted for numerous different purposes with many different cryptocurrency projects. We're now seeing blockchains as a way to host decentralized apps, execute smart contracts, and perform many additional functions that were impossible before blockchain technology.

How does a blockchain work?

Watch Video
5:24 minutes
Watch Video
5:24 minutes

What are the mechanics of a blockchain?

When we say that blockchains are ledgers, we’re describing the information that blockchains are made of. Every blockchain is composed of blocks and each block holds information about transactions. All transactions are confirmed and encoded using protocols specific to the technology of the blockchain being used. Every blockchain has rules that dictate what can and cannot be done. Any legal or valid action on the network, once written onto the blockchain, is virtually irreversible. All of the blocks which contain transactions are connected like links on an ever-growing chain.

How do users use addresses to transfer coins on blockchains?

Users of a blockchain are able to transfer coins or tokens from one address to another. For example, users that purchase Bitcoin are given control of their funds with private keys to addresses that hold Bitcoin. If you hold the private key of an address that contains any amount of Bitcoin, you can send your Bitcoin to any other valid Bitcoin address. This makes it so that no one can touch your coins without knowing a secret code that only you should have access to.

How do blockchains remain accurate?

Blockchains are able to remain safe, accurate, and secure because they are distributed. This means that they are stored on many different machines which are located in different locations across the world. Miners and nodes facilitate blockchain protocols by confirming and validating transactions. Each computing machine participating in any blockchain is constantly sending and receiving data to and from the network. Through this process, blockchains are able to maintain updated ledgers as well as cross-reference new transactions with old ones to verify that everything always adds up.

Are blockchains safe?

Watch Video
03:59 minutes
Watch Video
03:59 minutes

What is the main concern people have about blockchains?

By now, you should be starting to understand what blockchains are and why we use them. One of the largest reasons that people resist this powerful new technology, though, is that they question its safety and security. Many individuals learn a bit about blockchains but then disregard them because they fear losing their wealth to hackers, computer errors, or other unforeseen difficulties. Quite simply, alternatives like traditional banking are seen as "tried and true." We've used banks for many years and most people have never had significant problems with them. So why would we adopt a new, relatively unproven method of doing the same thing?

Are blockchains really safer than traditional banks?

The reality is that blockchains are actually much safer than traditional banking in many ways. Blockchains operate with three levels of security that protect their users in ways that other alternatives don't. These three levels are decentralization, cryptography, and points of verification known as miners and/or nodes.

When we say that blockchains are "decentralized," we're describing the fact that there is no single authority that controls blockchains. This also means that there is no single point of failure. If you use a traditional bank, for example, you're placing tremendous trust in that bank. You're relying on them to handle your money safely and you can only hope that they provide the services they promise. Many times, reality doesn't match these expectations. Individuals experience delays in payment, withdrawal, and money transfers. In extreme cases, accounts are frozen for reasons that customers do not understand.

What is the main difference between “trusting” a bank and “trusting” a blockchain?

If you place your trust in a blockchain rather than a bank, you're not trusting any single entity. You're trusting technology. Blockchains are executed by software that is run by any computer or machine running that software. This means that there is no centralized authority that is capable of making mistakes or supervising your actions in any way. As long as the software runs properly, the system is perfect.

What is cryptography and why does it improve security?

The second level of security is cryptography. When you use a blockchain to store wealth, that wealth is stored in a location that can only be accessed with a unique alphanumeric address that is referred to as a "private key." Private keys are so secure that if a malicious individual wished to hack your private key, they would need to spend enormous amounts of time, energy, and resources in this endeavor and they would still almost certainly fail. For this reason, it is not economically viable for someone to try and steal your wealth stored on a blockchain.

How do miners/nodes work?

The third and final level of blockchain security is miners and/or nodes. These miners/nodes participate in a blockchain by continually verifying all transactions that occur on that blockchain. Rewriting or corrupting of a blockchain's data is virtually impossible because miners/nodes are always ensuring that all of a blockchain's data adds up. In order to change the data in a way that would compromise a blockchain's integrity, an attacker would have to gain control of the majority of the miners/nodes on a blockchain. Because this isn't feasible, blockchains are considered virtually immutable.

Should you trust blockchains?

Decentralization, cryptography, and miners/nodes represent three extremely efficient levels of blockchain security. Although there have been attacks on blockchains in the past, the technology is always improving and is already far safer than it is given credit for by the general public.

The History of the Blockchain

Watch Video
04:46 minutes
Watch Video
04:46 minutes

When did the first work on blockchains begin?

1991 - First work on blockchain-like concept occurred
The first mention of any sort of blockchain-like technology dates back to 1991, when Stuart Haber and W. Scott Stornetta did the first work on a secured chain of blocks.

1992 - Blockchain-like technology improved by incorporating Merkle trees
The next year, 1992, saw the introduction of Merkle Trees to blockchain-like design which enabled multiple documents to be stored in a single block, increasing blockchain efficiency.

When was decentralization first thought of?

2002 - Decentralized trust within a network system was conceptualized
Ten years later, in 2002, the concept of decentralized trust within a network file system was formulated by David Mazieres and Dennis Shasha.

2005 - Bitgold was proposed: A Blockchain-like system with Proof of Work
In 2005, Nick Szabo proposed Bitgold: a protocol for decentralized property titles that incorporated a blockchain-like system. This protocol involved Proof-of-Work and timestamping features. Unfortunately, BitGold had one fatal weakness. It was discovered that someone who held a balance of BitGold could spend their coins twice without being “caught” - this weakness became known as the “double-spending problem.”

Bitcoin arrives on the scene!

2008 - Bitcoin’s Whitepaper was published
Everything mentioned up until this point laid the foundation for the first real blockchain. While Haber, Stornetta, Mazieres, Szabo, etc. were flirting with the concept of a blockchain, a real live blockchain was never actually created until 2008. In 2008, Satoshi Nakamoto published a paper called Bitcoin - A Peer-to-Peer Electronic Cash System. This paper solved the double-spending problem that troubled Bitgold and would become the white paper written for the first real, working blockchain.

2009 - Bitcoin launched using true blockchain technology
In 2009, with help from programmer Hal Finney and others, Satoshi Nakamoto made Bitcoin a reality. The code was written, the blockchain was born, and Nakamoto mined the first blocks himself. Hal Finney was the recipient of the very first Bitcoin transaction when he received 10 Bitcoin from Nakamoto.

Blockchains enter mainstream consciousness

2014 - Blockchain innovation gathered attention
The years following Bitcoin's release saw it gain tremendous popularity and use. It became seen as a legitimate method of payment - in fact, it was the only one that could be used for certain purposes (like donating to WikiLeaks). From 2009 to present, we've seen huge increases in file sizes on blockchains, innovations that change the way they work, and booms in the prices of shares of the technology.

Many people who are uninformed about blockchain technology think that Bitcoin and blockchain are the same thing. This is not correct. Actually, Bitcoin is a cryptocurrency protocol built on a blockchain. 2014 was the first year that investors and innovators really started focusing on improving blockchain technology and building new blockchains.

How have blockchains evolved since Bitcoin?

2014 - Blockchain 2.0: Decentralized Apps and Smart Contracts were conceptualized
In 2014, the term Blockchain 2.0 was first used in The Economist magazine. Blockchain 2.0 refers to the emergence of applications that can be executed on a blockchain database. This innovation represented a massive step forward in blockchain technology. With this concept, the prospect of running Decentralized Apps (apps that have their code distributed amongst users rather than stored by a centralized authority)on a blockchain became a possibility and Smart Contracts became plausible, as well.

2015 - Ethereum launched as the first Blockchain 2.0
The very next year, 2015, saw the launch of the first Blockchain 2.0. Vitalik Buterin, a contributor during Bitcoin's creation, saw room for improvement over Bitcoin and wrote the code for Ethereum. Ethereum promises to provide the same functionality as Bitcoin but will also feature the ability to run Decentralized Apps.

2017 - Initial Coin Offerings and blockchain-based projects became common
While new blockchain projects have been appearing since investors and innovators started focusing on blockchain technology in 2014, 2017 was a year marked by an explosion in blockchain-based platforms. Initial Coin Offerings, also known as ICOs, in which early investors are given the chance to buy the first shares of a project became extremely common in 2017.

text
text