Behind the Scenes of Cryptocurrency: Understanding Blockchain Technology
Cryptocurrency has fast become an accepted part of today’s technology-driven world. First something of a novelty, cryptocurrency quickly gained ground and media attention when many people suddenly found themselves rich overnight after Bitcoin’s explosive growth.
Today, it seems that new and different types of cryptocurrency enter the market every day, offering buyers more options to choose from. Additionally, the technology that fuels cryptocurrency (blockchain) has taken off in its own right, making waves as a potential new solution for other important types of data encryption (such as patient records in the healthcare industry). Blockchain technology is what makes cryptocurrency work, and its use of decentralization and cryptographic hashing help make the technology so unique and secure.
How Blockchain Works
Sometimes called distributed ledger technology (DLT), blockchain is the record-keeping technology that makes cryptocurrency secure. You may have run into a definition of blockchain technology that read something like “a decentralized, distributed, public ledger.” Though that might seem complicated at first, the reality is that it is easier to understand than you might imagine.
At a very basic level, a blockchain is exactly what it sounds like: a chain of blocks. The “blocks” contain three important types of information and are connected on a “chain” (a public database). Just one block on a blockchain can hold up to 1MB of data, which, depending on the size of the individual transactions, means that several thousand transactions could potentially be stored on one single block on the chain. Because of the decentralized format, no one person has access to all the information stored on the blockchain; rather, multiple users have copies of the encrypted data, which helps to make the data more secure.
What Does a Block Contain?
There are a few different pieces of digital information contained on each block, and they fall into three main categories. Each block holds information about each transaction (things like the date, time, and amount of money exchanged), who is participating in the transaction (the merchant and name of purchasers, recorded as a digital signature), and data that distinguishes each block from every other block on the chain. This data is called a hash, and it is a cryptographic code generated by specialized algorithms. Every single block on a blockchain stores this unique code, along with the hash of every other block that comes before it on the chain. That is part of what makes the blockchain technology so secure.
The extra data security on a blockchain is extremely important when dealing with finances or other types of secure information. On a blockchain, the decentralized approach, combined with the unique hash stored on each block, help make it virtually impossible to interfere with the data or change it in any way. Since there is no single location that stores all the information contained in the blockchain, a hacker would be forced to alter every single copy of the block where they are attempting to alter information. With thousands upon thousands of users on the blockchain (accessing the blockchain network as nodes), that would require a staggering amount of processing power to complete, a virtually impossible task. This decentralization, with thousands of copies of the blockchain across the network, is what is referred to as a distributed ledger.
The hash code is the other factor that helps to ensure security, related to what is referred to above with the thousands of copies of the chain. In addition to that decentralization, each block on the chain contains an individual code (the hash), along with the hash for every other block on the chain before it. Every time the information is altered, the hash also changes. If a hacker attempts to change information contained in one block, the hash for that block will change as well, making it not match the other thousands of copies of that block on the distributed ledger. To cover the change, a hacker would be forced to modify the hash for each block on the chain before the one they had altered — on every single copy of the ledger. Again, the amount of processing power needed to make those alterations in a reasonable amount of time would be absolutely staggering and does not yet exist. Once a block is added to the chain, this extra security makes it extremely difficult to alter and virtually impossible to delete.
The security that blockchain technology provides is part of its appeal. For many other industries, the appeal of an unalterable record holding important data is extremely interesting. The healthcare industry, in particular, may soon begin to implement blockchain technology into its efforts to store and share patient records. Perhaps soon, we will see more use of blockchain technology in our daily lives.