If someone asked you to explain how the internet worked before it was used by everyone, would you have been able to? My guess is most of us wouldn't. I mean, who really knew what search engines, ‘crawling URL links’ and 'indexing web pages’ meant? Many of us still don't know today, but that's okay as it doesn't stop us using and benefiting from the internet.
Growing up with the internet has meant we don't need to fully understand it. You don't need to research how to do something online, you just do it.
The same logic can be applied to the blockchain. Concepts may sound confusing, but the likelihood is it will become part of our everyday lives.
But for those of you who do want to know more about this fancy piece of tech, keep reading.
The blockchain is a type of technology that stores data
This data might be somebody sending someone else a cryptocurrency such as bitcoin. Each time this happens, a new block is created to record the transaction
Blockchains are decentralised, meaning no central body or government controls it. Instead, it's managed by a 'peer-to-peer' network
Before the blockchain can challenge the centralised system, it must solve the ‘blockchain trilemma’
It’s the foundation of all Web 3. Crypto, NFTs and decentralised apps all need the blockchain to function
So, what is the blockchain?
Think of the blockchain like a judge; the fairest and most impartial judge there is.
This judge is constantly recording every transaction that happens. A transaction may be somebody paying someone else. This judge is so fair, that they also make all their recordings publicly available. Yep - you, me and even your neighbour can all view what is recorded on a blockchain at any time.
When the blockchain records a piece of information, a new block is formed. Of course, with lots of transactions happening we get a chain of blocks, or rather, a 'blockchain'.
Each block has three aspects to it. Let's take a look:
The first is simple. It's the data (or information) of what actually happened. If I sent you one bitcoin, the blockchain would record that my wallet was the sender, and your wallet was the receiver. It’s the same concept as sending your friend money via digital banking.
See, nice and simple!
The hash is a string of characters that might look like this: 'FtYjKul9rS489Z2iL'. These are like those verification codes you get emailed when you’re proving your identity when trying to log in to one of your accounts. In the same way, these are proving a block's identity. This is pretty important, otherwise the blockchain would lose track of which blocks are storing what data.
Still with me? You're doing great.
3. Hash of the previous block
This is where the fun begins. There's a lot of hype about the blockchain and this is why.
Every block also possesses the previous hash of the block before it. This is so that if someone hacked the blockchain, they couldn't just hack one block. They'd have to hack each block which follows it in the chain, otherwise all the other blocks would be out of sync and the hacker would be all too easy to detect.
I like to compare this to the game Jenga. A hacker can’t just take one piece out - they have to ensure the wellbeing of every other single piece. If they don’t, the whole tower falls.
Between this and the fact everything is visible to the public, it's no wonder why so many people rave about the blockchain.
A simple example
Here’s a simple example of how the blockchain works:
James has an ice cream. 🍦
Lucy uses a coin to buy the ice cream from James.
This is a transaction and now everyone can see James has the coin.
James uses his coin to buy a ball off Alex.
This is another transaction, the second so far.
These two transactions come together and connect, like two jigsaws in a puzzle slotting into place.
Now Alex uses the coin to buy an apple off Jack.
This is another transaction, the third so far. This also slots into place, proceeding the second transaction.
The continual process is what forms a blockchain. Each new transaction is a new block that grows the chain.
James though, being the sneaky child that he is, pretends he still has the coin despite trading it for the ball. He pretends to offer his coin to Paulo in exchange for a slice of pizza.
This transaction attempts to take place, but the new transaction fails and doesn’t slot into place. The blockchain has already recorded James giving his coin to Alex.
Paulo sees the failed transaction instantly and no exchange is made. Paulo also knows not to trust James. Good work Paulo.
Okay, so we know how a blockchain works. But it’s still difficult to imagine the point of using one.
If you think about Google Drive, it’s an online file storage system that is centralised. It uses apps like Gmail, Google Docs, Google Sheets that we can access from our laptop, phone or tablet. These apps let us work with others and communicate. Some blockchains may have similarities to Google's Cloud, only the system would be decentralised, as would the apps (hence why we call them 'dapps').
There are a lot of different blockchains in the same way there are lots of apps – different apps do different things, just like blockchains. You can read more about this in our article do all cryptocurrencies use the same blockchain?
Decentralisation and the blockchain
Decentralisation is a term you'll hear a lot when diving into all things Web 3 related.
Unlike other databases, a government or similar institution doesn't manage the blockchain. Instead, the blockchain uses a 'peer-to-peer' network, which is a fancy phrase for saying people manage it together, as a group. This is a large reason why many are in favour of the blockchain, as it gives more control back to the people and away from central bodies.
The classic example is removing the bank from payment transactions. Banks take a small fee each time we purchase something (this is why some small businesses don’t accept card payments). They charge this fee because when we go to pay for something, they check we have the necessary funds. Without the need for a bank though, we don’t need to pay a fee. Instead, the user holds onto this resulting in more money in our pockets - wahoo!
Transactions on the blockchain can't be reversed either. Instead, they are permanently available for anyone to view.
Crypto and NFTs steal a lot of the headlines within Web 3 news, but it's the blockchain that makes them possible. Without the blockchain, you really would just own a 'JPEG' (a photo file) instead of an actual NFT. Remember, the blockchain is the fair judge that proves you own that item, a bit like a blue tick proves someone's identity on Twitter.
What blockchain technology is to crypto and NFTs is like what an engine is to a car. It might look like it works on the outside, but remove the engine, and you won't be going anywhere.
The blockchain trilemma
Decentralisation isn’t the only aspect to the blockchain though. Vitalk Buterin, the founder of Ethereum, proposed the theory that to have a truly successful blockchain, three elements must work seamlessly and simultaneously. Today, it's widely accepted having two aspects working is possible, but having all three is a step too far.
The act of removing the middleman who takes a fee. We touched on this above with our example of the bank. Another example may be removing an estate agent when selling a house.
Hacking attacks are more likely to happen on a centralised system because hackers can get hold of data more easily. They can manipulate transactions to their own advantage. Hacking a blockchain is far more difficult because each block possesses a 'hash of the previous block'. Depending on whether a blockchain is ‘permissioned’ or ‘permissionless’ affects the security. Permissioned are often more secure because the creators specify who is allowed to join the blockchain and act as a validator. A permissionless blockchain is an open network meaning anyone can join and change them.
This means allowing lots of users to use the system without sacrificing performance or passing on high gas fees. When blockchain is slow at processing users transactions, it creates traffic on the network. Typically, more traffic results in higher gas fees.
Currently, it’s widely agreed there’s no blockchain that achieves all three. Many people are looking ahead to Ethereum 2.0 which proposes it will be able to find a balance between each aspect.
Investing in the blockchain
The blockchain comes with plenty of investment opportunities. This is why when looking for Web 3 projects to invest in, always do your research into the relationship it has with the blockchain.
At Shares, we're crazy about all things investing, and that includes investing in yourself. Today, there are endless jobs in digital marketing and social media. These are traditional 'Web 2' activities and positions are extremely competitive. However, there is a large demand for jobs requiring knowledge on Web 3 and with fewer people possessing this knowledge than the Web 2 sectors, you could open some serious doors for yourself by getting clued-up on all things blockchain.
For more blockchain quires and crypto questions, check out the following blog posts:
As with all investing, your capital is at risk.
Shares is a trading name of Shares App Ltd. Shares App Ltd is an appointed representative of RiskSave Technologies Ltd, which is authorised and regulated by the Financial Conduct Authority.