“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”- Don & Alex Tapscott

Usually, whenever somebody asks “What is blockchain technology?”, they will get an answer along the lines of the above quote. But what does that actually mean? How do blockchains work. And what other promises does blockchain technology have?

The past

After the release of Bitcoin in 2009, blockchain technology has been receiving plenty of attention from all kinds of people and companies. Many are interested in all the possible use cases of this new, ground-breaking, technology and companies have been looking at all the possibilities this new technology has to offer.

Total Market Capitalization Cryptocurrencies, coinmarketcap.com

A couple of years after the release of Bitcoin, people started realizing blockchain technology could be used for more than just simple currencies and overall interest in blockchain technology skyrocketed. This can also be seen in the graph of the total market capitalization of cryptocurrencies, which also grew enormously during this period.

How blockchains work

But how do blockchains work, and why is this technology so ground-breaking? Let’s start with the basics.

Traditionally, data is stored in a central place, where users have access to a central database. Depending on the design, users can add and/or edit data in this central database. This can however lead to problems, as data can get lost if the database is compromised. Data can also get hacked or get changed secretly.

Blockchains approach storing data differently, data is stored in a decentralized manner. They are essentially widely distributed ledgers, to which everybody has access, making it very hard for data to get lost or compromised. They are meant to keep track of everything of value, which can be anything ranging from cryptocurrencies to other data.

“Blockchain is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one.” - Sally Davies

Let’s start with the basics of blockchain technology. Blockchains consist of blocks which contain 3 things: A (new) hash, the hash of the previous block, and lastly, data. A hash is a string of characters that is unique for each block. The hash changes completely if the content of a block changes.

The (new) hash is generated based on the content of that block and is also based on the hash of the previous block(s). It is used to verify the block’s content and integrity.

The hash of the previous block is used to connect all blocks. As you already know, the hash of a block changes completely if even a small thing in the block changes, so if the hashes of two blocks are the same, you can safely say all blocks before those blocks are exactly the same.

Data is also included in each block. What this data is depends on the type of blockchain. For example, a block from the Bitcoin blockchain, consists of the sender, receiver, the amount of BTC sent and a digital signature.

Every user of the blockchain can broadcast a transaction to the network. These transactions are then collected by nodes (device connected to the blockchain network using a client that performs the task of validating and relaying transactions) and added into a block. Nodes can check if transactions broadcasted to the network are legitimate using the hash and the hash of the previous block. These blocks are then broadcasted to the network, where nodes reach consensus on which block gets added to the blockchain. If the majority (>50%) of the nodes agree that a block is legitimate it is added to the blockchain and can no longer get removed. These nodes are rewarded for their work. How they are rewarded for their work depends on the blockchain.

We know this may be hard to understand, so we have created an illustration to give you an idea of how this looks in practice. In this illustration, the playing cards represent blocks, and the symbols on the cards represent individual transactions. As you can see, the hash of all new blocks changes if even a single transaction in a (previous) block changes.