Explain Blockchain: What It Is, How It Works (Simplified)
Explain Blockchain: What It Is, How It Works (Simplified)
17 March 2023

What’s Blockchain and Why Is It Called Block-Chain?

The term “blockchain” has been floating around the web as the next big thing that’s tied to cryptocurrency and NFTs. We’ve covered these topics in the past and while they may, at the surface level, seem complex, they can be simplified to be better understood. Blockchains are no different. 

All data that exists online is stored in a database somewhere in the world. Databases will generally have large computers with hundreds of millions of bytes of storage space available. A byte is a value that represents the volume of a piece of data. Your computer, for example, may have a hard drive inside of it that contains a terabyte of memory storage. A single terabyte is equal to 1 trillion bytes. Just imagine how many bytes a data storage facility with thousands of terabytes of storage can hold!

So while a database is a physical place where data is stored, a blockchain is a digital database. You may be wondering: How can a database be digital? Surely the data has to be stored somewhere?  

You’re 100% correct, which comes to the second part of a blockchain’s definition. A blockchain is a digital database that stores data in nodes across a peer-to-peer network. 

This seems complex, but we’ll break down exactly what this means. 

(This article is brought to you by OneLaunch, the software program that lets you customize your Windows desktop experience. We are experts in desktop technology, not crypto, blockchain or Bitcoin. This blog is informational only, not to be mistaken for financial or legal advice.)  

Connected Blocks

When data is stored in a blockchain, it’s held in a block of data that has a certain capacity similar to a computer hard drive. This means that a block is essentially a large chunk of data. Once the block is filled, the block is closed with a specific timestamp being attached marking when the block was closed.

Perhaps the name “blockchain” is starting to make sense to you. Indeed, a blockchain is a collection of these data blocks that are strung together in a “chain”. Once a block of data is filled, it’s added to the chain of other data blocks that were created in the past. 

Picture a blockchain like a waiter at a restaurant taking orders on a ticket. As they write down your food order, the ticket fills up with information about the transaction that’s about to occur. Once you’re done ordering, the ticket is “completed” and the waiter gives the ticket to the kitchen. The ticket, in this example, is the block and your food order is the data. When the order is completed, the block is full and is added to the chain of other orders. 

That said, blockchains don’t contain food orders. The data that is typically stored in a blockchain is cryptocurrency transactions. This is the buying, selling, and trading of different digital currencies that exist entirely on the web. These transactions need to be secured, which is why they use blockchains. So why are blockchains so secure?

Decentralization of Blockchains 

We mentioned earlier that a blockchain is a peer-to-peer network. This means that the data contained in a blockchain doesn’t all exist in the same, central place. It’s stored on a bunch of different computers, or nodes, across the world. So what is the incentive for people to let a blockchain use their computer as a node? 

People who operate blockchain nodes receive incentives for allowing the blockchain to make calculations with their computers. These incentives may be discounts on cryptocurrency transactions, or even small pieces of crypto. The benefit is that the person operating the node doesn’t have to do very much — just allow the blockchain to operate on their system. 

Blockchain and DLTs

The “operation” that occurs on a node is referred to as distributed ledger technology, or DLT. DLT is a  piece of technology that allows transactions (data) to be recorded without a third party verifying it. This is because the DLT encrypts the data and makes it impossible to access without specific keys. Back to our waiter example, this essentially allows you to make your order without a waiter writing it down. With DLT, the kitchen won’t have to be concerned about whether or not the order they’re seeing is real. 

With the data spread out across several different nodes, the network as a whole isn’t as susceptible to failure from one point. If a traditional database is compromised in some way, the network that it’s attached to will go out. Additionally, this may protect the network from potential hacks. If a hacker attempts to access and change data in a single node or nodes of a network, the other majority of the nodes will remain unchanged. They’ll then see where the attempted breach occurred in the network and cut that node off from the blockchain. 

Blockchain and hashes

Another element of security that blockchains have is the hashes. Blockchains that are completed and stored have a “hash” at the end of them. This hash is a code that scrambles the data contained in a block into numbers and letters. A new block will contain the hash from the last block, essentially basing the new data on what was contained in the previous block. If a hacker were to try to alter a past block, it would be immediately apparent as the data would no longer match up with the block before and after it. 

Think of it like a physical chain that is made up of metal links. If a hacker wanted to alter a single link in the chain, they would need to remove it from the chain, make the change, and then put it back in. But, if they tried to do this, the chain would fall apart and they wouldn’t be able to put the link back in.

Remember, if a hacker removed a chain, the blockchain wouldn’t fall apart. Instead, the problem would be detected and the compromised node kicked off the network. 

Essentially, if you wanted to hack a blockchain, you would have to alter the majority of the links in the chain at the same time so no discrepancies are detected. This is sometimes referred to as a 51% hack, where a hacker would have to compromise 51% of the nodes in a blockchain simultaneously to make a change. This is so difficult that it is nearly impossible to perform. 

All this to say that blockchains can be safe and secure without a central authority protecting and securing the data. That way, online currencies not backed by a federal reserve can exist. 

Blockchain Examples

If you want to explore more about blockchains, many popular cryptocurrencies use blockchain networks to record and store transactions. 

Bitcoin, Ethereum, and Tether are all examples of popular cryptocurrencies that all have respective blockchains. If you purchase or sell coins on any of the networks, a blockchain will record your transaction. You’ll also notice that if you do this, there is a “gas fee” that incurs, which is the fee for processing your transaction on the blockchain. The aforementioned benefit of reducing fees for operating a blockchain node applies here.

If you want to dig more into the history of blockchain and bitcoin, Science Direct has a good overview, and you can also read what’s referred to as the “seminal article on bitcoin and blockchain” by Satoshi Nakamoto.