Blockchain Basics: Key Things to Know as A Beginner

Our blockchain basics guide explains how blockchain technology works and its many promising applications for a variety of industries. Ever since the introduction of Bitcoin in 2009 brought blockchain technology to the world, the practical uses of blockchain beyond digital currencies have continued to expand.

At first glance, both blockchain and Bitcoin can seem intimidating and incomprehensible. Let’s start your journey with confidence once you understand the blockchain and process behind it.

Table of Contents

• What is a Blockchain?
• Privacy & Security
  • Security by Design
  • Anonymous Digital Signature
• Blockchain vs Bitcoin
  • Blockchain Technology
  • Bitcoin Application
• Blockchain Uses
  • Compliance
  • Smart Contracts
  • Supply Chain
  • Recordkeeping
  • Media Distribution
• Blockchain Process
  • How the Process Works
• Start Your Bitcoin Journey
• FAQs
• Blockchain Infographic

What is a Blockchain?

Multiple interconnected computers called “nodes” maintain a digital ledger called a blockchain. Consecutive “blocks” that store an accounting of relevant transaction information make up the blockchain. Most commonly, this information includes transaction time, amount and addresses involved in transactions.

A cryptographic algorithm securely links each block to the one before it. This serves to verify and create a time-stamped hash of block data. Network users with access to view the stored information continuously receive copies of the blockchain as subsequent transactions produce new blocks.

Through this technology, Bitcoin and other digital currencies maintain privacy and security while having a public, decentralized ledger.

Privacy and Security of Blockchain

The security of a blockchain relies on the structure of its blocks and the peer-to-peer network that maintains it.

Blockchain Technology is Secure by Design

Blockchain technology adds new blocks to the chain in a linear and chronological order. Each successive block links to the previous one. Therefore, any bad actors wanting to tamper with data would need to decrypt previous blocks first. Upon reaching their targeted data, they would then have to rewrite the chain forward from within the chain itself. Additionally, they’d have to convince all other nodes to do the same.

This process becomes increasingly infeasible with every block added to the blockchain. As a result, the security of a blockchain is two-fold: tampering with data is both technologically difficult and economically impractical. 

In addition, each of the network’s users hold copies of the blockchain. To successfully alter data on one block, bad actors would need to change all other copies of that block as well. Such a feat would require substantial human cooperation and planning in order to subvert the whole network. Malicious changes to the ledger are therefore practically impossible. 

Privacy and Anonymous Digital Signature

Blockchain technology securely records information in a public space, establishing digital trust across the network. Data within the blockchain can exist in a decentralized state as network users reconcile it.

A key privacy feature of blockchain is the use of a digital signature. While the global peer-to-peer network can view the contents of the public ledger, user information is private. The only exception would be if a user proactively identifies themselves and associates their identity to their keys. Because blockchain networks are permissionless, a user may choose to anonymously generate keys and do business privately.  

The hashing algorithm generates the digital keys used to authorize transactions. The technical and economic security of the network makes it difficult for malicious parties to create fraudulent transactions by cracking keys.

Because the blockchain tags each block with a unique code to distinguish it from other blocks in the chain, the risk of hackers compromising a user’s data or the public ledger is almost zero.

Differences Between Blockchain and Bitcoin

As our guide to Bitcoin for beginners explains, blockchain and Bitcoin are not the same.

Blockchain Technology

Blockchain is a generic term for the technology that Bitcoin and other digital currencies use to secure and record their transactions. It organizes each transaction’s data into a block, marks it with a timestamp, and then hashes it with an encrypted algorithm.

The technology chains resulting blocks together in chronological order. Each new block carries a list of the previous block’s confirmed data. Each operating member of the blockchain network maintains a constantly-updated copy of the blockchain data. They create a balance of incentives across the network to maintain security and throughput for business and personal uses.

Through this relationship of economic balance, digital currencies can remain sufficiently decentralized and independent. No singular institution manages network transactions. This keeps transactions fast and costs low for both business and personal network use.  

The decentralized nature of a blockchain network also keeps it operational in adversarial conditions. For example, the ledger can remain intact even if hackers target one part of it, or if there were technical problems. Parties can come and go as they please, and pick up where the network has left off. This fulfills the singular purpose of blockchain technology: the storage and distribution of inalterable data.

Bitcoin is a Blockchain Application

Bitcoin is a specific digital currency that applies blockchain technology. It is only available electronically and is not reliant on banks and other institutions to regulate or distribute it. Utilizing blockchain technology, Bitcoin can enable peer-to-peer transactions without a middleman or governing authority while maintaining user security and nearly eliminating the risk of fraud or theft.

Uses of Blockchain

Aside from its use in digital currency, blockchain technology has seen useful applications in other industries.

Compliance and Auditing

Given the way blockchain security works, businesses and individuals can use it as a notary timestamping tool for regulatory compliance and auditing. Using a global, public ledger decreases the risk of human error, and allows organizations to strengthen the integrity of their records. Once the blockchain holds the data it is much more difficult to alter than if it was in a centralized, private database. 

Smart Contracts

In the insurance industry or other industries where the value and integrity of data is crucial, a blockchain can deploy smart contracts to automatically execute agreed-upon terms between two parties. This reduces the potential for technical and human errors in the management of financial transactions that require specific triggers before executing.

Smart contracts increase efficiency, eliminating the risk of failure to properly distribute funds based on the rules of the contract.

Supply Chain Management

Blockchain also has multiple uses in supply chain management and other event-based business operations. To timestamp and broadcast the state of many moving parts at relevant intervals reduces centralized network management costs while also allowing for greater transparency in the process.

This allows deeper audits that are always available, and may even increase the intrinsic value of the goods due to the provable timeliness of their manufacture or transport. An example of this would be the difference in economic value of provably fresh food versus food which has an unknown history. 

Recordkeeping

Blockchain technology also creates opportunities for more secure, efficient, private and useful record-keeping, such as for healthcare and government work. Data is easily accessible within the blockchain network, reducing the need for paper documents.

Additionally, authorized parties can access sensitive personal data without putting an individual’s privacy at risk due to the use of public key cryptography. Certain institutions wherein a public, financial audit is necessary can use publicly known wallet addresses so that a tally can be kept at all times. 

Media Distribution

Media companies have been taking advantage of blockchain technology for distribution at lowered costs, eliminating the need for traditional content delivery networks.

Additionally, creators and publishers can use the blockchain to distribute content like music and videos to better protect their Intellectual Property rights or to monetize their content in a way which is new, fast and cheap by cutting out middlemen.

Breaking Down the Blockchain Process

The following are the basics of how the blockchain process works. A vital part of this process is the peer-to-peer network that facilitates the creation and maintenance of the blockchain.

A user initiates a transaction

This can be any transaction: paying off debt, making a purchase, giving donations, or even fulfilling a contract. A wallet generates a transaction and sends it to a destination wallet address. 

Blockchain technology logs and stores transaction data into a block

Blockchain technology records data such as the date, time, and transaction amount are into a block, alongside data from other transactions. No personally identifiable information is necessary unless a user adds it. Instead, most transactions will only use a unique digital signature which will appear in the ledger.

Every user in the blockchain network gets a copy of the finished block

In centralized systems, there is usually a person or group responsible for processing and verifying transactions. Bitcoin and other digital currencies use a decentralized system that requires the distributed operators of the network to verify the data stored in the block. Nodes on the network receive copies of each valid block.

All nodes in the network work to verify the block

Once users receive a copy of the block, their devices compete to verify the block by resolving complex computational problems. Once a node – often referred to as a miner – is able to do so, the rest of the nodes work to solve the next block in the chain. Moving to the next block in the chain avoids duplicating the same block.

After verification, the block is added to the chain

The completed block receives a unique timestamp and identifying code called a “hash.” It is also given the hash of the previous block added to the chain. This interconnectivity gives the blockchain its immutable quality.

The transaction is complete and is part of the digital ledger

Once the successful node adds the newest block to the blockchain, the resulting update is transmitted to all network users. Attempts to alter earlier blocks will result in a mismatch with the hash encoded into the later blocks. If the hashes match up, all parties can confirm the accuracy of the ledger.

How the Blockchain Process Works

Start Your Bitcoin Journey

Once a concept that only existed on paper, the adoption of blockchain technology marks a crucial step towards innovation in digital currencies and beyond. By enabling a public digital ledger that is under the control of a distributed group, rather than a singular party or entity, Bitcoin and other digital currencies have begun to offer newer, more secure modes of transactions at lower costs.

For an even deeper look into Bitcoin or how-tos on blockchain technology, CoinGeek is the perfect place for people new to Bitcoin. Start learning the basics of how blockchain works and more at CoinGeek’s Bitcoin 101.

Blockchain Basics FAQs

Blockchain Basics Infographic

This infographic delves into how blockchain works in a visual format.