The blockchain is often described as a shared accounting book that is shared by all participants of the blockchain network and they agree what is the current status of all accounts. Generally, it is data structure thanks to which we can confirm that the events happened in specific order and time.
Blockchain consists of a string of time-tagged blocks which are enrolled in a fixed order. These records or events are often called transactions. Let’s describe the elements of blockchain more specifically.
Timestamp – Thanks to timestamping we can order all transactions and we also know the exact time when the transaction happened. Bitcoin transactions (blocks) have to be time-bound.
Chain – It is cryptographically secured data sequence which connects previous records (respectively blocks with records) with current records and maintains its fixed order.
Blocks – Because tagging all transactions with a timestamp is relatively complicated, almost every Blockchain protocol (including Bitcoin) groups more transactions into one block, which is then tagged with a timestamp. Bitcoin block is a data file (which contains data about transactions) of 1 MB. Bitcoin miners add a new block to the network approximately every 10 minutes.
Did you know? There were many disputes in the community about the size of the block which caused a split of the network.
Consensus – In addition to the elements above, one of the possible elements of a block chain (but not necessarily needed) is a system (so-called consensus), according to which all users (nodes) of blockchain agree on the current status of accounting book. There are more ways in which a given match can be achieved. Some are characterized by a higher ratio of decentralization than others. The Bitcoin blockchain uses so-called Nakamoto consensus (for better understanding we highly recommend you seeing this short video).
Why is time-tagging so difficult? In a distributed system, all nodes in the network have to agree on the final transaction status, so it takes longer. Decentralization is reached thus at the expense of performance. Therefore decentralized blockchain doesn’t have unlimited use and in most cases, it is better to use a centralized database.
Are there other blockchains apart from Bitcoin?
Apart from Bitcoin, Blockchain is used also in other cryptocurrencies. In addition to payments, we are witnesses of attempts to use it to store other types of data – for example, ownership records or to use it to manage corporate documents (for example project Factom tries to do that with the help of Bitcoin blockchain).
Also, decentralized platforms, on which it is possible to code so-called smart contracts – protocols, which automatically trigger an electronic agreement, experiment with the use of blockchain. For example: If I pay 1 BTC to X, the automatic production line will be started. Decentralized smart contracts have an advantage that no central authority can affect or stop them. The best known decentralized platform for a smart contract is nowadays Ethereum with their own cryptocurrency Ether (ETH) which serves as a financial unit and “fuel” for the network.
Majority of blockchains is public – we can track blockchain transaction online with the help of so- called blockchain explorer (you can use blockchain explorer on our site).
Blockchain doesn’t have to be public. Some cryptocurrencies are completely anonymous as they focus on maximal user financial privacy (e.g. Monero). Blockchain can be also created privately (for example among several companies). We call this block chain a private one.
“Bitcoin is useless but we like blockchain technology” – it is the same as if you said, “Internet is useless but we like HTTP technology”.
Therefore it makes sense to use blockchain anywhere where resistance to censorship, traceability and transaction publicity is required. Unfortunately, blockchain is considered to be a technology which will save the world. It is not like that – that is a pretty puffy claim. Apart from cryptocurrency and some specific uses where decentralization and resistance to third parties are needed, blockchain is a redundantly expensive and complicated solution. For common applications, centralized databases are still better.
TIP: Blockchain has one disadvantage – it has scaling problems. The second layer above blockchain – Lightning Network – can be a possible solution. Learn more in our article about Lightning Network.
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