What is Blockchain Technology?

Due to the rocketing value of Bitcoin and other crypto currencies, Blockchain seems to be constantly in the news these days. The technology was invented in 2008 by a mysterious person or persons known as ‘Satoshi Nakamoto’, the following year saw the launch of the first Crypto currency by Nakamoto, Bitcoin. Its function is to serve as a public record for every transaction that occurs on the network.

How Does Blockchain Work?

Although Blockchain is mostly associated with Bitcoin and Crypto currencies, it has many uses beyond money exchange. But, if you ask what a Blockchain is not many people will be able to answer or explain how it works.

The standard definition of a Blockchain is:

“A decentralized, distributed, public digital ledger that is used to record transactions across many computers so that a record cannot be altered retroactively without the alteration of all subsequent blocks and the consensus of the network.”

But what does that mean in more simple terms? A useful description of how Blockchain works from the Bitcoin Talk forums defines it as:

“Imagine there are a bunch of safes lined up in a giant room somewhere. Each safe has a number on it identifying it, and each safe has a slot that allows people to drop money into it. The safes are all made of bulletproof glass, so anybody can see how much is in any given safe, and anybody can put money in any safe. When you open a bitcoin account, you are given an empty safe and the key to that safe. You take note of which number is on your safe, and when somebody wants to send you money, you tell them which safe is yours, and they can go drop money in the slot.”

Add into this concept that the room also has security cameras so that transactions occurring between safes can be recorded and you have a simple analogy of how Blockchains work.

A Bitcoin or any other crypto currency or token sits on top of the Blockchain and can be seen as a secured representation of a set of rights, asset or a utility.

Where Does Mining Come Into it?

Decentralized systems can come in two forms, Proof of Work (PoW) or Proof of Stake (PoS). Bitcoin uses the Proof of Work function where the performed work becomes useful to the network. They are mined using the “Hashcash proof-of-work function” by miners and confirmed by the network of nodes that make up the system, essentially providing computing power to the Blockchain and rewarding for it. Mining can then be used to verify the transactions that are taking place or to create new coins or tokens. Anyone with the appropriate hardware and access to the internet can participate in the mining process.

The Proof of stake function however states that an individual can validate or mine blocks according to how many coins or tokens they hold. This means the more cryptocurrency the individual holds the more mining power they have. This removes the need for specialist hardware to take part in mining. Using this method tokens are said to be ‘minted’ rather than mined.

What Are The Advantages of Blockchain?


Blockchains use a peer-to-peer network to store its ledger, so it doesn’t rely on a single computer or server to function. Every node on the Blockchain system has a copy of the ledger, therefore removing the need for a centralised copy that controls all trades. This eliminates the risks associated with storing databases centrally including a central point of failure.

It also means that all transactions are immediately available to view by everyone, making the Blockchain a public ledger. The public may not know the identity of who made the transaction but can see exactly how much has been transferred from one party to another.


The security of the Blockchain is provided by the use of Public-key cryptography methods. They are considered secure by design and demonstrate a decentralised consensus mechanism.

Blocks are what hold the encrypted valid documents or records. To do this the current block uses the cryptographic code from the previous block to create its own, connecting the two to form a chain. This process confirms the integrity of the previous block and goes all the way back to the original block, which is called the ‘Genesis block’. This confirms that each asset has only been assigned to a party once and eliminates the double spending issue associated with traditional ledgers. This method leads to data stored on the Blockchain to be considered incorruptible.

Smart contracts

Smart contracts enable parties to exchange assets such as money, services or anything of value in a completely transparent, automatic method whilst avoiding the cost of using a broker or distributor.

For instance, Smart contracts have the ability to use rule-based intelligence to perform supply chain functions autonomously. Blockchains support the construction of smart and trusted code that is embedded securely into the system. Participants can use this to specify terms, conditions and any other logic into their transactions which be enacted when the circumstances of the contract are met. If the conditions aren’t met then the smart contract will automatically make a refund. During this period when the contract is waiting for the conditions to be met, the document or item is stored by the decentralised ledger system therefore providing secure and unchangeable storage.

A supply chain smart contract between a supplier and buyer would consist of a computer package that is executed on the Blockchain and is then applied by the entire Blockchain system. Its code would consist of the terms and conditions of the contract and will be secure and unchangeable, therefore providing the trust that is required in the current complex control and auditing methods used today.

What are Blockchains used for?

Blockchains cut transaction costs and eliminate the need for a third-party intermediary. Combined with smart contracts they also provide an automatic trust element between two parties that wish to carry out a transaction.

Although Bitcoin was the first application of Blockchain methodology, it has since expanded into sectors such as legal contracts, asset management and supply chain logistics.

One of the most promising applications of Blockchain technology is in the use of the Internet of things. A research report by Gartner  claims that there will be over 21 billion connected devices by 2020. Connecting these devices to a Blockchain and utilising smart contracts will allow these devices to act autonomously. For example, by placing orders or releasing assets when they have been purchased. The Blockchain will also provide a layer of security to the billions of connected devices protecting the masses of data that they will produce.

Source: Wikipedia

Source: Bitcoin Talk

Source: Gartner; https://www.gartner.com/en/newsroom/press-releases/2017-02-07-gartner-says-8-billion-connected-things-will-be-in-use-in-2017-up-31-percent-from-2016

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