The blockchain technology is at the basis of Bitcoin – the first cryptocurrency created. The pseudonymous creator of Bitcoin, Satoshi Nakamoto, made the protocol open-source. This meant anyone who wanted to use the code or parts of the code to develop similar projects was allowed to do so. Ever since the creation of Bitcoin, the blockchain has found applicability in many other areas, both financial and non-financial. In order to understand and properly evaluate other cryptocurrencies that you often see in the ICO stage, you must understand what the blockchain is and how it works.
First off, the blockchain is simply a register that records all the transactions in the entire history of the market. It starts with the genesis block, the first block that was ever mined in the ecosystem.
[A sends 1 BTC to B]
In order for the blockchain to verify this transaction, it has to make sure wallet A owns the 1 BTC it intends to send to B. The network refers to the previous transactions in the blockchain and sees that at some point A received 0.4 Bitcoins from X, 0,3 from Y and 0.5 from Z. Going back, previous transactions are checked, back to the minting of the bitcoins involved. Therefore, the network knows A has the necessary funds to send B.
The blockchain network is secured in a decentralized manner. Any user can freely download what is called a node on their device. This means they download the entire register of transaction, the full blockchain, on the computer, and allow it to update regularly. This means there is not one single point of failure in the register.
In order to appropriate funds from a bank, a hacker would normally have to break the bank’s cyber security in a few central points (central server). This may be difficult, but not impossible, and has happened on numerous occasions.
In the case of blockchain technology, the register is recorded on numerous computers across the world, many of them with undisclosed locations. In order for a hacker to tamper with this register, it has to modify each register. Nodes constantly verify their registers and compare them to each other, so they would immediately identify signs of tampering and reestablish the valid blockchain across the network.
Not only that, but the blockchain is supported by a processing power (hashrate) of 3 to 4 million Terrahashes per second, provided by “miners” involved in the ecosystem. Miners are devices with processing power that connect to the network and expend electricity in order to get a Bitcoin reward. Anyone who wants to mine can use a mining-capable device, in the same decentralized manner, spread across the world. Every 10 minutes (in the case of Bitcoin), the miners record transactions that took place in the network in a block. It is a complex process, where they try to solve an algorithm to find the hashrate (the encoded cypher) of the transactions. After they find the hash for the block of transactions, they timestamp the respective block and add it to a chronological chain. Each block contains a header that references the previous block. Therefore, if someone wants to tamper with a transaction in a block, they must also alter all the blocks that come after it.
The older the block, the more blocks they must tamper with. In doing so, they must have a bigger power than the entire processing power the network employs. This is virtually impossible, as the network sums up almost 4 million Th/s (more than the first 10 super-computers combined).
This is an utterly new and innovative technology. Ever since its inception, it sparked a lot of creativity in many areas – security, transfer of information and data record. The Bitcoin currency is not an exhaustive use of the blockchain. It has many use cases that are currently explored by other developers.