You may have noticed that cryptocurrencies like Bitcoin have taken off this year. Their market capitalization went from about $18B in January 2017 to more than $110B in June. The foundation of such digital currency is built on a technology called ‘blockchain.’ This is the foundation that enables users of the digital assets to trust that the asset actually exists. In other words, it establishes trust in an otherwise most untrustworthy environment, such as the internet. How does it do that? Blockchain can also be described as ‘distributed ledger.’ The ledger of transactions in a blockchain is public; anyone can see them. You can’t see details (such as people’s names), but the transaction itself is public. For Bitcoin this basically means that amount ‘X’ was transferred from ‘wallet A’ to ‘wallet B.’
Blockchain technology establishes trust by having computers equipped with lots of processing power (aka miners), to validate that information in the chain has not been tampered with. The motto is ‘easy to validate, hard to break.’ As transactions are recorded, they are written into blocks of data that are pre-determined sizes. Once the block is filled, it is encrypted so the contents of the block can’t be read or modified. A hash is then generated from the encrypted block and written into the header of the next block. This is the part that creates the ‘chain’ in blockchain. Now that the hash is written into the header of the next block, if anything is changed, the hash won’t match – effectively breaking the chain and making it blatantly obvious that data has been tampered with.
The blockchain itself is stored in full on millions of computers around the world. These are the miners responsible for validating the data in the chain and adding new transactions to the blocks. The reason for so many copies of the blockchain is so if someone does manage to crack the encryption of a block and change data, it would immediately be detected by the rest. They would form a ‘consensus’ saying that block of data was tampered with, and overwrite it. The ‘consensus’ part is just as important to the trust as the encryption.