What you need to know about Blockchain

Certainly, you have heard someone talk about it, or you have read this word several times recently. It will not be surprising then, that the word Bitcoin, by logical association with Blockchain, came to mind almost immediately. If you thought of it, you thought well, because both are connected, although they are, of course, two different things.

With this article we want to show you that effectively “reducing” Blockchain’s dimension to the natural – and perfectly understandable – association to crypto-coins is a very common error. We wanted, above all, to try to clarify your perception on some points that seem essential to us so that you can finish this article and feel that now you have realized what Blockchain technology is.

What is Blockchain after all?

First of all, a little context.

By all indications, the appearance of the first public Blockchain is linked to the appearance of Bitcoin in late 2008, early 2009.

As you remember, 2008 was a year marked by the onset of a global economic crisis, with its origins in the US markets and the housing bubble of unbelievable proportions that led to the bankruptcy of the historic Lehman Brothers bank on 15 September 2008, leading to an economic crisis that would cross the Atlantic and seriously hit Europe. Portugal to say so.

In 2010, the crisis even forced financial bailouts to countries such as Greece, Ireland, Cyprus and, of course, Portugal. Here, this period will forever be known as the period in which the Troika settled in our country, with all the consequences that this has brought and of which the Portuguese will hardly forget.

Thus, at the end of 2008, Bitcoin was born, in an attempt to increase confidence in financial transactions, pulling transactions into the largest and most democratised market on the planet: the Internet.

We all know that in a digital environment our data can be changed and copied very easily. Blockchain appears and presents itself as a clear attempt to prevent this from happening, as the database is completely decentralised, minimising the risk of compromising information and functioning as a “distributed ledger”, or in a linear translation, function as a distributed and public Ledger.

Imagine Blockchain as your smartphone and Bitcoin as one of the many apps available on it. Which means, of course, that Bitcoin is only one of the many possible apps for existing Blockchains.

If we translate the word – and you will understand why it is useful to translate it in this case – Blockchain is a chain of blocks.

Imagine an iron chain, long and extended, with intertwined links, each connected to the previous and the next. That’s what this is.

The block

In practical terms, this is a system that grows and multiplies exponentially as new blocks are added.

Each block consists of the information it contains, the “fingerprint” (hash) of that block and the “fingerprint” of the previous block. The information it contains depends on the type of Blockchain being reported or analysed.

A Bitcoin Blockchain, for example, stores information relating to financial transactions: Person A transferred money to person B and what amount was transferred.

By default, this system allows you to carry out value transactions without the need for an intermediary, such as a bank.

Nodes

So, we have that Blockchain is a distributed and shared database among thousands of computers, validating truths together in order to verify all transactions occurred. These computers are known as nodes.

Each of the nodes, that is, each of the computers connected to Blockchain, has a copy of all the movements and records made in the Blockchain in question.

Proof-of-work

We can look at this validation mechanism as one of the Blockchain’s defence systems. Adding a block requires the consensus and agreement of all Blockchain Nodes.

This measure aims to ensure that there are no attempts to corrupt the blocks and, consequently, the Blockchain to which they are associated.

That is, if someone wants to erase one of the blocks, the entire network will realise that it is facing a corrupted “block chain”. It is this democratisation that adds value to the system.

So, in a very simple way so that you do not feel that you are reading another text with dozens of complex and difficult to understand terminologies, we present a simple and objective definition of what Blockchain truly is.

The definition

It is a database that is not owned by any entity, that saves blocks of information connected between each other using as security measures the decentralisation in multiple computers located in different places and the need for consensus among them.

DLT vs. Blockchain

It is also important not to confuse Blockchain with DLT (Distributed Ledger Technology).

DLT is essentially the term used to describe technologies that store, distribute, and facilitate access to transactions between users of this technology, whether public or private. This type of technology has as main objective to ensure that there is no type of authority to control or supervise these transactions.

That is, Blockchain is a type of DLT. A kind of subcategory.

Think of cars and vehicles. A car is a type of vehicle of the many existing on the planet.

One of the differences, for example, is that not all DLT use the proof of work method proof-of-work and not all of them need to have the information structure organised in blocks.

Here, the Bank of Portugal is already talking about this type of technology, as you can read in the Payment Systems Report of 2018:

“(…) In order to promote the adoption of more efficient processing solutions, some infrastructure operators have developed DLT-based proofs of concept. These proofs of concept have shown that the major strengths of DLT technology are the inherent resilience, transparency, and speed of consensus, although this technology continues to be less efficient in processing large volumes of operations than traditional technologies. For the moment, DLT technology is not expected to be adopted in payment systems that require the processing of a large number of operations in a short period of time.”

Certainly, in a very near future, we will see how banks will deal with this type of technology, which aims, among other things, to eliminate intermediaries and the relevance they still have in any transactional process.

In short, all Blockchains are DLT’s, but not all DLT’s are Blockchains.

Conclusion

A Blockchain is designed to record and save digital transactions and aims to bring the long-awaited transparency, efficiency and security to the business world.

Blockchain is just the tip of a tremendous iceberg that promises to forever change – if its widespread use is accepted – the face of trade and business transactions on the planet.