Blockchain technology supports the Bitcoin network. It is extremely secure and now many organizations across the world are seriously looking at it for not just financial transactions but for their supply chain processes as well. In this article we will discuss the 3 pillars of the blockchain technology behind Bitcoin.
The Decentralization Pillar
Before the invention of blockchain most transactions over the Internet involved a central server. This server stored all of the essential data that supported the service that it provided. A good example of this is the banking system. Your bank stores your money and when you need to pay someone you have to use them and they charge you for this.
Client server technology is everywhere online. When you use a search engine to find something your query ends up on a central server which dispatches the information that you asked for. The problem with client server is that there are a number of vulnerabilities:
- The biggest and most obvious of these is that everything is stored in one place. This makes a central server a real target for hackers.
- If there any operational issues with a central server the whole system grinds to a halt.
- The data held on a central server can be compromised which shuts down the whole operation.
The solution to these centralized vulnerabilities is decentralization. With a decentralized network all computers have the same information stored. If you want to interact with someone else on a decentralized network you can do this without any third party intervention. You can send and receive Bitcoins without the use of a bank and a centralized server.
The Transparency Pillar
A lot of people do not fully understand the concept of transparency when it comes to blockchain technology. Isn’t the Bitcoin network supposed to be private? Yes it is but it is also public for verification purposes.
You need to understand the concept of public and private keys here. A public key is used on the blockchain to show that you have made a transaction. Your private key is never shared. It is linked to your public key to make the transaction valid.
With the Bitcoin blockchain you can see the public keys associated with all transactions. No other financial system has ever had this kind of transparency. There is a much needed level of accountability with blockchain that financial institutions certainly want.
When you have a blockchain public address you can view all of the transactions made using that key. A lot of financial institutions are looking at blockchain because of this but some are concerned that it will force their hand to reveal all of their transactions!
The Immutability Pillar
Blockchain technology creates immutable records. This means that after verifying a transaction you cannot change it. Once your transaction is added to the blockchain there is no turning back. You cannot reverse the transaction.
The immutability in blockchain comes from the cryptographic hash functionality. The blockchain system takes input strings of any length and converts these to an output string of a fixed length. The Bitcoin blockchain uses the highly secure SHA 256 algorithm.
Blockchain is basically a linked list of transactions. Each block has a hash pointer connecting it to the previous block. If a hacker tries to change the details of a block it will affect the entire blockchain which is impossible to do.