What is and how does Blockchain technology or Block Chain work?

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The definition of blockchain is not something difficult to understand. But it is important to be very clear about certain basic concepts so as not to get lost. That's why we bring you an explanation of Blockchain in Spanish. Although at the beginning you will see concepts for beginners, later on you will find more advanced technical concepts.

What is blockchain technology or chain of blocks

Blockchain technology, or chain of blocks, is nothing more than an encrypted record book or ledger, although with certain peculiarities.

Specifically, what blockchain does is to store each of the transactions made on its platform in sets of data known as blocks. All the blocks are connected chronologically. That is, when a new block is created, it is linked to the one that was created just before (and subsequently, it will be linked to the next block that is created).

What makes blockchain special, compared to other accounting systems like those used by banks, is its way of storing data. The generated blocks are stored in millions of computers connected to the blockchain network. Each of these computers is known as a node of the blockchain network.

When you make a traditional transfer, it is confirmed by your bank and, after several management processes, the operation is carried out. These transactions take hours or days, and it can even take a week if it is an international transfer.

On the other hand, the blockchain allows for peer 2 peer transactions, that is, person to person. Without intermediaries and instantly. In addition, it is a service available anywhere in the world, 24 hours a day, 365 days a year.

This is possible thanks to one of the characteristics of cryptocurrencies: Decentralization.

While traditional transfer validation processes require manual approval, transactions on a blockchain are validated automatically. To do this, the blockchain uses the computing power of all interconnected computers.

In exchange for the resources provided by these machines, the sender of the transaction must pay a small fee.

History: Blockchain and cryptocurrencies

The blockchain was born to support bitcoin, so initially it was based on financial transactions. We can then affirm that the inventor of the blockchain is the creator of bitcoin: Satoshi Nakamoto.

The origin of the blockchain dates back to January 2009, when the first block of the bitcoin blockchain was mined.

» Related article: If you are interested in knowing more about the origin of the blockchain, you should learn all the details of its birth. To do this, visit our section on the origin of the blockchain.

Although during the early days of blockchain, bitcoin was not taken very seriously, its popularity has only increased in recent years, highlighting the advantages of the blockchain over traditional transactions.

However, while the blockchain and the banking world have always been related, the potential of the blockchain does not lie in its financial functionality, but in the possibility of executing smart contracts.

Smart Contracts and Blockchain

» Related article: Smart Contracts.

In 2014, Vitalik Buterin, a 21-year-old Russian programmer, developed a new cryptocurrency that was able to harness the computational power of computers. Not only to manage transactions, but also to execute pieces of code. This cryptocurrency was Ethereum, the precursor of smart contracts.

The emergence of Ethereum represented a twist in the meaning of blockchain. From then on, blockchain started to be used to create applications similar to those currently "in the cloud". That is, blockchain could function as a database or as a server, and even to run applications.

The advantage that blockchain offers over these traditional cloud applications is once again decentralization. When you use these services, you surrender your data to multinational companies such as Google, Microsoft, or Amazon, which often charge substantial amounts of money for using their services.

On the other hand, blockchain allows for these services to be carried out without any intermediaries and with significantly lower fees compared to those charged by multinational companies.

In addition, the data stored on the blockchain is encrypted and distributed across thousands of computers, making its security significantly superior to traditional servers (which are easily hackable).

It is also true that blockchain is not perfect, and it still has a lot of room for improvement. In recent years, other cryptocurrencies capable of executing smart contracts and improving certain shortcomings of Ethereum have emerged, such as Cardano, EOS, or NEO.

In other words, currently blockchain is a technology in development. Thanks to the massive use that cryptocurrencies are acquiring, it is being tested, errors are being identified, and it is being significantly improved.

For all these reasons, many experts believe that blockchain will be adopted in multiple industries and for multiple functions. What we are beginning to learn is just the beginning of the future of blockchain.

How Blockchain Works

Transactions in a blockchain network are made directly from wallet to wallet. You don't need to identify yourself, all a user needs to use the blockchain is a digital wallet.

Digital wallets are alphanumeric codes that identify them within the blockchain.

When a user makes a transfer, it is distributed to all computers connected to the blockchain network. Within the information propagated in a transfer, there are the codes of the recipient and sender wallets, date, and an identification code.

Every so often, all the transactions that have been made are gathered and what is known as a block is created. For example, in the Bitcoin network, blocks are created every 10 minutes.

When a block is created, all the information is encrypted. This is done using a function that transforms the data into an alphanumeric code known as a hash. The peculiarity of hash algorithms is that they are easy to encrypt, but very difficult to undo.

Finally, it is necessary to validate the encrypted block. At this point, the blockchain miners come into play.

Mining in the blockchain

Miners are network-connected devices that offer their processing power to validate the blocks.

First, when miners receive a transaction, they perform two checks by consulting the blockchain. First, they check that you have previously received the money you want to transfer. Afterwards, they verify that you have not yet spent it. In other words, they calculate the balance of your wallet. Additionally, they check that the transaction is signed with the wallet's private key.

Each wallet has two keys:

• A public key, which is the address where cryptocurrencies are sent and received.
A private key, which only the wallet owner should know. It is used to sign transactions before making them.

This verification is key to the security of the blockchain, as its goal is to prevent double spending.

If everything is fulfilled, they start validating the block.

To perform the validation, miners need to solve complex algorithms. Specifically, they look for the specific hash with which the block has been encrypted, known as nonce. Miners perform iterative searches until they find the nonce. Once found, the block is validated and propagated through the blockchain. This way, miners eliminate that third party that centralized transactions.

The iterative calculations require a lot of resources from the mining equipment. This causes the electricity consumption of these computers to be very high and, therefore, the cost of mining as well. That is why mining is usually rewarded. For example, in Bitcoin, they are rewarded with the cryptocurrency itself.

Security of Blockchain

On one hand, blocks are created by millions of computers connected to the blockchain. If someone wants to create a fake block, for example, to add bitcoins to their wallet, they would need to manipulate the information in all of them at once. That is, they would need a power similar to that of all the connected computers: Something totally impossible.

If the intention is to modify the information of an existing block, for example, to change the destination wallet to one that you own, the result would be similar. The hashes that identify each block are created from the data of that block. Therefore, if you change a transaction, you would change the information of the block and consequently, its hash.

The hash of a block contains a reference to the previous block. Therefore, you would also have to modify the hash of the previous block to make the references match. When you modify this block, we would find ourselves in the same situation, and we would also have to alter the previous one.

But the same thing happens with the next block, as it has a reference to the previous block, which you just modified. Therefore, we would also have to alter all the subsequent blocks.

In conclusion, to change just one block, it would be necessary to transform the entire chain of blocks of all the nodes in the network, and furthermore, at the same time. There is no doubt that this feat is completely impossible, as there is no computer with enough computing power.

Double Spending on a Blockchain Platform

Finally, miners prevent what is known as double-spend. This occurs when a person sends the same money to two different recipients.

In the case of a bank, this task is easy. They know the state of your account and each transfer is validated individually. However, nowadays it is still done practically manually (that's why it takes so long).

The blockchain requires the figure of the miner as a validator. The miner will always check through the blockchain that you have not spent that money previously. And, of course, it is done automatically.

In conclusion: The security of the Blockchain is fully guaranteed.

What is Blockchain

The technological revolution that the blockchain promises arises when it begins to be applied in other areas. This is how Ethereum was born, which has its own blockchain.

Ethereum proposes that the chain solves what they call smart contracts, instead of transactions. They are even capable of running applications, known as Ðapps.

With smart contracts, the blockchain would eliminate intermediaries in many processes. For example, contracts could be created to automate transfers, such as those for rent or a loan, automatically resolve bets or microinsurance. By eliminating intermediaries, these services would be completely decentralized.

In addition, the combination represented by Blockchain and Big Data has attracted many companies around the world, due to their wide range of applications. Some of them are shown in the following examples of blockchain applications.

How to use blockchain

From the idea of Ethereum, many blockchain projects have been born to create decentralized services. The fastest adoption has been in the sector for which it was created: finance.

The combination of fintech and blockchain is already relatively common. For example, Banco Santander already uses it to perform ultra-fast international transfers.

However, that's not all. The security and transparency of blockchain have allowed it to spread to many other sectors. Below, you can see what the blockchain is used for:

• Management of information by Public Agencies. There are many public services that could be decentralized. Social Security data and medical records can be managed on the blockchain. Some countries are already starting to consider applying this technology to some services. For example, Japan is going to create a blockchain to manage property records.
• Identity verification. Numerous companies are developing a reliable and secure way to verify identities using the blockchain.
• Cloud storage/services. Technology companies like Microsoft or Amazon have experienced considerable growth in the last year by offering in-cloud services. However, there are already proposals to create web services through the blockchain, such as the one proposed by DADI.
• Music and Blockchain. Even Spotify believes that blockchain is the ideal medium for music distribution.
• Electronic Elections and Voting. Blockchain would be a secure way to conduct voting. Its immutability would guarantee the veracity of the results. Some small-scale voting has already been conducted using Ethereum's smart contracts. Even Banco Santander (again) has used it to vote in its General Shareholders' Meeting.
• Digital Marketing. Some sources propose blockchain as a means to make safer purchases, increase trust in online brands, and give more power to the user.
• Blockchain Logistics. Maersk, the world leader in cargo transport, has formed a joint venture with technology company IBM to create a blockchain platform to manage its entire supply chain.

These are just some examples of how to use blockchain. New blockchain projects are constantly being published, and it's difficult to imagine an area where it won't disrupt. Gradually, blockchain will develop and more and more people will understand what it's about.

Probably, in the not-too-distant future, we will begin to see everyday applications of blockchain technology that will transform the digital world.

You can visit the following link to learn many more applications of blockchain.

Opinions about Blockchain

Cryptocurrencies have many supporters, but also many detractors. However, there is a consensus around the technology that supports them: The majority of institutions, companies, and experts trust the future of blockchain.

On the internet, you can find many opinions about Blockchain. We bring you one of the most relevant: The opinion of the Massachusetts Institute of Technology (MIT for its initials in English), one of the most prestigious universities in the world, known for its work in research, engineering, and technological education.

MIT has conducted extensive research on blockchain. As a result, they have published two works: The Age of Cryptocurrency and The Truth Machine: The Blockchain and the Future of Everything.

In the latter, they express the following opinion about Blockchain:

Summary of Blockchain

Blockchain is a technology developed based on cryptocurrencies, but with a strong potential in software development and execution. The emergence of smart contracts has significantly increased its functionalities, presenting itself as one of the most flexible and powerful technologies today.

Its relationship with cryptocurrencies creates some distrust about the future of blockchain, due to the lack of understanding and the bad press that digital assets have.

However, many large companies are investing in decentralized applications, especially for the potential represented by the combination of Big Data and Blockchain. Surely, in the near future, the blockchain will be a common and widespread technology.

Characteristics of Blockchain

Some of the characteristics of Blockchain are:

• It is a decentralized system, which does not require intermediaries.
• The blockchain is secure. Its database is encrypted, making it very difficult to hack and impossible to modify.
• The blockchain is immutable. Once a process is executed, it cannot be modified.
• It is a fast technology. Financial transactions on the blockchain take a maximum of a few minutes.
• It represents a cost-saving compared to the use of traditional technology.
• It is a global technology. Regardless of where the parties are located, the blockchain is the same for everyone.

Perhaps a video with an explanation of blockchain can help you understand the blockchain

We hope you have enjoyed our explanation of bitcoin from scratch. But if, after knowing what blockchain technology consists of, you still have any questions, feel free to leave a comment.