Almost all industries today require some kind of security to operate and finance is no different. In fact, security is arguably the most important aspect of finance, since money — the most liquid form of asset, hence the most vulnerable — is at stake. The domino effect from a single bad transaction could lead to the loss of millions of dollars or even the collapse of financial institutions. Blockchain technology has been gaining acclaim as a potential solution to this problem.

Today, blockchain is used in dozens of applications from supply chain management to cybersecurity. However, one of its most famous applications is in the use of cryptocurrency — including Litecoin, Ethereum and possibly the most well-known, Bitcoin. They all work under the same principle of blockchain, which enables extremely secure transactions that do not rely on an authority. Instead, blockchain relies on users verifying the authenticity of every single one of their transactions — rendering financial institutions and reliance on government value monitoring unnecessary. Do the bountiful advantages and applications of blockchain show how complicated and cutting-edge it is? Perhaps not so much.

The idea of blockchain dates back to 1991, when a group of researchers wanted to permanently timestamp digital documents to ensure they wouldn’t be tampered with in the future. It was not until 2009 that the idea of using blockchain for recording transactions bloomed with the invention of Bitcoin by the infamous Satoshi Nakamoto. It took another few years for cryptocurrency and other blockchain applications to emerge into the mainstream as one of the most highly speculated markets. The price of a single bitcoin today is worth almost $60,000 compared to 11 years ago when it was worth no more than a dollar. It is blockchain that enables all of the potential of cryptocurrency, so let’s talk about that.

Blockchain is highly technical, but its theoretical roots are much simpler. The main problem with traditional transactions is that they usually have to go through a financial medium like a bank. However banks are subject to a myriad of problems, from technical errors to hacking and tampering. Cryptocurrency deals with this problem by inscribing transactional details in blocks, chaining them together and distributing them to other users. This forms the blockchain.

A block is an abstract container with 3 attributes: data, hash and the hash of the previous block. The data is the recorded information — in the case of cryptocurrency, it is the details of the transaction. The hash is the identifier of a block, calculated using complicated functions that are both unique for each block and make it impossible to recover the original data from the hash itself. Finally, the hash of the previous block is what chains a block with its predecessor. If someone wants to change some information in a block to lie about their debts or balance, for instance, every other block will be affected as its hash will be changed, leading to every other block needing to be changed. This in practice guarantees that a mistake will be spotted immediately.

However, with only these mechanisms, an attacker could simply change the information of every block — a very costly but possible endeavor. Blockchain avoids this problem by requiring a proof of work for every block. This is an algorithm where every user can compete to solve a complex mathematical problem, known as a hash problem, to confirm a transaction and create a new block. The action of solving these problems is called mining. In the case of bitcoin, these problems take 10 minutes and the first one to complete them receives a reward of 6.25 bitcoin. Bitcoin comes into existence only through this method and the reward is approximately halved every year — until the time it will eventually cease to exist.

Blockchain further avoids tampering with its blocks by giving every user a copy of the blockchain — called the ledger. Everytime a block is added, all users must confirm with each other whether the block they received is the same through a Peer-to-peer, or P2P, network**. This helps secure transactions as they require the consensus of everyone, meaning all blocks tampered with will be rejected. Each transaction is recorded by everyone and is encrypted through complex algorithms like SHA-256 or ECDSA, which prevents it from being seen directly. Only the senders and receivers of these transactions can see them, as they each have a unique key that allows them to decrypt transactions belonging to them. This makes sure that everyone protects one another without posing a threat to one another.

Blockchain is still a developing technology and new features are being added constantly. Cryptocurrency is still far from the day where it will be used widely, if that day even exists. But, as blockchain technology continues to develop, we can hope to see faster, more secure and more convenient transactions being made in the future.