Blockchain

Taxonomy

A blockchain is a huge digital ledger that is created by grouping transactions (edits to this ledger) into “blocks” (groups of transactions) and linking them to the previous “blocks” (edits to the ledger) to prove their validity.

The first and most well known blockchain is the Bitcoin blockchain. The Bitcoin blockchain is permissionless meaning that anyone who pays a fee is allowed to make an edit to the ledger (send a transaction), no exceptions. Once an edit is suggested (a transaction is sent), a peer to peer network of computers works on solving a math problem involving all of the previous blocks (the full ledger), and a couple of other variables. This math problem proves that the suggested edits are in fact valid and confirms those transactions.

This specific type of math problem that all of the computers on the bitcoin network are working on solving is called a cryptographic hash function. To solve this math problem a huge amount of computational power is required, which means that it is impossible to solve the problem without owning lots of expensive computers that use lots of electricity. The requirement to use lots of computational power in order to solve the math problem (cryptographic hash function) is know as proof of work, often abbreviated to PoW. The requirement of PoW to solve the math problem makes it very expensive to make an unauthorized edit to the ledger, so expensive that it would never be worth anyone’s effort to try. Because unauthorized edits to the ledger are effectively impossible, when this network of computers solves this math problem, the latest block (group) of transactions are proved valid and are added to the blockchain permanently. In other words, transactions added to the blockchain are impossible to remove or change.

When we reference “blockchain” in this guide, it will be referring to any of the many technologies that work in this manner. In other words, a technology that operates across a neutral peer to peer network and that is made secure through proof of work and cryptography. If a technology does not meet these requirements, it is not a blockchain, or at least not the type this guide it referring to.