Although I discussed the problem blockchains solve a few months ago, I never really explained how it works. This is a good time to do so since DeFi is a pioneer use case for Blockchain (after Bitcoin).
Blockchain is a decentralized database. We know what decentralized means from last week's newsletter:
- "How many computers are in the system
- The number of organizations or individuals that control the system
- If the computers, organization, and users were reduced by 50%— would the system still be able to function?"
If the above criteria is met in a multiple (consensus) manner—away from single (centralized) methods, the system is decentralized.
Blockchain is a public database updated and shared across multiple computers in a network. Like the name suggests, it’s made up of “blocks” and “chains”:
We have block...We have chain...uhh...blockchain
Data is stored and verified in sequences known as “blocks”. Each successful transaction adds a block to the “chain”, which is a cryptographic reference to previous legit transactions.
You cannot transact data unless it’s successfully stored in a block and added to the chain. Altering a block’s data would require changing all subsequent blocks in the chain. For that to happen, you’d need a majority consensus of the entire network.
This is why it’s difficult to hack something like Bitcoin. You’d have to control a minimum of 50% of the nodes before even attempting to alter Bitcoin’s code. That’s the type of security blockchain promises. A database built on trust and consensus rather than central control.
As for technical aspects of blockchain, I have no clue. Hopefully we get a clear picture after seeing more blockchain applications. I'll continue breaking it down next week.