Blockchain for Dummies
Blockchain is a foreign word for many. Most have never heard it, and some who have heard it have no idea what it means or how it works.
While the programming behind blockchain may be complicated, the consumer’s view is easy to understand.
There are public and private blockchains, with one key difference between them: Anyone can access the ledger in a public blockchain, while in a private one you need an invitation to join.
Blockchain is being used in more and more circumstances, however, it is most widely known for being used with the Bitcoin network. Blockchain offers users several advantages over traditional networks. The blockchain network is made up of decentralized nodes. The way the chain is set up, each node in the network witnesses each transaction, a verification method that can be public, such as the one that Bitcoin uses. The transactions are broadcast out from every two participating parties to every other point on the network, offering a decentralized way to track and manage cryptocurrency.
This verification offers a security benefit not available when a single third party is managing transactions — if anyone gets access to it, they can easily corrupt the data. With blockchains, that isn’t really possible since copies of each transaction are stored in each node of the network. And since each user has a private key, as well as a public key, it is incredibly difficult to make it look like transactions came from someone without actually having come from them. In nearly every case, theft on a blockchain network comes from private keys being stored insecurely. So, as long as a user is storing their private key securely, it is very difficult for them to be defrauded in the Bitcoin, or any other, marketplace that is run through a blockchain system.
There are several different ways to make sure that your private key is stored securely.
The easiest way is to jot it down on paper and put it in a safe that can survive a fire or flood. If no one but you has access to it than there isn’t a safer solution. For this method, however, there is no backup.
Digitally there are several ways to store your private key. Storing it on your computer, in a document named “private key,” isn’t a safe way to do it. However, if the key is split into multiple documents with unrelated names, that could make it harder for hackers to find, and they are unlikely to stumble across it if they aren’t specifically looking for the key. If you completely trust a service provider, you can also store it in a cloud-based service such as Dropbox or on services such as Roboform, a popular password manager, and digital wallet.
While there are a lot of positives to using blockchain, it isn’t without its downsides. Blockchains are much slower than centralized systems. Communication within the network and updating ledgers takes time since so many nodes are involved with them.
That’s with a public blockchain, though. Getting into what financial houses use, private blockchains, allows administrators to restrict who has access to transaction ledgers, which can speed things up. Also, private blockchains offer the ability to vet transactions more quickly and reverse transactions that are found to be fraudulent. In public blockchains, by the time a transaction is found to be fraudulent, it is often deep enough in the ledger that it can be very troublesome. If administrators of closed blockchains choose to, they can act more like a centralized system — and be much quicker because of it.