How do Blockchains Function Like Ledgers?

It’s been over ten years already. Yet, the buzz about Blockchain, crypto, bitcoin, and its family take center stage in many discussions on innovation and a digital economy. 

As much as blockchain technology is a keenly debated topic, many people struggle with the concept of Blockchain, how it works, and the uses of this spectacular innovation. Some people only have a vague idea and need clarity on the topic. If you fall in these categories, this article will inform you what Blockchain is about and its function relative to other well-known systems such as ledgers.

What is Blockchain?

Blockchain is an innovation in record-keeping that allows people to store information in a way that cannot be changed, deleted, or hacked.

It is a system of recording transactions such that the evidence of these transactions spreads across the entire networks of users on the platform. No alterations can be made to an already completed transaction, making it a safer, more transparent means of rendering records indelible.

How Does Blockchain Work?

Blockchain is an advanced form of record keeping. Most conventional means of recording information store data in tabular form. However, as the name implies, blockchain keeps entries and records in the block structure.

When a new entry is made, it is added to a group of already existing transactions in a block. This entry is added to the chain of transactions completed on that platform with a timestamp. Every user on the Blockchain gets a share of this information, so they all record this new entry and other entries as well. 

It means the record is irreversible, and to make any changes, one would have to locate all the users that have the record of these transactions to edit it.

Now, let's double down on this explanation to simplify how the blockchain works. 

Data is stored on the blockchain in batches. These batches of data are referred to as blocks. Blocks correspond to pages of entry in a record-keeping book. 

A block of data contains three significant elements.

• The data
• Hash
• Hash of the previous block

Data 

This refers to the actual information that goes out. There are many uses of the Blockchain, but each use case has specific information that makes up the block's data.

Hash

This is a secure imprint on that data that identifies it as unique. It is a value obtained through a mathematical function from a string of texts to ensure security when transmitting a message.

Hash of the previous block

Blocks are added to the chain in chronological order. Every new block adds the hash of the last to its identity, contributing to its security. This feature makes the blockchain spectacular.

Transactions on the Blockchain occur when an asset is moved from one place to another. It is recorded with information such as who moves what, where, in what state, and when? When this information is confirmed, a new block is added. 

It contains the signature of the block transaction immediately preceding it. That way, no user can add a block to the chain. Also, every block added with a hash of the previous solidifies the credibility of the last block. By extension, the blocks solidify the credibility of the entire Blockchain.

If a block has to be altered for whatsoever purpose, the blocks after it will also have to be changed to keep the information authentic. Likewise, the blocks preceding it, all the way to the genesis block have to be altered for the data in that block to be valid.

Overall, the blockchain creates a revolutionary ledger that can be trusted and secure. 

What is a Ledger?

A ledger is a book used for keeping accounts of transactions. It contains the details needed to create a financial statement. These days, many transactions are performed digitally, and as such, the record of these transactions is stored digitally. 

Keeping a digital ledger helps ensure that records of a transaction can be accessed at any time and from anywhere. It also means that the records may be tampered with if they fall into the wrong hands. This leads us to the two kinds of digital ledgers.

Centralized ledger

this is a general ledger that holds all an organization's financial and non-financial accounting information. It gives control over all transactions to the person or entity in possession of this ledger. A bank is an example, as it holds the information of all transactions initiated by its customers.

It has direct access to approve or nullify any transaction, as it wills. Its disadvantage is that if the entity with this information is unavailable, it becomes inaccessible to anybody else. This is known as a single point of failure.  

Distributed ledger

This type of ledger shares the information in its database across all the participants in its network. That way, no singular entity has all the records of every transaction to itself. If a change is made to any entry, all the other participants receive an update. 

In this case, the participants view all entries, making them transparent. Furthermore, as each participant keeps a copy of the ledger, there can be no single point of failure. Blockchain technology is a popular type of distributed ledger system.

How Does Blockchain Work Like a Ledger? 

We have already established that the Blockchain is a system of keeping records cryptographically. We also confirmed that a ledger is a book of records of transactions. It then follows that the Blockchain is a type of ledger. Let’s use an example to explain how ledgers and blockchain work.

Say you open a shop on the 14th of January. You record every sale you made in your ledger, to whom, and at the exact time. The entries for that day are recorded on one page in your ledger. That page represents a block in your blockchain.

Back to the ledger analogy: You have to close with a balance for every page or day. This balance is carried over to the next day. When this balance from the previous day does not tally with the balance the next day, you know the records have been changed. This balancing figure is similar to the hash in the blockchain.

A new block carries a hash from the previous block. The latest block also contains its hash, which is, in turn, carries on to the next block. The hash corresponds to a function that comes about by computing the data in the block. All the hashes in that network must be altered for a block to be tampered with.

If you were to hand over this shop to a new owner, with all the assets and transactions, you would also hand over the ledger to the new owner. This transfer of ownership is also recorded as a new entry, with all the previous transactions remaining valid. On the blockchain, this latest entry or block (transfer of ownership) comes with the history of all other transactions that concern that shop.

However, there is a difference between how blockchain operates and how ledgers operate.

Difference Between Ledger and Blockchain

The significant difference between a ledger and a blockchain is that the ledger stores the information in one place. In contrast, the blockchain disperses the data across all participants in the network.

However, the distributed ledger is a type of ledger that distributes its data to all participants in the network. The blockchain belongs to this class of ledger. Still, not all distributed ledgers are blockchain. 

The first differentiating factor is that blockchain records transactions in blocks, whereas the distributed ledger does not give preference to the data structure. It is simply a record that is distributed across its network of users.

In addition, blockchain provides an additional layer of security in record keeping. It combines a series of complex mathematical equations with verification from all participants (called proof of work) to validate a transaction. Distributed ledgers, on the other hand, do not require this proof of work to validate an entry.

Conclusion

A blockchain and a ledger are alike essentially because both serve record-keeping purposes. However, a blockchain is regarded as a kind of distributed ledger that shares the information across a network in blocks, underpinned by a proof-of-work method of validating and securing those blocks.