Aug 30, 2022
What is Blockchain?
Blockchain is a highly secure, transparent, and decentralized digital ledger. It consists of individual blocks of data that are linked together securely using cryptography. As new data blocks are created, they’re verified by independent peer-to-peer networks, securely timestamped, and added to the ever-growing ledger. You could think of it like Legos: individual pieces that lock together, which you can keep adding to indefinitely. And just like Legos, you can’t remove one piece without affecting all the others.
Many people associate blockchain with cryptocurrency, but they’re not the same thing. Blockchain technology is the foundation of digital currency, like Bitcoin, but it also has applications in many other recordkeeping systems, from health information to inventory management and beyond.
In this article, we’ll cover:
- The history of blockchain
- Features of blockchain technology
- How blockchain technology works
- Types of blockchain
- Benefits of blockchain
- Industries that use blockchain technology
The history of blockchain
The protocols underlying blockchain have been around since the 1980s, sparked by computer scientist David Chaum’s 1982 dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.” Other scientists built on Chaum’s principles over the next two decades, expanding on technologies involving cryptography, unalterable document timestamps, distributed computer systems, and systems for verifying digital records.
But blockchain technology as we know it today came about in 2008, with “Bitcoin: A Peer-to-Peer Electronic Cash System,” a paper published under the pseudonym Satoshi Nakamoto; no one knows the actual person or people who wrote the paper. This was the beginning of Bitcoin, the first modern digital currency.
Bitcoin and Blockchain
The basic idea of Bitcoin is a currency unregulated by a central authority like a bank or government. Instead, it relies on blockchain technology to create a secure, distributed ledger of transactions, validated using a blockchain network. One year after Nakamoto’s paper was published, the first bitcoin was minted.
Features of blockchain technology
Blockchain technology relies on a peer-to-peer network of computers, all working together to run the blockchain’s algorithm in order to record and validate transactions, create blocks of data, and add them to the chain. Three key aspects of this technology are the ledger itself, the nodes in the blockchain network, and hashes that secure blocks. And when blockchain is used in cryptocurrency, there’s another crucial feature: each user’s digital wallet.
A blockchain’s ledger is the entire database of information: every block of data representing each transaction. This distributed ledger is the foundation of blockchain technology; traditional databases structure data into tables, while blockchain strings together data blocks. In doing so, it creates an irreversible timeline of data that cannot be altered.
Each blockchain network operates on a decentralized peer-to-peer network of computers; every computer in that network is a node. Each node downloads and stores the entire blockchain, and can also validate new transactions as they happen. In the world of cryptocurrency, the person running a node earns coins for validating transactions; investors can support this process by cryptostaking in order to earn passive income without operating a node themselves.
A hash is a sort of cryptographic fingerprint that’s added to each block in the blockchain. Hashing is a mathematical function in which input of any length is run through an algorithm that produces a fixed-length output. That output is the hash, and it provides security because it cannot be reverse-engineered and the same data will always produce the same hashed value.
A digital wallet is an application that stores an individual’s financial transactions. In the world of cryptocurrency, you need one to store your coins and make transactions, like making purchases or transferring coins to people. When you make a transaction, it’s verified by a node and added to the ledger; your digital wallet is then updated to reflect your transaction.
How blockchain technology works step-by-step
Let’s look at how blockchain works in practice by using the example of a Bitcoin transaction:
- First, you request a transaction. For this example, say you want to send bitcoins to another user, so you log in to your digital wallet and enter the user’s digital wallet address to send the coins
- The transaction request is broadcast to the nodes in the blockchain network
- The nodes compete to be the fastest to verify the transaction using the Bitcoin Core, which is the software used by Bitcoin’s blockchain. The fastest node verifies the transaction and earns bitcoins for doing so
- Your transaction is gathered up with several other transactions and put into a block with a hash; this is done by a node that functions as a miner in the blockchain
- This new block containing your transaction is added to Bitcoin’s distributed ledger
- The transaction is complete, so the coins you sent are deducted from your digital wallet and added to the other user’s wallet
Types of blockchain
As blockchain technology has evolved, four primary types have emerged. The original blockchain that powers Bitcoin is permissionless, meaning anyone can be part of the network; permissionless public blockchains are the basis of most other forms of cryptocurrency. There are also permissioned blockchains, which only allow certain users to join the blockchain network.
Also known as permissionless blockchain, a public blockchain is open to anyone who wants to join the network. Many popular cryptocurrencies rely on this type of blockchain, including Bitcoin and Ether. Proponents of decentralized finance praise public blockchains because they’re transparent, immutable, and open to anyone with a computer and internet access. That said, there are drawbacks: the size of the network can slow processing time for validation, and their anonymous nature can make them attractive to criminals who want to perpetrate fraud or sell illegal commodities.
A private blockchain is just that: private to a select group of users. These permissioned blockchains are managed by a centralized system, and users must obtain permission from a network administrator to join. Private blockchains are often used by individual organizations that want to leverage the benefits of the technology while also maintaining strict compliance protocols. Private blockchains tend to offer more speed, scalability, and stability than public ones.
Consortion blockchains, also called Federated blockchains, are a bit like private blockchains, but they’re managed by multiple organizations instead of just one, making them semi-decentralized. They require permission to join, are considered highly secure, and have relatively few nodes. This type of blockchain technology is commonly used by a group of companies in the same industry, such as insurance and healthcare, in order to more efficiently exchange information and process transactions. The downside is that a network structure governed by multiple entities can slow down development and create logistical obstacles if all parties can’t come to an agreement on protocols and processes.
A hybrid blockchain is like a blend of public and private blockchains, attempting to leverage the best of both worlds. While they can be structured in different ways, in most cases the ledger is accessible and transparent to everyone, just like a public blockchain, while modifications made to the ledger are controlled by a central organization, as they are in a private blockchain. This approach is used in many industries; for example, the IBM food trust uses a hybrid blockchain to improve efficiency in the food supply chain.
The benefits of blockchain
Blockchain enthusiasts cite many advantages of this technology, both for cryptocurrency and beyond. It’s intended to solve many of the issues that have long been associated with digital record-keeping, such as security, transparency, data integrity, and efficiency.
- Security: Every transaction is recorded, verified by a node, hashed with a unique identifier, and added to the blockchain. This makes it very difficult for hackers to tamper with data; any attempt to edit information in one block would require a hacker to edit every single block in the chain, all while publicly visible to the thousands of nodes in the blockchain. And hashing ensures that if a transaction is altered later, the tampering is evident.
- Immutability: Once a transaction is verified, it cannot be erased from the ledger. That permanence increases security and the reliability of the record-keeping.
- Transparency: With a public blockchain, the ledger is visible to anyone who wishes to view it. Records can be reviewed for security and accuracy at any time, by any party, reducing the potential for fraud to go undetected.
- Privacy: While the ledger is viewable by everyone, personal information about individuals is not. Each user has a unique code called a public key; when they make a transaction, that’s the only identifiable info recorded in the ledger.
- Efficiency: The decentralized nature of blockchain technology enables rapid processing of transactions, with thousands of nodes operating 24/7. For example, if you were to deposit a check into your traditional bank account on Friday night, you might not see the funds in your account until the following week. If someone sent bitcoins to your digital wallet, on the other hand, they’d likely be verified and secure in a couple hours or less.
- Reduced costs: Management by a central authority usually comes at a price, such as fees for processing credit card transactions or making purchases in foreign currency. With blockchain, there’s no third-party verification costs. When using cryptocurrency, transaction fees are often minimal.
- Banking accessibility: A central tenant of most cryptocurrencies is making it possible for anyone with an internet connection to store and use money without a central authority gatekeeping who can access financial tools. Blockchain enables systems in which the “unbanked” can do just that, which has an especially notable impact in developing countries, where access to banking can be limited and security concerns about cash abound. There are over 18,000 types of cryptocurrency available, including stablecoins, whose value is pegged to a fiat currency like the US dollar.
Other industries that use blockchain technology
If you’re asking “What is blockchain?” you may be one of the many people who first heard of this technology in the context of Bitcoin and other cryptocurrencies. While enabling the rise of various types of digital currency, blockchain technology has an incredibly wide variety of applications.
One reason blockchain can be useful in so many industries is that it enables smart contracts. These digital contracts are recorded securely on the blockchain and automatically executed when certain terms and conditions are met. Automation makes it possible for all parties to instantly know the outcome without the time and cost of third-party validation.
Blockchain has applications for traditional financial services as well as cryptocurrency, including asset management, payment processing, insurance, banking, and lending. One example is mortgage lending: blockchain can make a process that usually takes up to two months faster and less risky. Lenders can quickly and accurately verify financial documents, predict and collect credit score information, automate processes like underwriting, and manage transactions throughout the life of the loan. Liquid Mortgage, for example, is one platform using blockchain to support every part of the mortgage lifecycle.
A tremendous amount of data must be securely recorded, stored, and shared in the healthcare industry, and privacy is paramount. There’s a vast number of entities involved in the data, including healthcare providers, hospitals, insurance companies, and pharmaceutical companies. All that complexity can be streamlined with blockchain. Enterprise Ethereum is one blockchain being used in the healthcare industry to keep protected health information private when managing medical records, enable better traceability in the pharmaceutical supply chain, minimize fraud in clinical trials, and more.
Media and Entertainment
One of the central concerns of the media industry is protecting against copyright infringement, which has grown increasingly challenging in the digital age. The music industry encountered its first major headache with the launch of the music-sharing software Napster in 1999, and the difficulties have only compounded as file sharing and streaming services have blossomed. With a centralized blockchain ledger, identifying and shutting down infringement is far more effective. There’s an upside for artists, too: blockchain can remove intermediaries that eat into their royalties and make it easier for them to get paid for their content thanks to smart contracts.
Retail fashion industry
The complexity of the supply chain creates a tremendous amount of data management issues in the fashion industry. Blockchain can make it easier for producers and consumers to track the origin and journey of every component of their products. This allows people to understand the sustainability impact of goods and authenticate luxury items with tokens to guard against counterfeiting. Businesses can also reduce the operational costs associated with tracking production and inventory.
The promise of blockchain technology
The answer to “What is blockchain?” is deceptively simple: a decentralized digital ledger of transactions. But what the technology enables is vast and complex. While it all started with Bitcoin, and is most often associated with digital currency, the possible applications of blockchain technology are changing the landscape of many industries.