What is Blockchain?
People associate the terms ‘blockchain’ and ‘cryptocurrency’ together and presume them synonymous. Blockchain is so much more than just the technology behind bitcoin and other cryptocurrencies.
Blockchain technology is a distributed data system that enables an online list of transactions. Through cryptographic processes, this list is simultaneously copied across thousands of computers in what we call the distributed ledger system.
How does it work?
If you are asking yourself “what is a blockchain,” fortunately for you, the answer is simple. A synonymous name for blockchain is distributed ledger technology. A ledger is a record or collection of financial accounts of a particular type. On this hangs the foundation of blockchain.
The blockchain is made up of packages of data called blocks. The data within these blocks are transactions, among other things, but for now let’s stick with transactions. Next, the blocks of transaction data are linked together like a chain — hints the name blockchain.
The blocks are linked together cryptographically, in a serial or sequential way, so that if any of the transaction data is altered it creates a permanent change in the record or “ledger“. These blocks (i.e., data packages or transaction records) are distributed to computers all over the world called nodes. These nodes create a network.
These blocks can be thought of as permanent pages in a file where data about the network is stored. Once the information is written, or the block is added, it cannot be changed without the consensus of the nodes running on that network. Each block has a timestamp and link to the previous block. Anyone can read this list of transactions.
Why is blockchain important to cryptocurrency?
Blockchains are the technology that cryptocurrencies are created out of. To be clear, you can have a blockchain that does not issue any cryptocurrency. They are — for all intents and purposes — two separate things.
When you create a transaction with a cryptocurrency it is stored on the blockchain in the blocks. The reason that the blocks are linked together sequentially, and distributed to nodes across the world is to prevent double spending.
The reason that the blocks are linked together cryptographically is to preserve privacy, and secure the transaction data. Another key point, blockchain nodes are distributed across the world so that if any one computer goes down, a record of the blockchain still exists. Furthermore, anyone can run a node to secure the network.
Blockchains are known for their decentralized, immutable, and censorship resistant properties. This makes them popular for recording transaction data. As opposed to centralized ledgers or bookkeeping, wherein records can be altered, blockchains can not. Cryptocurrencies not only need a way to record transactions, but need a way to be issued. This is where blockchains come in.
Problems that blockchain technology solves:
- Eliminates the “middleman” – or need of a mediator, which is usually represented by a bank. Even online payment methods such as Paypal require an integration with a bank account to work. Blockchain technology means we can confirm transactions, confirm identities, and verify contracts all without the need of a third party.
- Trust issues — The network builds the trust for us through a combination of the complex math problem that must be solved, proven, and then verified by the rest of the network before any new piece of information can be added. Compare this to making a payment online; there are several elements involved which all need to be individually trusted, for example, banks, websites, and payment systems.
- Transparency — In public blockchains, all transactions are available for viewing; this enables a level of integrity and accountability, which has not existed in previous financial systems.
- Control — Blockchain is a decentralized system, no one can control what happens, and things can only change via consensus.
- Decentralization — Blockchains became famous for their ability to securely decentralize the issuance of currency. The problem with centralized currency issuance is that the issuer can arbitrarily print more currency units, which causes its value to plummet. This is known as inflation.
- Censorship Resistance — Because anyone can maintain the record of transactions (i.e., blockchain), no one can be denied access to the ledger. This is particularly useful for peer-to-peer transactions, where peers want to confirm that the counterparty has the ability to pay.
- Immutability — Records stored on the blockchain are permanent. In traditional finance, centralized entities have the ability to alter or “cook their books,” to defraud customers. With blockchain technology, this is nearly impossible.
How they are used?
This concept was first created in 2008 and then implemented in 2009 by Satoshi Nakamoto as an integral part of Bitcoin. It was the first digital currency that solved the double-spending problem (file duplication) without the need for a central server. Keys transfer blocks containing information about financial value. This records the transfer and gets rid of the need for a third party like a bank. It also ensures security seen as you must have the corresponding key to edit any data stored in the ledger.
Ways to apply blockchain technology
A banks function, verifying identities and recording transactions, can be done faster and more accurately by blockchain. Blockchain started with Bitcoin, but the applications are vast across many sectors. Here are just some ways that blockchains improve several industries:
- Smart contracts – In addition to storing a unit of value, some blockchains can be used to store different types of digital information. This means code can be programmed to trigger when we enter keys or when conditions are met from external data feeds (e.g., stock prices, energy usage). Smart contracts have the potential to transform so many sectors.
- Internet of Things – This term describes the growing number of everyday objects that can connect to a more extensive network via the internet. Blockchain technology offers the opportunity for further scalability and integration.
- Fundraising – The charity industry can benefit from the transparency offered by blockchain transactions. Often charities can face challenges ensuring that the public has trust in the funds arriving at their intended destination. Blockchain means that information on the allocation of funds is visible for funders.
- Healthcare – Because blockchain technology is so secure and reliable, it’s the perfect method of recording and storing sensitive information such as healthcare data.
- Supply chain management – The ability to precisely track processes with complete transparency is useful from both the production and consumer point of view. Customers can know the exact origin and contents of their products, helping to reduce scandal and maintain integrity for companies.
What’s next for blockchain?
As more and more companies are utilizing blockchain technology to create greater reliability and transparency across their digital platforms, the prospective uses of blockchain technology are becoming apparent. As awareness increases, it seems blockchain technology will be solving problems and transforming processes for many industries. Take a look at our list of the most revolutionary blockchain-based businesses for an idea of the huge scale of potential applications.
Frequently Asked Questions
What is the difference between blockchains and cryptocurrency?
Blockchains are the technology that cryptocurrencies are created out of. To be clear, you can have a blockchain that does not issue any cryptocurrency. They are — for all intents and purposes — two separate things.
Why are blockchains popular?
Blockchains are known for their decentralized, immutable, and censorship resistant properties. This makes them popular for recording transaction data. As opposed to centralized ledgers or bookkeeping, wherein records can be altered, blockchains can not.
Why are blockchains decentralized?
Blockchains became famous for their ability to securely decentralize the issuance of currency. The problem with centralized currency issuance is that the issuer can arbitrarily print more currency units, which causes its value to plummet. This is known as inflation.
How are blockchains censorship resistant?
Because blockchains are distributed globally, and anyone can maintain the record of transactions (i.e., blockchain), no one can be denied access to the ledger. This means that if one or many nodes go offline, the network can still function.
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