What Is a Blockchain?
A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation of a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
One key difference between a typical database and a blockchain is how the data is structured. A blockchain collects information together in groups, known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.
A database usually structures its data into tables, whereas a blockchain, as its name implies, structures its data into chunks (blocks) that are strung together. This data structure inherently makes an irreversible timeline of data when implemented in a decentralized nature. When a block is filled, it is set in stone and becomes a part of this timeline. Each block in the chain is given an exact time stamp when it is added to the chain.
How Does a Blockchain Work?
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. In this way, a blockchain is a foundation for immutable ledgers, or records of transactions that cannot be altered, deleted, or destroyed. This is why blockchains are also known as distributed ledger technology (DLT).
First proposed as a research project in 1991, the blockchain concept predated its first widespread application in use: Bitcoin, in 2009. In the years since, the use of blockchains has exploded via the creation of various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.
Blockchain consists of three important concepts: blocks, nodes and miners.
- The data in the block.
- A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash.
- The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).
- When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.
Every chain consists of multiple blocks and each block has three basic elements:
- Miners create new blocks on the chain through a process called mining.
- In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.
- Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the “golden nonce” and their block is added to the chain.
- Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely difficult to manipulate blockchain technology. Think of it as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.
- When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.
One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.
Combining public information with a system of checks and balances helps the blockchain maintain its integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.
Imagine that a company owns a server farm with 10,000 computers used to maintain a database holding all of its client’s account information. This company owns a warehouse building that contains all of these computers under one roof and has full control of each of these computers and all of the information contained within them. This, however, provides a single point of failure. What happens if the electricity at that location goes out? What if its Internet connection is severed? What if it burns to the ground? What if a bad actor erases everything with a single keystroke? In any case, the data is lost or corrupted.
What a blockchain does is to allow the data held in that database to be spread out among several network nodes at various locations. This not only creates redundancy but also maintains the fidelity of the data stored therein—if somebody tries to alter a record at one instance of the database, the other nodes would not be altered and thus would prevent a bad actor from doing so. If one user tampers with Bitcoin’s record of transactions, all other nodes would cross-reference each other and easily pinpoint the node with the incorrect information. This system helps to establish an exact and transparent order of events. This way, no single node within the network can alter information held within it.
Because of this, the information and history (such as of transactions of a cryptocurrency) are irreversible. Such a record could be a list of transactions (such as with a cryptocurrency), but it also is possible for a blockchain to hold a variety of other information like legal contracts, state identifications, or a company’s product inventory.
Because of the decentralized nature of Bitcoin’s blockchain, all transactions can be transparently viewed by either having a personal node or using blockchain explorers that allow anyone to see transactions occurring live. Each node has its own copy of the chain that gets updated as fresh blocks are confirmed and added. This means that if you wanted to, you could track Bitcoin wherever it goes.
For example, exchanges have been hacked in the past, and those who kept Bitcoin on the exchange lost everything. While the hacker may be entirely anonymous, the Bitcoins that they extracted are easily traceable. If the Bitcoins stolen in some of these hacks were to be moved or spent somewhere, it would be known.
Of course, the records stored in the Bitcoin blockchain (as well as most others) are encrypted. This means that only the owner of a record can decrypt it to reveal their identity (using a public-private key pair). As a result, users of blockchains can remain anonymous while preserving transparency.
Is Blockchain Secure?
Blockchain technology achieves decentralized security and trust in several ways. To begin with, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. After a block has been added to the end of the blockchain, it is extremely difficult to go back and alter the contents of the block unless a majority of the network has reached a consensus to do so. That’s because each block contains its own hash, along with the hash of the block before it, as well as the previously mentioned time stamp. Hash codes are created by a mathematical function that turns digital information into a string of numbers and letters. If that information is edited in any way, then the hash code changes as well.
Let’s say that a hacker, who also runs a node on a blockchain network, wants to alter a blockchain and steal cryptocurrency from everyone else. If they were to alter their own single copy, it would no longer align with everyone else’s copy. When everyone else cross-references their copies against each other, they would see this one copy stand out, and that hacker’s version of the chain would be cast away as illegitimate.
How Are Blockchains Used?
As we now know, blocks on Bitcoin’s blockchain store data about monetary transactions. Today, there are more than 10,000 other cryptocurrency systems running on the blockchain. But it turns out that blockchain is actually a reliable way of storing data about other types of transactions as well.
Some companies that have already incorporated blockchain include Walmart, Pfizer, AIG, Siemens, Unilever, and a host of others. For example, IBM has created its Food Trust blockchain to trace the journey that food products take to get to their locations.3
Why do this? The food industry has seen countless outbreaks of E. coli, salmonella, and listeria, as well as hazardous materials being accidentally introduced to foods. In the past, it has taken weeks to find the source of these outbreaks or the cause of sickness from what people are eating. Using blockchain gives brands the ability to track a food product’s route from its origin, through each stop it makes, and finally, it’s delivery. If a food is found to be contaminated, then it can be traced all the way back through each stop to its origin. Not only that, but these companies can also now see everything else it may have come in contact with, allowing the identification of the problem to occur far sooner and potentially saving lives. This is one example of blockchain in practice, but there are many other forms of blockchain implementation.
Banking and Finance
Perhaps no industry stands to benefit from integrating blockchain into its business operations more than banking. Financial institutions only operate during business hours, usually five days a week. That means if you try to deposit a check on Friday at 6 p.m., you will likely have to wait until Monday morning to see that money hit your account. Even if you do make your deposit during business hours, the transaction can still take one to three days to verify due to the sheer volume of transactions that banks need to settle. Blockchain, on the other hand, never sleeps.
By integrating blockchain into banks, consumers can see their transactions processed in as little as 10 minutes—basically the time it takes to add a block to the blockchain, regardless of holidays or the time of day or week. With blockchain, banks also have the opportunity to exchange funds between institutions more quickly and securely. In the stock trading business, for example, the settlement and clearing process can take up to three days (or longer, if trading internationally), meaning that the money and shares are frozen for that period of time.
Given the size of the sums involved, even the few days that the money is in transit can carry significant costs and risks for banks.
Blockchain forms the bedrock for cryptocurrencies like Bitcoin. The U.S. dollar is controlled by the Federal Reserve. Under this central authority system, a user’s data and currency are technically at the whim of their bank or government. If a user’s bank is hacked, the client’s private information is at risk. If the client’s bank collapses or the client lives in a country with an unstable government, the value of their currency may be at risk. In 2008, several failing banks were bailed out—partially using taxpayer money. These are the worries out of which Bitcoin was first conceived and developed.
By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates many of the processing and transaction fees. It can also give those in countries with unstable currencies or financial infrastructures a more stable currency with more applications and a wider network of individuals and institutions with whom they can do business, both domestically and internationally.
Using cryptocurrency wallets for savings accounts or as a means of payment is especially profound for those who have no state identification. Some countries may be war-torn or have governments that lack any real infrastructure to provide identification. Citizens of such countries may not have access to savings or brokerage accounts—and, therefore, no way to safely store wealth.
Healthcare providers can leverage blockchain to securely store their patients’ medical records. When a medical record is generated and signed, it can be written into the blockchain, which provides patients with the proof and confidence that the record cannot be changed. These personal health records could be encoded and stored on the blockchain with a private key, so that they are only accessible by certain individuals, thereby ensuring privacy.
If you have ever spent time in your local Recorder’s Office, you will know that the process of recording property rights is both burdensome and inefficient. Today, a physical deed must be delivered to a government employee at the local recording office, where it is manually entered into the county’s central database and public index. In the case of a property dispute, claims to the property must be reconciled with the public index.
This process is not just costly and time-consuming—it is also prone to human error, where each inaccuracy makes tracking property ownership less efficient. Blockchain has the potential to eliminate the need for scanning documents and tracking down physical files in a local recording office. If property ownership is stored and verified on the blockchain, owners can trust that their deed is accurate and permanently recorded.
In war-torn countries or areas that have little to no government or financial infrastructure, and certainly no Recorder’s Office, it can be nearly impossible to prove ownership of a property. If a group of people living in such an area is able to leverage blockchain, then transparent and clear timelines of property owners could be established.
A smart contract is a computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions to which users agree. When those conditions are met, the terms of the agreement are automatically carried out.
Say, for example, that a potential tenant would like to lease an apartment using a smart contract. The landlord agrees to give the tenant the door code to the apartment as soon as the tenant pays the security deposit. Both the tenant and the landlord would send their respective portions of the deal to the smart contract, which would hold onto and automatically exchange the door code for the security deposit on the date when the lease begins. If the landlord doesn’t supply the door code by the lease date, then the smart contract refunds the security deposit. This would eliminate the fees and processes typically associated with the use of a notary, a third-party mediator, or attorneys.
As in the IBM Food Trust example, suppliers can use blockchain to record the origins of materials that they have purchased. This would allow companies to verify the authenticity of not only their products but also common labels such as “Organic,” “Local,” and “Fair Trade.”
As reported by Forbes, the food industry is increasingly adopting the use of blockchain to track the path and safety of food throughout the farm-to-user journey.
As mentioned above, blockchain could be used to facilitate a modern voting system. Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout, as was tested in the November 2018 midterm elections in West Virginia.5 Using blockchain in this way would make votes nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and providing officials with nearly instant results. This would eliminate the need for recounts or any real concern that fraud might threaten the election.
The number of live blockchains is growing every day at an ever-increasing pace. As of 2022, there are more than 10,000 active cryptocurrencies based on blockchain, with several hundred more non-crypto currency blockchains.
Cryptocurrencies: The Beginning of Blockchain’s Technological Rise
Blockchain’s most well-known use (and maybe most controversial) is in cryptocurrencies. Cryptocurrencies are digital currencies (or tokens), like Bitcoin, Ethereum or Litecoin, that can be used to buy goods and services. Just like a digital form of cash, crypto can be used to buy everything from your lunch to your next home. Unlike cash, crypto uses blockchain to act as both a public ledger and an enhanced cryptographic security system, so online transactions are always recorded and secured.
HOW DOES CRYPTOCURRENCY WORK?
Cryptocurrencies are digital currencies that use blockchain technology to record and secure every transaction. A cryptocurrency (for example, Bitcoin) can be used as a digital form of cash to pay for everything from everyday items to larger purchases like cars and homes. It can be bought using one of several digital wallets or trading platforms, then digitally transferred upon purchase of an item, with the blockchain recording the transaction and the new owner. The appeal of cryptocurrencies is that everything is recorded in a public ledger and secured using cryptography, making an irrefutable, timestamped and secure record of every payment.
To date, there are roughly 6,700 cryptocurrencies in the world that have a total market cap of around $1.6 trillion, with Bitcoin holding a majority of the value. These tokens have become incredibly popular over the last few years, with one Bitcoin equaling $60,000. Here are some of the main reasons why everyone is suddenly taking notice of cryptocurrencies:
- Blockchain’s security makes theft much harder since each cryptocurrency has its own irrefutable identifiable number that is attached to one owner.
- Crypto reduces the need for individualized currencies and central banks- With blockchain, crypto can be sent to anywhere and anyone in the world without the need for currency exchanging or without interference from central banks.
- Cryptocurrencies can make some people rich- Speculators have been driving up the price of crypto, especially Bitcoin, helping some early adopters to become billionaires. Whether this is actually a positive has yet to be seen, as some retractors believe that speculators do not have the long-term benefits of crypto in mind.
- More and more large corporations are coming around to the idea of a blockchain-based digital currency for payments. In February 2021, Tesla famously announced that it would invest $1.5 billion into Bitcoin and accept it as payment for their cars.
Of course, there are many legitimate arguments against blockchain-based digital currencies. First, crypto isn’t a very regulated market. Many governments were quick to jump into crypto, but few have a staunch set of codified laws regarding it. Additionally, crypto is incredibly volatile due to those aforementioned speculators. In 2016, Bitcoin was priced at around $450 per token. It then jumped to about $16,000 a token in 2018, dipped to around $3,100, then has since increased to more than $60,000. Lack of stability has caused some people to get very rich, while a majority have still lost thousands.
Whether or not digital currencies are the future remains to be seen. For now, it seems as if blockchain’s meteoric rise is more starting to take root in reality than pure hype. Though it’s still making headway in this entirely-new, highly-exploratory field, blockchain is also showing promise beyond Bitcoin.
Types of blockchain networks
There are several ways to build a blockchain network. They can be public, private, permissioned or built by a consortium.
Public blockchain networks
A public blockchain is one that anyone can join and participate in, such as Bitcoin. Drawbacks might include substantial computational power required, little or no privacy for transactions, and weak security. These are important considerations for enterprise use cases of blockchain.
Private blockchain networks
A private blockchain network, similar to a public blockchain network, is a decentralized peer-to-peer network. However, one organization governs the network, controlling who is allowed to participate, executing a consensus protocol and maintaining the shared ledger. Depending on the use case, this can significantly boost trust and confidence between participants. A private blockchain can be run behind a corporate firewall and even be hosted on-premises.
Permissioned blockchain networks
Businesses that set up a private blockchain will generally set up a permissioned blockchain network. It is important to note that public blockchain networks can also be permissioned. This places restrictions on who is allowed to participate in the network and in what transactions. Participants need to obtain an invitation or permission to join.
Multiple organizations can share the responsibilities of maintaining a blockchain. These pre-selected organizations determine who may submit transactions or access the data. A consortium blockchain is ideal for business when all participants need to be permissioned and have a shared responsibility for the blockchain.