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What Is Blockchain? | IBM

What is blockchain?

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What is blockchain?

Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.

An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.

Why is blockchain important?

Business runs on information. The faster information is received and the more accurate it is, the better. Blockchain is ideal for delivering that information because it provides immediate, shared, and observable information that is stored on an immutable ledger that only permissioned network members can access. A blockchain network can track orders, payments, accounts, production and much more. And because members share a single view of the truth, you can see all details of a transaction end to end, giving you greater confidence, and new efficiencies and opportunities.

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Blockchain Facts: What Is It, How It Works, and How It Can Be Used

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Table of Contents

What Is a Blockchain?

How Does a Blockchain Work?

Blockchain Decentralization

Blockchain Transparency

Is Blockchain Secure?

Bitcoin vs. Blockchain

Blockchain vs. Banks

How Are Blockchains Used?

Pros and Cons of Blockchain

Benefits of Blockchains

Drawbacks of Blockchains

FAQs

The Bottom Line

Learn what these digital public ledgers are capable of

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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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What Is a Blockchain?

A blockchain is a distributed database or ledger shared among a computer network's nodes. They are best known for their crucial role in cryptocurrency systems for maintaining a secure and decentralized record of transactions, but they are not limited to cryptocurrency uses. Blockchains can be used to make data in any industry immutable—the term used to describe the inability to be altered.

Because there is no way to change a block, the only trust needed is at the point where a user or program enters data. This aspect reduces the need for trusted third parties, which are usually auditors or other humans that add costs and make mistakes.

Since Bitcoin's introduction in 2009, blockchain uses have exploded via the creation of various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.

Key Takeaways

Blockchain is a type of shared database that differs from a typical database in the way it stores information; blockchains store data in blocks linked together via cryptography.Different types of information can be stored on a blockchain, but the most common use for transactions has been as a ledger. In Bitcoin’s case, blockchain is decentralized so that no single person or group has control—instead, all users collectively retain control.Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, transactions are permanently recorded and viewable to anyone.

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How Does a Blockchain Work?

You might be familiar with spreadsheets or databases. A blockchain is somewhat similar because it is a database where information is entered and stored. But the key difference between a traditional database or spreadsheet and a blockchain is how the data is structured and accessed.

A blockchain consists of programs called scripts that conduct the tasks you usually would in a database: Entering and accessing information and saving and storing it somewhere. A blockchain is distributed, which means multiple copies are saved on many machines, and they must all match for it to be valid.

The blockchain collects transaction information and enters it into a block, like a cell in a spreadsheet containing information. Once it is full, the information is run through an encryption algorithm, which creates a hexadecimal number called the hash.

The hash is then entered into the following block header and encrypted with the other information in the block. This creates a series of blocks that are chained together.

Transaction Process

Transactions follow a specific process, depending on the blockchain they are taking place on. For example, on Bitcoin's blockchain, if you initiate a transaction using your cryptocurrency wallet—the application that provides an interface for the blockchain—it starts a sequence of events.

In Bitcoin, your transaction is sent to a memory pool, where it is stored and queued until a miner or validator picks it up. Once it is entered into a block and the block fills up with transactions, it is closed and encrypted using an encryption algorithm. Then, the mining begins.

The entire network works simultaneously, trying to "solve" the hash. Each one generates a random hash except for the "nonce," short for number used once.

Every miner starts with a nonce of zero, which is appended to their randomly-generated hash. If that number isn't equal to or less than the target hash, a value of one is added to the nonce, and a new block hash is generated. This continues until a miner generates a valid hash, winning the race and receiving the reward.

Generating random hashes until a specific value is found is the "proof-of-work" you hear so much about—it "proves" the miner did the work. The amount of work it takes to validate the hash is why the Bitcoin network consumes so much computational power and energy.

Once a block is closed, a transaction is complete. However, the block is not considered to be confirmed until five other blocks have been validated. Confirmation takes the network about one hour to complete because it averages just under 10 minutes per block (the first block with your transaction and five following blocks multiplied by 10 equals about 60 minutes).

Not all blockchains follow this process. For instance, the Ethereum network randomly chooses one validator from all users with ether staked to validate blocks, which are then confirmed by the network. This is much faster and less energy intensive than Bitcoin's process.

Blockchain Decentralization

A blockchain allows the data in a database to be spread out among several network nodes—computers or devices running software for the blockchain—at various locations. This not only creates redundancy but maintains the fidelity of the data. For example, if someone tries to alter a record at one instance of the database, the other nodes would prevent it from happening. This way, no single node within the network can alter information held within it.

Because of this distribution—and the encrypted proof that work was done—the information and history (like the transactions in 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 inventory.

Blockchain Transparency

Because of the decentralized nature of the Bitcoin 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 a bitcoin wherever it goes.

For example, exchanges have been hacked in the past, resulting in the loss of large amounts of cryptocurrency. While the hackers may have been anonymous—except for their wallet address—the crypto they extracted are easily traceable because the wallet addresses are published on the blockchain.

Of course, the records stored in the Bitcoin blockchain (as well as most others) are encrypted. This means that only the person assigned an address can reveal their identity. As a result, blockchain users 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, previous blocks cannot be changed.

A change in any data changes the hash of the block it was in. Because each block contains the previous block's hash, a change in one would change the following blocks. The network would reject an altered block because the hashes would not match.

Not all blockchains are 100% impenetrable. They are distributed ledgers that use code to create the security level they have become known for. If there are vulnerabilities in the coding, they can be exploited.

For instance, imagine that a hacker runs a node on a blockchain network and wants to alter a blockchain and steal cryptocurrency from everyone else. If they were to change their copy, they would have to convince the other nodes that their copy was the valid one.

They would need to control a majority of the network to do this and insert it at just the right moment. This is known as a 51% attack because you need to control more than 50% of the network to attempt it.

Timing would be everything in this type of attack—by the time the hacker takes any action, the network is likely to have moved past the blocks they were trying to alter. This is because the rate at which these networks hash is exceptionally fast—the Bitcoin network hashed at 348.1 exahashes per second (18 zeros) on April 21, 2023.

Bitcoin vs. Blockchain

Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with. But it wasn’t until almost two decades later, with the launch of Bitcoin in January 2009, that blockchain had its first real-world application.

The Bitcoin protocol is built on a blockchain. In a research paper introducing the digital currency, Bitcoin’s pseudonymous creator, Satoshi Nakamoto, referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”

The key thing to understand is that Bitcoin uses blockchain as a means to transparently record a ledger of payments or other transactions between parties.

Blockchain

Blockchain can be used to immutably record any number of data points. This could be in the form of transactions, votes in an election, product inventories, state identifications, deeds to homes, and much more.

Currently, tens of thousands of projects are looking to implement blockchains in various ways to help society other than just recording transactions—for example, as a way to vote securely in democratic elections.

The nature of blockchain’s immutability means that fraudulent voting would become far more difficult. For example, a voting system could work such that each country's citizens would be issued a single cryptocurrency or token.

Each candidate would then be given a specific wallet address, and the voters would send their token or crypto to the address of whichever candidate for whom they wish to vote. The transparent and traceable nature of blockchain would eliminate the need for human vote counting and the ability of bad actors to tamper with physical ballots.

Blockchain vs. Banks

Blockchains have been heralded as a disruptive force in the finance sector, especially with the functions of payments and banking. However, banks and decentralized blockchains are vastly different.

To see how a bank differs from blockchain, let’s compare the banking system to Bitcoin’s blockchain implementation.

How Are Blockchains Used?

As we now know, blocks on Bitcoin’s blockchain store transactional data. Today, more than 23,000 other cryptocurrency systems are running on a blockchain. But it turns out that blockchain is a reliable way of storing data about other types of transactions.

Some companies experimenting with blockchain include Walmart, Pfizer, AIG, Siemens, and Unilever, among others. For example, IBM has created its Food Trust blockchain to trace the journey that food products take to get to their locations.

Why do this? The food industry has seen countless outbreaks of E. coli, salmonella, and listeria; in some cases, hazardous materials were 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 allows brands to track a food product’s route from its origin, through each stop it makes, to delivery. 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—potentially saving lives. This is one example of blockchain in practice, but many other forms of blockchain implementation exist.

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 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 might see their transactions processed in minutes or seconds—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. Given the size of the sums involved, even the few days the money is in transit can carry significant costs and risks for banks.

The settlement and clearing process for stock traders can take up to three days (or longer if trading internationally), meaning that the money and shares are frozen for that period. Blockchain could drastically reduce that time.

Currency

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.

Blockchain can also give those in countries with unstable currencies or financial infrastructures a more stable currency and financial system. They would have access to more applications and a wider network of individuals and institutions with whom they can do domestic and international business.

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 the processing and transaction fees.

Using cryptocurrency wallets for savings accounts or as a means of payment is especially profound for those without state identification. Some countries may be war-torn or have governments lacking any real identification infrastructure. Citizens of such countries may not have access to savings or brokerage accounts—and, therefore, no way to safely store wealth.

Healthcare

Healthcare providers can leverage blockchain to store their patients’ medical records securely. 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 to specific individuals, thereby ensuring privacy.

Property Records

If you have ever spent time in your local Recorder’s Office, you will know that 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 with little to no government or financial infrastructure and no Recorder’s Office, proving property ownership can be nearly impossible. If a group of people living in such an area can leverage blockchain, then transparent and clear timelines of property ownership could be established.

Smart Contracts

A smart contract is a computer code that can be built into the blockchain to facilitate 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. The smart contract would automatically send the door code to the tenant when it was paid. It could also be programmed to change the code if rent wasn't paid or other conditions were met.

Supply Chains

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.

Voting

As mentioned above, blockchain could 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.

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.

Pros and Cons of Blockchain

For all of its complexity, blockchain’s potential as a decentralized form of record-keeping is almost without limit. From greater user privacy and heightened security to lower processing fees and fewer errors, blockchain technology may very well see applications beyond those outlined above. But there are also some disadvantages.

Pros

Improved accuracy by removing human involvement in verification

Cost reductions by eliminating third-party verification

Decentralization makes it harder to tamper with

Transactions are secure, private, and efficient

Transparent technology

Provides a banking alternative and a way to secure personal information for citizens of countries with unstable or underdeveloped governments

Cons

Significant technology cost associated with some blockchains

Low transactions per second

History of use in illicit activities, such as on the dark web

Regulation varies by jurisdiction and remains uncertain

Data storage limitations

Benefits of Blockchains

Accuracy of the Chain

Transactions on the blockchain network are approved by thousands of computers and devices. This removes almost all people from the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain and not be accepted by the rest of the network.

Cost Reductions

Typically, consumers pay a bank to verify a transaction or a notary to sign a document. Blockchain eliminates the need for third-party verification—and, with it, their associated costs. For example, business owners incur a small fee when they accept credit card payments because banks and payment-processing companies have to process those transactions. Bitcoin, on the other hand, does not have a central authority and has limited transaction fees.

Decentralization

Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change.

By spreading that information across a network, rather than storing it in one central database, blockchain becomes more difficult to tamper with.

Efficient Transactions

Transactions placed through a central authority can take up to a few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. Financial institutions operate during business hours, usually five days a week—but a blockchain works 24 hours a day, seven days a week, and 365 days a year.

On some blockchains, transactions can be completed in minutes and considered secure after just a few. This is particularly useful for cross-border trades, which usually take much longer because of time zone issues and the fact that all parties must confirm payment processing.

Private Transactions

Many blockchain networks operate as public databases, meaning anyone with an internet connection can view a list of the network’s transaction history. Although users can access transaction details, they cannot access identifying information about the users making those transactions. It is a common misperception that blockchain networks like Bitcoin are fully anonymous; they are actually pseudonymous because there is a viewable address that can be associated with a user if the information gets out.

Secure Transactions

Once a transaction is recorded, its authenticity must be verified by the blockchain network. After the transaction is validated, it is added to the blockchain block. Each block on the blockchain contains its unique hash and the unique hash of the block before it. Therefore, the blocks cannot be altered once the network confirms them.

Transparency

Most blockchains are entirely open-source software. This means that everyone can view its code. This gives auditors the ability to review cryptocurrencies like Bitcoin for security. However, it also means there is no real authority on who controls Bitcoin’s code or how it is edited. Because of this, anyone can suggest changes or upgrades to the system. If a majority of the network users agree that the new version of the code with the upgrade is sound and worthwhile, then Bitcoin can be updated.

Banking the Unbanked

Perhaps the most profound facet of blockchain and cryptocurrency is the ability for anyone, regardless of ethnicity, gender, location, or cultural background to use it. According to The World Bank, an estimated 1.3 billion adults do not have bank accounts or any means of storing their money or wealth. Moreover, nearly all of these individuals live in developing countries where the economy is in its infancy and entirely dependent on cash.

These people are often paid in physical cash. They then need to store this physical cash in hidden locations in their homes or other places, incentivizing robbers or violence. While not impossible to steal, crypto makes it more difficult for would-be thieves.

Blockchains of the future are also looking for solutions to not only be a unit of account for wealth storage but also to store medical records, property rights, and a variety of other legal contracts.

Drawbacks of Blockchains

Technology Cost

Although blockchain can save users money on transaction fees, the technology is far from free. For example, the Bitcoin network's proof-of-work system to validate transactions consumes vast amounts of computational power. In the real world, the energy consumed by the millions of devices on the Bitcoin network is more than Pakistan consumes annually.

Some solutions to these issues are beginning to arise. For example, bitcoin-mining farms have been set up to use solar power, excess natural gas from fracking sites, or energy from wind farms.

Speed and Data Inefficiency

Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s PoW system takes about 10 minutes to add a new block to the blockchain. At that rate, it’s estimated that the blockchain network can only manage about three transactions per second (TPS). Although other cryptocurrencies, such as Ethereum, perform better than Bitcoin, blockchain still limits them. Legacy brand Visa, for context, can process 65,000 TPS.

Solutions to this issue have been in development for years. There are currently blockchains that boast more than 30,000 TPS. Ethereum's merge between its main net and beacon chain (Sep. 15, 2022) is predicted to allow up to 100,000 TPS after it rolls out a series of upgrades that include sharding—a splitting of the database so that more devices (phones, tablets, and laptops) can run Ethereum. This is expected to increase network participation, reduce congestion, and increase transaction speeds.

The other issue is that each block can only hold so much data. The block size debate has been and continues to be one of the most pressing issues for the scalability of blockchains going forward.

Illegal Activity

While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network. The most cited example of blockchain being used for illicit transactions is probably the Silk Road, an online dark web illegal-drug and money laundering marketplace operating from February 2011 until October 2013, when the FBI shut it down.

The dark web allows users to buy and sell illegal goods without being tracked by using the Tor Browser and make illicit purchases in Bitcoin or other cryptocurrencies. This is in stark contrast to U.S. regulations, which require financial service providers to obtain information about their customers when they open an account. They are supposed to verify the identity of each customer and confirm that they do not appear on any list of known or suspected terrorist organizations.

Illicit activity accounted for only 0.24% of all cryptocurrency transactions in 2022.

This system can be seen as both a pro and a con. It gives anyone access to financial accounts, but allows criminals to transact more easily. Many have argued that the good uses of crypto, like banking the unbanked world, outweigh the bad uses of cryptocurrency, especially when most illegal activity is still accomplished through untraceable cash.

Regulation

Many in the crypto space have expressed concerns about government regulation over cryptocurrencies. While it is getting increasingly difficult and near impossible to end something like Bitcoin as its decentralized network grows, governments could theoretically make it illegal to own cryptocurrencies or participate in their networks.

This concern has grown smaller over time as large companies like PayPal begin to allow customers to use cryptocurrencies on their e-commerce platforms.

What Is a Blockchain in Simple Terms?

Simply put, a blockchain is a shared database or ledger. Pieces of data are stored in data structures known as blocks, and each network node has a replica of the entire database. Security is ensured since the majority will not accept this change if somebody tries to edit or delete an entry in one copy of the ledger.

How Many Blockchains Are There?

The number of live blockchains is growing every day at an ever-increasing pace. As of 2023, there are more than 23,000 active cryptocurrencies based on blockchain, with several hundred more non-cryptocurrency blockchains.

What’s the Difference Between a Private Blockchain and a Public Blockchain?

A public blockchain, also known as an open or permissionless blockchain, is one where anybody can join the network freely and establish a node. Because of their open nature, these blockchains must be secured with cryptography and a consensus system like proof of work (PoW). A private or permissioned blockchain, on the other hand, requires each node to be approved before joining. Because nodes are considered to be trusted, the layers of security do not need to be as robust.

The Bottom Line

With many practical applications for the technology already being implemented and explored, blockchain is finally making a name for itself in no small part because of Bitcoin and cryptocurrency. As a buzzword on the tongue of every investor in the nation, blockchain stands to make business and government operations more accurate, efficient, secure, and cheap, with fewer middlemen.

As we head into the third decade of blockchain, it’s no longer a question of if legacy companies will catch on to the technology—it’s a question of when. Today, we see a proliferation of NFTs and the tokenization of assets. As a result, the next decades will prove to be a significant period of growth for blockchain.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own any of the assets discussed here.

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Bitcoin (BTC) is a digital or virtual currency created in 2009 that uses peer-to-peer technology to facilitate instant payments.

What Is Block Time? What It Measures, Verification, and Example

Block time, in the context of cryptocurrency, is the average amount of time it takes for a new block to be added to a blockchain.

Genesis Block: Bitcoin Definition, Mysteries, and Secret Message

The Genesis Block is what the Bitcoin community calls the first block created for the Bitcoin blockchain. It contained a message and the first transaction.

Light, Full, and Master Nodes: Definition, Differences

Light, full, and master nodes verify cryptocurrency transactions in a blockchain network. Master nodes are full nodes that perform additional roles.

Nonce: What It Means and How It's Used in Blockchain

Blockchain ETF: Meaning, Criticism, and Example

What Is Bitcoin? How to Mine, Buy, and Use It

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What Is Blockchain Technology? How Does It Work? | Built In

Is Blockchain Technology? How Does It Work? | Built In Skip to main content Blockchain.What Is Blockchain Technology? How Does It Work?Written bySam DaleyUPDATED BYBrennan Whitfield | Sep. 01, 2022REVIEWED BYOmar BhedaWhat Is Blockchain?Blockchain technology is a decentralized, distributed ledger that stores the record of ownership of digital assets. Any data stored on blockchain is unable to be modified, making the technology a legitimate disruptor for industries like payments, cybersecurity and healthcare. Discover more on what it is, how it’s used and its history.Blockchain OverviewBlockchain UsesBlockchain HistoryBlockchain OverviewBlockchain is most simply defined as a decentralized, distributed ledger technology that records the provenance of a digital asset. | Image: ShutterstockWhat Is Blockchain Technology?Blockchain, sometimes referred to as distributed ledger technology (DLT), makes the history of any digital asset unalterable and transparent through the use of a decentralized network and cryptographic hashing.A simple analogy for how blockchain technology operates can be compared to how a Google Docs document works. When you create a Google Doc and share it with a group of people, the document is simply distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the base document at the same time. No one is locked out awaiting changes from another party, while all modifications to the document are being recorded in real-time, making changes completely transparent. A significant gap to note however is that unlike Google Docs, original content and data on the blockchain cannot be modified once written, adding to its level of security.Of course, blockchain is more complicated than a Google Doc, but the analogy is apt because it illustrates critical ideas of the technology:Blockchain Meaning: Blockchain ExplainedA blockchain is a digital ledger or database where encrypted blocks of digital asset data are stored and chained together, forming a chronological single-source-of-truth for the data.Digital assets are distributed, not copied or transferred.Digital assets are decentralized, allowing for real-time accessibility, transparency and governance amongst more than one party.Blockchain ledgers are transparent — any changes made are documented, preserving integrity and trust.Blockchain ledgers are public and constructed with inherent security measures, making it a prime technology for almost every sector.Why Is Blockchain Important?Blockchain is an especially promising and revolutionary technology because it helps reduce security risks, stamp out fraud and bring transparency in a scalable way. Popularized by its association with cryptocurrency and NFTs, blockchain technology has since evolved to become a management solution for all types of global industries. Today, you can find blockchain technology providing transparency for the food supply chain, securing healthcare data, innovating gaming and overall changing how we handle data and ownership on a large scale.An error occurred.Unable to execute JavaScript. Try watching this video on www.youtube.com, or enable JavaScript if it is disabled in your browser.What is blockchain? | Video: Simply Explained How Does Blockchain Work?For proof-of-work blockchains, this technology consists of three important concepts: blocks, nodes and miners.What Is a Block?Every chain consists of multiple blocks and each block has three basic elements:The data in the block.The nonce — “number used only once.” A nonce in blockchain is a whole number that’s randomly generated when a block is created, which then generates a block header hash. The hash — a hash in blockchain is a number permanently attached to the nonce. For Bitcoin hashes, these values 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.Best Blockchain Companies With Open JobsTop Blockchain Companies Hiring Now What Is a Miner in Blockchain?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.The whole point of using a blockchain is to let people — in particular, people who don't trust one another — share valuable data in a secure, tamperproof way.— MIT Technology Review What Is Decentralization in Blockchain?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. Blockchain nodes can be any kind of electronic device that maintains copies of the chain 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, creating inherent blockchain security. 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 integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.How Blockchain WorksThe blockchain is a digital database, composed of encrypted blocks of data which are “chained” together and secured by complex math problemsThe math problems involving matching nonces and hashes is almost impossible to change later — the record of previous actions on the blockchain is highly accurate and secure from manipulation.The blockchain is distributed identically across different decentralized nodes, ensuring no one organization can own or manipulate it.Blockchain UsesImage: ShutterstockBlockchain ApplicationsBlockchain isn’t only used for financial transactions. Due to its secure and transparent nature, the technology is versatile to needs beyond one area of expertise. Industries covering energy, logistics, education and more are utilizing the benefits of blockchain every day. Top Blockchain Uses & ApplicationsCryptocurrencyCybersecurityAccounting and record keepingSupply chainHealthcare Cryptocurrency: Blockchain vs CryptocurrencyBlockchain’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.The term Bitcoin, for example, is used interchangeably to refer to both the blockchain and the cryptocurrency, but they remain as two separate entities. The very first blockchain application appeared in 2009 as Bitcoin, a crypto system using the distributed ledger technology. This also marked Bitcoin as the first “blockchain.” The aspect of blockchain being used to house this new digital currency is what brought both entities into association, and what led them quickly into the spotlight. The Bitcoin blockchain describes only the technology in which the currency is housed, while the Bitcoin cryptocurrency describes only the currency itself.How Does Cryptocurrency Work?Cryptocurrencies are digital currencies that use blockchain technology to record and secure every transaction. A cryptocurrency (Bitcoin, for example) can be used as a digital form of cash to pay for everyday items as well as 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 more than 20,000 cryptocurrencies in the world that have a total market cap around $1 trillion, with Bitcoin holding a majority of the value. These tokens have become incredibly popular over the last few years, with the value of one Bitcoin fluctuating between several thousands of dollars. Here are some of the main reasons behind cryptocurrency’s recent popularity: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 came around to the idea of a blockchain-based digital currency for payments. In February 2021, Tesla 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 speculators. Lack of stability has caused some people to get very rich, while a majority have still lost thousands of dollars. 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. What Is a Blockchain Platform?While a blockchain network describes the distributed ledger infrastructure, a blockchain platform describes a medium where users can interact with a blockchain and its network. Blockchain platforms are created to be scalable and act as extensions from an existing blockchain infrastructure, allowing information exchange and services to be powered directly from this framework. An example of a blockchain platform includes Ethereum, a software platform which houses the Etherium, or ether, cryptocurrency. With the Ethereum platform, users can also create programmable tokens and smart contracts which are built directly upon the Ethereum blockchain infrastructure. Beyond Bitcoin: Ethereum BlockchainOriginally created for Bitcoin to operate on, blockchain has long been associated with cryptocurrency, but the technology's transparency and security has seen growing adoption in a number of areas, much of which can be traced back to the development of the Ethereum blockchain. In late 2013, Russian-Canadian developer Vitalik Buterin published a white paper that proposed a platform combining traditional blockchain functionality with one key difference: the execution of computer code. Thus, the Ethereum Project was born. Today, the Ethereum blockchain lets developers create sophisticated programs that can communicate with one another through the blockchain itself.Similarly to Bitcoin, it’s worth noting that the Ethereum blockchain and the Ethereum cryptocurrency are two separate entities. TokensEthereum programmers can create tokens to represent any kind of digital asset, track its ownership and execute its functionality according to a set of programming instructions.Tokens can be music files, contracts, concert tickets or even a patient’s medical records. In the past couple of years, non-fungible tokens (NFTs) grew in popularity. NFTs are unique blockchain-based tokens that store digital media (like a video, music or art). Each NFT has the ability to verify authenticity, past history and sole ownership of the piece of digital media. NFTs have become wildly popular because they offer a new wave of digital creators the ability to buy and sell their creations, while getting proper credit and a fair share of profits.Newfound uses for blockchain have broadened the potential of the ledger technology to permeate other sectors like media, government and identity security. Thousands of companies are currently researching and developing products and ecosystems that run entirely on the burgeoning technology.Blockchain is challenging the current status quo of innovation by letting companies experiment with groundbreaking technology like peer-to-peer energy distribution or decentralized forms for news media. Much like the definition of blockchain, the uses for the ledger system will only evolve as technology evolves. Smart ContractsWhat is a smart contract? These are digital, programmed contracts that automatically enact or document relevant events when specific terms of agreement are met. Each contract is directly controlled through lines of code stored across a blockchain network. So once a contract is executed, agreement transactions become trackable and unchangeable. Though fundamental to the Ethereum platform, smart contracts can also be created and used on blockchain platforms like Bitcoin, Cardano, EOS.IO and Tezos. Blockchain Applications for IndustriesAs mentioned, blockchain technology is being used far beyond just its roots in cryptocurrency — almost every modern industry is being morphed by the technology in some way.Alongside banking and finance, blockchain is revolutionizing healthcare, record-keeping, smart contracts, supply chains and even voting. While the capabilities of such technology continue to grow, all the possible applications of blockchain are very much yet to be discovered.Blockchain HistoryImage: ShutterstockHistory of BlockchainAlthough blockchain is a relatively new technology, it already boasts a rich and interesting history. The following is a brief timeline of some of the most important and notable events in the development of blockchain.Blockchain EvolutionThe first concept of blockchain dates back to 1991, when the idea of a cryptographically secured chain of records, or blocks, was introduced by Stuart Haber and Wakefield Scott Stornetta. Two decades later the technology gained traction and widespread use. The year 2008 marked a pivotal point for blockchain, as Satoshi Nakamoto gave the technology an established model and planned application. The first blockchain and cryptocurrency officially launched in 2009, beginning the path of blockchain’s impact across the tech sphere. 2008Satoshi Nakamoto, a pseudonym for a person or group, publishes “Bitcoin: A Peer to Peer Electronic Cash System.”2009The first successful Bitcoin (BTC) transaction occurs between computer scientist Hal Finney and the mysterious Satoshi Nakamoto.2010Florida-based programmer Laszlo Hanycez completes the first ever purchase using Bitcoin — two Papa John’s pizzas. Hanycez transferred 10,000 BTCs, worth about $60 at the time.The market cap of Bitcoin officially exceeds $1 million.20111 BTC = 1 USD, giving the cryptocurrency parity with the US dollar.Electronic Frontier Foundation, Wikileaks and other organizations start accepting Bitcoin as donations.2012Blockchain and cryptocurrency are mentioned in popular television shows like The Good Wife, injecting blockchain into pop culture.Bitcoin Magazine launched by early Bitcoin developer Vitalik Buterin.2013BTC market cap surpassed $1 billion.Bitcoin reached $100/BTC for the first time.Buterin publishes the “Ethereum Project” paper, suggesting that blockchain has other possibilities besides Bitcoin (like smart contracts).2014Companies Zynga, The D Las Vegas Hotel and Overstock.com all start accepting Bitcoin as payment.Buterin’s Ethereum Project is crowdfunded via an Initial Coin Offering (ICO) raising over $18 million in BTC and opening up new avenues for blockchain.R3, a group of over 200 blockchain firms, is formed to discover new ways blockchain can be implemented in technology.PayPal announces Bitcoin integration.The first-known NFT is minted2015Number of merchants accepting BTC exceeds 100,000.NASDAQ and San-Francisco blockchain company Chain team up to test the technology for trading shares in private companies.2016Tech giant IBM announces a blockchain strategy for cloud-based business solutions.The government of Japan recognizes the legitimacy of blockchain and cryptocurrencies.2017Bitcoin reaches $1,000/BTC for the first time.Cryptocurrency market cap reaches $150 billion.JP Morgan CEO Jamie Dimon says he believes in blockchain as a future technology, giving the ledger system a vote-of-confidence from Wall Street.Bitcoin reaches its all-time high at $19,783.21/BTC.Dubai announces its government will be blockchain-powered by 2020.2018Facebook commits to starting a blockchain group and also hints at the possibility of creating its own cryptocurrency.IBM develops a blockchain-based banking platform with large banks like Citi and Barclays signing on.2019China’s President Ji Xinping publicly embraces blockchain as China’s central bank announces it is working on its own cryptocurrency.Twitter & Square CEO Jack Dorsey announces that Square will be hiring blockchain engineers to work on the company’s future crypto plans.The New York Stock Exchange (NYSE) announces the creation of Bakkt - a digital wallet company that includes crypto trading.2020BTC almost reaches $30,000 by the end of 2020.PayPal announces it will allow users to buy, sell and hold cryptocurrencies.The Bahamas becomes the world’s first country to launch its central bank digital currency, fittingly known as the “Sand Dollar.”Blockchain becomes a key player in the fight against COVID-19, mainly for securely storing medical research data and patient information.2021Bitcoin surpasses $1 trillion in market value for the first time.Popularity for the implementation of Web3 rises.El Salvador becomes first nation to adopt Bitcoin as legal tender.Tesla buys $1.5 billion in BTC, becoming the first car manufacturer to accept Bitcoin as a form of automobile payment.The metaverse, a virtual environment incorporating blockchain technology, garners mainstream attention.2022Cryptocurrency loses $2 trillion in market value, due to economic inflation and rising interest rates.Google launches a dedicated Digital Assets Team to provide customer support on blockchain-based platforms.The U.K. government proposes safeguards for stablecoin holders.Popular video game Minecraft bans blockchain technologies and NFT use in its game. 46 Blockchain Companies Paving the Way for the FutureWe've rounded up 37 interesting examples of US-based companies using blockchain. Read Article Where to Buy NFTs: 20 Marketplaces and What They Sell More StoriesBack to Top 4 Lessons From the Crypto Winter Read Article 5 Companies Hiring Blockchain Developers How Tech Is Shaping the Future of E-Commerce What the FTX Trial Means for the Future of Cryptocurrency Is Generative AI the New Metaverse? Bitcoin For All: How Cash App is Redefining the World’s Relationship With Money Read Article Here’s How Non-Tech Founders Build High-Tech Startups Without Going Broke 10 Small Business Tech Trends Defining 2023 What Is Bitcoin Cash? What Is a Rug Pull, Exactly? 46 Blockchain Companies Paving the Way for the FutureWe've rounded up 37 interesting examples of US-based companies using blockchain. 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What is Blockchain Technology? A Step-by-Step Guide For Beginners

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ToggleBlockchain 101: Blockchain For BeginnersTypes of Blockchains1. Public Blockchains2. Private Blockchains3. Hybrid Blockchains or Consortiums4. SidechainsHistory of BlockchainWho Invented Blockchain?Who Owns Blockchain Technology?Who Founded Bitcoin?Who Sent and Received the First Bitcoin Transaction?How Does a Public Blockchain Work (Step-by-Step)Proof of Work (PoW) vs. Proof of Stake (PoS)Blockchain or Scalability Trilemma: Decentralization, Security, and ScalabilityWhat Is the Difference Between Bitcoin and Ethereum Blockchains?Bitcoin BasicsEthereum BasicsEthereum vs. Bitcoin BlockchainsWhat Are the Benefits of Blockchains Over Traditional Finance?What Are the Disadvantages of Blockchains?1. Environmental Impact2. Personal Responsibility3. Growing Pains4. False NarrativesPromising Blockchain Use Cases and Killer ApplicationsHow to Invest in Blockchain TechnologyBlockchain Companies to Invest in 2021Traditional Finance and Blockchain Investment StrategiesOverview of 10 Major Investment StrategiesHow can businesses benefit from blockchain?Blockchain Is the Present and the Future

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Blockchain For Beginners: What Is Blockchain Technology? A Step-by-Step Guide

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Updated on: October 18th, 2022

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What is blockchain technology? What makes it so important?

Imagine a world where you can send money directly to someone without a bank – in seconds instead of days, and you don’t pay exorbitant bank fees.

Or one where you store money in an online wallet not tied to a bank, meaning you are your own bank and have complete control over your money. You don’t need a bank’s permission to access or move it, and never have to worry about a third party taking it away, or a government’s economic policy manipulating it.

This is not a world of the future; it is a world that an avid but growing number of early adopters live in right now. And these are just a few of the important blockchain technology use cases that are transforming the way we trust and exchange value. We’ll get into the rest later on.

Yet, for many, blockchain technology is still a mysterious or even intimidating topic. Some even remain skeptical that we’ll use this technology in the future. This skepticism that exists today is understandable because we’re still very early in the development and widespread adoption of blockchain technology.

2021 is to blockchain what the late 1990s were to the internet. And like the internet, blockchain technology is anything but a fad, it’s here to stay, and if you’re reading this, you’re early too.

This post demystifies blockchain technology. This is your ‘intro to blockchain technology 101’. A complete, easy-to-understand, step by step beginners blockchain breakdown. You’ll learn everything from what blockchain is and why it matters, to how blockchain works (step by step) and what today – tomorrow’s – most promising blockchain applications may be.

You’ll also walk away from this post confident, and well on your way to making informed, independent blockchain technology investment decisions. And you’ll be no slouch if you want to hold your own in conversations with family and friends too!

So let’s dive in

Contents

Blockchain 101: Blockchain For Beginners

Blockchain technology is the concept or protocol behind the running of the blockchain. Blockchain technology makes cryptocurrencies (digital currencies secured by cryptography) like Bitcoin work just like the internet makes email possible.

The blockchain is an immutable (unchangeable, meaning a transaction or file recorded cannot be changed) distributed digital ledger (digital record of transactions or data stored in multiple places on a computer network) with many use cases beyond cryptocurrencies.

Immutable and distributed are two fundamental blockchain properties. The immutability of the ledger means you can always trust it to be accurate. Being distributed protects the blockchain from network attacks.

Each transaction or record on the ledger is stored in a “block.” For example, blocks on the Bitcoin blockchain consist of an average of more than 500 Bitcoin transactions.

The information contained in a block is dependent on and linked to the information in a previous block and, over time, forms a chain of transactions. Hence the word blockchain.

Types of Blockchains

There are four types of blockchains:

1. Public Blockchains

Public blockchains are open, decentralized networks of computers accessible to anyone wanting to request or validate a transaction (check for accuracy). Those (miners) who validate transactions receive rewards.

Public blockchains use proof-of-work or proof-of-stake consensus mechanisms (discussed later). Two common examples of public blockchains include the Bitcoin and Ethereum (ETH) blockchains.

2. Private Blockchains

Private blockchains are not open, they have access restrictions. People who want to join require permission from the system administrator. They are typically governed by one entity, meaning they’re centralized. For example, Hyperledger is a private, permissioned blockchain.

3. Hybrid Blockchains or Consortiums

Consortiums are a combination of public and private blockchains and contain centralized and decentralized features. For example, Energy Web Foundation, Dragonchain, and R3.

Take note: There isn’t a 100 percent consensus on whether these are different terms. Some make a distinction between the two, while others consider them the same thing.

4. Sidechains

A sidechain is a blockchain running parallel to the main chain. It allows users to move digital assets between two different blockchains and improves scalability and efficiency. An example of a sidechain is the Liquid Network.

History of Blockchain

Blockchain isn’t just a database, it’s a new technology stack with ‘digital trust’ that is revolutionizing the way we exchange value and information across the internet, by taking out the ‘gatekeepers’ from the process. For a complete and more detailed deep dive check out our article: A Concise History of Blockchain Technology

Blockchain history goes back farther than you might imagine, but we’ve condensed it by answering four critical questions:

Who Invented Blockchain?

The first blockchain-like protocol was proposed by cryptographer David Chaum in 1982. Later in 1991, Stuart Haber and W. Scott Stornetta wrote about their work on Consortiums.

But it was Satoshi Nakamoto (presumed pseudonym for a person or group of people) who invented and implemented the first blockchain network after deploying the world’s first digital currency, Bitcoin.

Cryptography is a deep and fascinating discipline with a history that goes back further than blockchain. For a richer understanding of how cryptography helps blockchain technology, check out: Why Cryptography Makes Blockchain Unstoppable

Who Owns Blockchain Technology?

Because blockchain technology is the technology behind the blockchain, it cannot be owned. It’s like the internet. But anyone can use the technology to run and own their own blockchains.

Who Founded Bitcoin?

Satoshi Nakamoto.

Who Sent and Received the First Bitcoin Transaction?

Nakamoto sent ten bitcoins to Hal Finney, who built the first reusable proof-of-work system in 2004.

How Does a Public Blockchain Work (Step-by-Step)

For a more in-depth account of the next section, check out the thorough discussion in: What is Blockchain Technology and How Does it Work?

Let’s start with an oversimplification.

As a society, we created ledgers to store information—and they have a variety of applications. For example, we use ledgers in real estate to store a house’s records, such as when alterations were made or the house was sold. We also use ledgers in bookkeeping to record all the transactions a company makes.

Bookkeeping mostly relies on double-entry accounting to store transactions. Although this is a step-up from single-entry accounting that lacks transparency and accountability, double-entry accounting also has its pitfalls: Entries are accounted for separately, making it difficult for one counterparty to verify the other’s records.

Records stored using traditional ledgers are also easy to tamper with, meaning you can easily edit, remove, or add a record. As a result, you’re less likely to trust that the information is accurate.

Public blockchains solve both these problems – and the way we trust – by evolving the traditional bookkeeping model to triple-entry bookkeeping: transactions on a blockchain are cryptographically sealed by a third entry. This creates a tamper-proof record of transactions stored in blocks and verified by a distributed consensus mechanism.

These consensus mechanisms also ensure new blocks get added to any blockchain. An example of a consensus mechanism is proof-of-work (PoW), often referred to as “mining.”

Mining isn’t universal to all blockchains; it’s just one type of consensus mechanism currently used by Bitcoin and Ethereum, though Ethereum plans to move to another—proof-of-stake (PoS)— by 2022.

Here’s how this process works with Bitcoin. When sending Bitcoin, you pay a small fee (in bitcoin) for a network of computers to confirm your transaction is valid. Your transaction is then bundled with other transactions pending in a queue to be added to a new block.

The computers (nodes) then work to validate this list of transactions in the block by solving a complex mathematical problem to come up with a hash, which is a 64-digit hexadecimal number.

Once solved, the block is added to the network—and your fee, combined with all other transaction fees in that block, is the miner’s reward. It’s that simple.

Each new block added to the network is assigned a unique key (via cryptography). To obtain each new key, the previous block’s key and information are inputted into a formula.

As new blocks are continually added through the ongoing mining process, they become increasingly secure and harder to tamper with. Anyone caught trying to edit a record will simply be ignored. All future blocks then depend on information from prior blocks—and this dependency from one block to the next forms a secure chain: the blockchain.

You can see this depicted below for house records stored on the blockchain. For example, Block 2 provides a key after taking all the information from Block 1 into account (including the key) and inputting it into a formula. Block 3, in turn, provides a new key after taking all the information from Block 1 and Block 2 into account (including the key) and inputting it into a formula. And so, the process repeats itself indefinitely.

Now, let’s dig deeper, exploring proof-of-work (PoW) vs. proof-of-stake (PoS) and the blockchain trilemma, which are fundamental to the public blockchain’s functioning.

Proof of Work (PoW) vs. Proof of Stake (PoS)

A public blockchain functions through consensus mechanisms: the process for validating transactions without a third party like a bank.

PoW and PoS are two such mechanisms. While their goal—to reach a consensus that a transaction is valid—remains the same, how they get there is a little different.

What Is PoW?

PoW, the technical term for mining, is the original consensus mechanism. It is still used by Bitcoin and Ethereum as of writing but, as mentioned, Ethereum will move to PoS by 2022. PoW is based on cryptography, which uses mathematical equations only computers can solve.

The example in the previous section of how blocks get added to the Bitcoin Blockchain explains this system.

The two big problems with PoW are that it uses a lot of electricity and can only process a limited number of transactions simultaneously (seven for Bitcoin). Transactions typically take at least ten minutes to complete, with this delay increasing when the network is congested. Though compared to the days-long wait required to wire money across the globe, or even to clear a check, Bitcoin’s ten-minute delay is quite remarkable.

Other consensus mechanisms were created to solve these PoW problems; the most popular being PoS.

What Is PoS?

PoS still uses cryptographic algorithms for validation, but transactions get validated by a chosen validator based on how many coins they hold, also known as their stake.

Individuals aren’t technically mining, and there’s no block reward. Instead, blocks are ‘forged.’ Those participating in this process lock a specific number of coins on the network.

The bigger a person’s stake, the more mining power they have—and the higher the chances they’ll be selected as the validator for the next block.

To ensure those with the most coins aren’t always selected, other selection methods are used. These include randomized block selection (forgers with the highest stake and lowest hash value are chosen) and coin age selection (forgers are selected based on how long they’ve held their coins)

The results are faster transaction times and lower costs. The NEO and Dash cryptocurrencies, for example, can send and receive transactions in seconds.

Blockchain or Scalability Trilemma: Decentralization, Security, and Scalability

Most blockchain projects are built around three core properties: decentralization, scalability, and security. Developers are constantly trying to balance these aspects, so one isn’t compromised.

But they often have to sacrifice one for the others. The ‘blockchain trilemma,’ concept was first coined the ‘scalability trilemma’ by Ethereum founder, Vitalik Buterin.

Let’s look at these concepts in more detail and explore the tradeoffs:

Decentralization

Decentralization means there’s no central point of control. Instead, decisions are made via consensus over a distributed network of computers.

There is, however, one significant tradeoff: speed. Sending transactions takes longer because multiple confirmations are required to validate a transaction. Hence why Bitcoin is slow.

Scalability

Scalability is the ability of the system to cope with a growing number of transactions. Scalability is crucial for mass adoption because any system needs to operate efficiently as more people use it.

Below is a rough breakdown of how many transactions Ethereum, Bitcoin, and credit card companies can process per second:

Bitcoin: seven per second

Ethereum: 30 per second

Credit cards: 5,000 credit card transactions per second with the ability to process much more if needed. Visa, for example, can process up to 24,000 transactions per second.

But achieving scalability often comes at the expense of decentralization. EOS, for example, promises a maximum of 4000 TPS but has come under criticism for being too centralized.

Security

Security is the ability of a blockchain to be protected from attacks. Unfortunately, exchanges and source code have been hacked on many occasions, suggesting that many developers focus on scalability and decentralization at the expense of security.

What Is the Difference Between Bitcoin and Ethereum Blockchains?

Bitcoin and Etherum are the two biggest cryptocurrencies and blockchains, so discussing and comparing them makes sense.

Bitcoin Basics

The Bitcoin network is a public, decentralized peer-to-peer payment network that allows users to send and receive bitcoins without a bank getting involved. The digital currency or bitcoin token uses the ticker symbol BTC, and is the only cryptocurrency traded on the Bitcoin network.

Transactions are recorded using a digital ledger, and nodes ensure the PoW consensus mechanism is followed (or that mining happens). For many, Bitcoin seems complicated, but it isn’t when you view it as a combination of three things:

A peer-to-peer payment system: You can send money (BTC) from one person or company to another without the need for a bank. Sending money this way is faster, more secure, and cheaper than using traditional methods.

A decentralized system like the internet, so it’s not controlled by one entity and cannot be stopped by a third party.

A store of value like gold (often called digital gold), but much easier to transfer than gold.

Ethereum Basics

In 2013, after traveling, meeting with bitcoin developers, and discovering Bitcoin’s limitations, Vitlaik Buterin decided to improve upon the Bitcoin blockchain and built Ethereum.

The Ethereum network is a public, decentralized peer-to-peer network. Like Bitcoin, it uses nodes and allows users to send and receive cryptocurrency—in this case, Ether.

The network is much more than a payment system—it was primarily created to deploy decentralized applications (dapps) and smart contracts.

Dapps are simply ‘decentralized apps,’ or computer programs that interact with the Ethereum blockchain. Smart contracts, however, operate on the Ethereum blockchain, and are contracts that automatically execute without an intermediary once certain conditions (written into computer code) are met. For example, a smart contract could be programmed to send a designated person a portion of your Bitcoin when you die.

Ethereum vs. Bitcoin Blockchains

In summary, Bitcoin and Ethereum networks are public, decentralized peer-to-peer networks with their own tokens: bitcoins and Ether. Both rely on cryptography, and both use digital ledger technology. For a complete Ethereum vs. Bitcoin match up check out our deep dive post: Ethereum Vs Bitcoin: What’s the Difference?

But they differ significantly in purpose and capability. Bitcoin is a decentralized payment system and a store of value. Its blockchain is a database of all bitcoin transactions and tracks their ownership. Ethereum is more than a payment system and allows smart contracts and apps to be built on it, making it a more sophisticated blockchain.

What Are the Benefits of Blockchains Over Traditional Finance?

Trustless: The blockchain is immutable and automates trusted transactions between counterparties who do not need to know each other. Transactions are only executed when programmed conditions are met by both parties.

Unstoppable: Once the conditions programmed into a blockchain protocol are met, an initiated transaction cannot be undone, changed, or stopped. It’s going to execute and nothing – no bank, government, or third party – can stop it.

Immutable: Records on a blockchain cannot be changed or tampered with – Bitcoin has never been hacked. A new block of transactions is only added after a complex mathematical problem is solved and verified by a consensus mechanism. Each new block has a unique cryptographic key resulting from the previous block’s information and key being added into a formula.

Decentralized: No single entity maintains the network. Unlike centralized banks, decisions on the blockchain are made via consensus. Decentralization is essential because it ensures people can easily access and build on the platform, and there are multiple points of failure.

Lower Cost: In the traditional finance system, you pay third parties like banks to process transactions. The blockchain eliminates these intermediaries and reduces fees, with some systems returning fees to miners and stakers.

Peer-to-Peer: Cryptocurrencies like Bitcoin, let you send money directly to anyone, anywhere in the world, without an intermediary like a bank charging transaction or handling fees.

Transparent: Public blockchains are open-source software, so anyone can access them to view transactions and their source code. They can even use the code to build new applications and suggest improvements to the code. Suggestions are accepted or rejected via consensus.

Universal Banking: 2 Billion people globally do not have a bank account. Because anyone can access the blockchain to store money, it’s a great way to bank the unbanked and protect against theft that can happen due to holding cash in physical locations.

What Are the Disadvantages of Blockchains?

Public open source blockchains are not without their hazards and challenges. Here is a list of the top concerns:

1. Environmental Impact

Blockchain networks like Bitcoin use a lot of electricity to validate transactions, leading to environmental concerns. For example, Bitcoin consumes more electricity than a small, medium-sized European country, and Bitcoin mining is threatening China’s climate change goals.

However, many would argue that Bitcoin is held to higher environmental standards than anyone and anything. This may be true, especially if you consider that the blockchain and Bitcoin are an alternative to the traditional finance system that uses much more electricity and has a much larger environmental impact.

A study by Galaxy Digital suggests Bitcoin energy consumption is less than half that of the traditional banking system. If anything, you could argue that Bitcoin is a step in the right direction for the environment.

No one is saying that making strides to lowering the carbon footprint shouldn’t be on the agenda (this is already happening with some mining farms shifting to renewable energy sources like solar panels and the El Salvadoran President calling for a plan to use geothermal energy (volcanoes) to mine Bitcoin).

But it’s crucial to maintain a balanced view when viewing the cost, environmental impact, and blockchain benefits.

2. Personal Responsibility

One of blockchains and cryptocurrencies’ most significant advantages is also its biggest weakness. When you invest in public open-source blockchains by mining or buying cryptocurrencies and store it in your cryptocurrency wallet (your wallet is like your bank account, except only you can access it and have the passwords), only you control your money.

You are your own bank— and this is great! But if you lose your seed phrases – the list of words that give you access to recover your wallets – there is no recourse (compared to banks where you can reset your password). Your money is lost forever.

Unsurprisingly, a large portion of Bitcoin remains permanently lost. According to some estimates, 20% or 3.7 million of the currently minted Bitcoin is probably lost forever.

3. Growing Pains

Even though public blockchains remain more efficient than traditional banking systems, decentralization comes at the cost of scalability. Trying to grow blockchain networks to global capacity, in turn, is the root cause of speed inefficiencies. It’s why, as we saw, Bitcoin and Ethereum can only process a maximum of seven and 30 transactions, respectively, compared to Visa’s 24,000.

Luckily solutions are being built to improve scalability and the speed of transactions. For example, the lightning network allows transactions to happen off the Bitcoin blockchain to speed up transactions. On Ethereum, many innovative Layer 2 (L2) solutions are being developed to improve scalability and speed including rollups, zero-knowledge proofs and side chains.

4. False Narratives

Some cryptocurrencies are undoubtedly used in unlawful activity. The most famous example is Silk Road: people laundered money and bought drugs on the platform using Bitcoin.

However, this is no different from the illegal activity that constantly happens when people use other currencies like the Dollar.

This false narrative that cryptocurrencies are only or mainly used for illicit activities only delays their inevitable adoption, which can hugely benefit everyone, including the financial system.

Promising Blockchain Use Cases and Killer Applications

For an even more in-depth discussion of the most interesting and disruptive blockchain use cases as of 2021 check our guide: Disruptive Blockchain Technology Use Cases 2021

Blockchain technology is currently used across various industries like supply chain, healthcare, retail, media and advertising, financial services, insurance, travel and transportation, oil and gas, and gaming.

Here are some promising use cases:

Cryptocurrencies: The ‘killer app’ of blockchains today is internet money. Cryptocurrencies let you transfer value faster and cheaper across borders without a bank. Besides Bitcoin and Ethereum, other digital currency examples include Polkadot (DOT), NEO, Cardano (ADA), Tether (USDT), Binance Coin (BNB), and Litecoin (LTC).

Smart Contracts: These blockchain applications are contracts that automatically execute without an intermediary once conditions written into the computer code are met.

Decentralized Banking: The use of blockchain technology is also proliferating in banking. For example, many banks like Barclays, Canadian Imperial Bank, and UBS are interested in how blockchain can make their back-office settlement systems more efficient.

Video Games/Art: You may have heard Crypto Kitties—a game launched on the Ethereum blockchain. One of the virtual pets in the game was sold for over $100,000.

Peer-to-peer Energy Trading: People buy or sell energy directly without an intermediary.

Supply chain and logistics tracking: Blockchain is being used to track precious metals’ origins and foods. For example, Walmart and IBM worked together to create a food traceability system based on open-source ledger technology, making it easier to trace contaminated food.

Healthcare process optimization: Blockchain can speed up the time required to pay health insurance payments to patients and store and securely share medical data and records.

Real estate processing platform: Property ownership records can be securely stored and verified on the blockchain. These records cannot be tampered with, so you can trust they’re accurate and more easily verify property ownership.

NFT marketplaces: These are marketplaces that allow you to buy nonfungible tokens (NFTs): digital tokens of things like paintings and clothing.

Music royalties tracking: Blockchain can trace music streams and immediately pay those who contributed to a song.

Anti-money laundering tracking system: Authorities can more easily track the original source of money because every transaction on the blockchain is recorded and leaves behind a tamper-proof trail.

Personal identity security: Traditional systems for storing identities are insecure and fragmented. Blockchain provides a unified, immutable, and interoperable infrastructure so you can store and manage records securely and efficiently.

New insurance distribution methods: For example, peer-to-peer insurance, parametric insurance, and microinsurance.

Automated Advertising Campaigns: Advertisers can use smart contracts to automate advertising campaigns, e.g., an audience is only shown an ad when specific criteria are met.

How to Invest in Blockchain Technology

With blockchain offering some promising use cases, helping many companies become more efficient, and attracting big companies like Amazon and Tesla, it can be an attractive investment.

But there are risks: It’s a new technology, and many projects will not pan out. So, invest only what you can afford to lose, do your own research to determine if the project (or initial coin offering) is worth investing in, and decide what level of exposure you want.

For example, you can get more exposure by investing in cryptocurrencies directly instead of an exchange-traded fund (ETF).

That being said, here are a variety of ways you can invest in the blockchain depending on your goals and risk tolerance:

Buy shares in companies using blockchain (e.g., Visa, Walmart, and Siemens) on traditional stock exchanges like the NYSE. You can buy shares by using an online broker such as Vanguard and Betterment (U.S.).

Invest in companies with Bitcoin on their balance sheet, e.g., Square, WeWork, MicroStrategy, and Tesla. Again, use an online broker to buy shares.

Buy cryptocurrencies like Bitcoin or Ethereum directly on Centralized Finance (CeFi) or Decentralized (DeFi) exchanges. Centralized exchanges were the norm in the crypto world until decentralized exchanges arrived. With centralized exchanges, you don’t have your own private keys, and the exchange is the custodian for storing your funds. Decentralized exchanges are peer-to-peer, and there’s no intermediary. Examples of CeFi exchanges include Binance, Kraken, Bittrex, Bitfinex, Luno, and Coinbase. Examples of DeFi exchanges include Uniswap, Compound, KyberSwap, Airswap, IDEX, SushiSwap, Balancer, and Totle.

Invest in crypto exchange-traded funds (ETFs). ETFs are a basket of securities that track an asset or index you can buy or sell on an exchange throughout the day. For example, many traditional ETFs will include bonds, currencies, commodities, and stocks and track the S&P 500 Index. In the crypto space, you get a variety of ETFs you can invest in, such as a Bitcoin ETF that tracks the price of Bitcoin. Each ETF will differ depending on who issues it. Companies that offer ETFs include Grayscale, Galaxy Digital, and Gemini.

Invest in crypto mining companies such as Riot, Hive, and Marathon. Many mining companies let investors participate indirectly by offering equity in their companies. To invest in Riot, use an American-based online broker like Robinhood. To invest in Hive and Marathon, use a Canadian-based broker like Questrade, TD Direct Investing, or BMO InvestorLine.

Buy crypto hardware and mine cryptocurrency yourself. While Bitcoin mining requires a large capital outlay, there are other tokens you can mine for a reasonably low barrier to entry. For example, Helium miners cost roughly $500 and mint HNT using the ‘proof of coverage’ consensus protocol to verify new blocks. Get started with cryptocurrency mining by reading our short guide on Bitcoin mining.

Invest in mining pools. An alternative to mining cryptocurrency yourself is to join a mining pool. Mining pools pool together the computational power of others on the network to improve the chances of mining a block. The rewards for all blocks mined are shared among miners in the pool. Slush Pool is a popular mining pool.

Blockchain Companies to Invest in 2021

If you’re looking to get started with crypto investing, we’ve created a comprehensive step-by-step guide you can follow to get started here: How To Invest in Cryptocurrencies: The Ultimate Beginners Guide

Here is a comprehensive list of public blockchain companies to invest in. We have segmented them based on these categories: banking, supply chain, health care, energy, insurance, travel, real estate, exchanges, and mining.

These public companies are either using blockchain, have cryptocurrency on their balance sheets, allow you to trade cryptocurrency, or are mining cryptocurrency.

*Technically, Binance is not a public company, but you can invest in it by purchasing their own digital currency (BNB). You can use their currency to pay for transaction and trading fees on the exchange. This is also true for DeFi exchanges like Uniswap, 1inch, and PancakeSwap.

Traditional Finance and Blockchain Investment Strategies

In some ways, the process of investing in shares and cryptocurrencies is the same. First, you can buy cryptocurrencies on exchanges like you can buy shares through an online broker.

Second, you are also able to apply traditional investment principles to investing in cryptocurrencies and the blockchain. For example, you can invest the same amount of money into Bitcoin each month regardless of price (dollar-cost averaging) to remove any emotion out of the investment process.

But there are also investment strategies that are unique to the blockchain and cryptocurrencies, like yield farming.

Read on to learn about ten common traditional finance and blockchain investment strategies you can use when investing in public blockchain companies and cryptocurrencies.

Overview of 10 Major Investment Strategies

Growth Investing: Investors look for companies that demonstrate above-average growth. Investors using this strategy will often still invest in shares even if they seem expensive.To narrow down your search, focus on industries currently doing well or have historically performed. With the blockchain technology market expected to grow in size, there are bound to be several companies with strong growth potential.

Value Investing: Investors look for undervalued companies, e.g., their price doesn’t fully reflect their value. Successful value investing often requires that you hold your shares for the long term.

Dividend Growth Investing: Investors invest in companies that have a history of paying out dividends. You can look at a company’s financial statements to see if they pay out dividends. Look for a yield of between 2-6%.

Indexing: This is more of a cautious and passive investment strategy, but indexed investors often outperform more active investors. These investors typically invest in an index fund.An index fund consists of pooled funds from investors, is managed by a fund manager, and automatically invests in the companies of a specific index like the S&P 500 to effectively track against the index’s performance.It is different from an ETF in that you can only buy or sell index funds at the end of the day and not throughout. An example of a cryptocurrency index fund is the Bitwise 10 Crypto Index Fund (BITW).

Day Trading: Day trading is a more active and aggressive short-term trading strategy. Investors frequently trade throughout the day to capitalize on small market movements to make a profit. Day traders will use technical analysis to develop trade ideas around how the market will move. Day trading cryptocurrency is equally lucrative and risky due to highly volatile assets.

Algorithmic Trading: Also known as automatic trading, this investment strategy involves using computer programs to execute trades based on pre-programmed instructions such as price, time, etc. A large portion of the American market consists of algorithmic trading. AlgoTrader is an automated trading program you can use for Bitcoin trading.

Contrarian Investing: Contrarian investors purposely go against the market sentiment. They buy when people are selling and sell when people are buying.By following the Bitcoin Fear and Greed Index, you can get a good idea of the prevailing sentiment in the Bitcoin market and then do the opposite: buy when people are fearful and sell when they’re greedy (see Fear & Greed Index below).

Arbitrage: This strategy involves taking advantage of price differences of the same asset between markets. You buy the asset in one market and then sell it for a higher price in another.Because cryptocurrencies like Bitcoin often differ in price between countries, there are great opportunities to profit from this strategy.In a nutshell, traders will buy cryptocurrency on an overseas exchange (for a lower price) and then transfer it to a local exchange and sell it for a higher price.As Business Tech reports, you can make 2-4% per trade using the right investment platform. Just make sure you follow local exchange control laws because there are usually limits to how much local currency you can move beyond the borders.

Yield Farming: This blockchain-specific investment strategy involves lending your cryptocurrency to someone else via smart contracts.The lendee pays you a fee for your services. Yield farmers often move their cryptocurrency between different lending platforms to maximize returns. A few yield farming platforms include Compound Finance, Aave, and MarketDAO. Learn more about DeFi yield farming.

Diversification: Spread your risk and invest in different assets and companies to limit your overall downside while exposing you to more opportunities to make money. Diversification is more than just an investment strategy; it’s a smart way to invest that most financial experts and brokers encourage.This strategy works well for traditional finance and cryptocurrency.In traditional markets, you can spread risk across bonds, money markets, and shares— and even diversify your share portfolio by investing across industries.For cryptocurrencies and blockchain, you can invest in different public blockchain companies and also cryptocurrencies with different use cases like Bitcoin (payments), Ethereum (smart contracts), Monero (privacy), and XRP (cross border payments).If you really want to prioritize diversification, you should invest across traditional and crypto markets, and rebalance your portfolio as needed.

How can businesses benefit from blockchain?

Let’s look at the business-specific advantages of blockchain technology.

– As mentioned above, the blockchain is a great way to build trust among entities that have never worked together. As such, it is an excellent way for businesses to work together without requiring a trusted third party.

– The blockchain can help create a consortium of businesses and provide an operational structure with no central “leader.” This can allows multiple businesses to interact effectively and share information.

– The fact that all data stored within blockchains are immutable has game-changing security implications. It’s no longer possible for malicious centralized parties to tamper with crucial data.

– By removing the need for trusted third parties, the overall organizational costs go down significantly. Plus, taking away these intermediaries drastically increases operational speeds. For example, Walmart used blockchain to trace the source of sliced mangoes in seconds. Normally, this process would take a week.

– The blockchain is a major boon for companies that rely on or operate supply chains. The blockchain’s transparency helps fix a majority of the issues present in traditional supply chain structures. For example, not only has Walmart successfully applied blockchain in their supply chain via IBM, but the medical industry is actively using the tech in their crackdown on counterfeit medication.

Blockchain Is the Present and the Future

With many promising real-world use cases like faster cross-border payments and smart contracts, blockchain technology is here to stay.

As more companies realize how the blockchain can help them, they’ll commit more resources, money, and time into the technology—and even more use cases will emerge. While we understand that blockchain technology will remain a complex topic for many, it really doesn’t have to be for you.

We hope this guide gave you the confidence to have conversations with friends and acquaintances about the blockchain and that it demystified and simplified an often scary topic. Refer to it whenever you need to brush up on any blockchain concepts.

Most importantly, we hope it lit a small fire in you to learn even more about a technology that’s fundamentally changing the way we trust and exchange value.

Nick Darlington

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Crystal To#6219A very informative guide! Thank you so much Blockgeeks for your hard work! I will certainly use it from time to time. Its gonna be so great if Blockgeeks offers regular updates on the current state of the mentioned projects using blockchain! Once again, thank you so much!

Vote Up17Vote Down 4 years ago

Mike Nahounou#7000Without a doubt, this is the single most important article written on Blockchain Technology since Bitcoin’s Genesis Block. Well done!

Vote Up3Vote Down 4 years agoBlockNut#6974This beginners guide is structured in the best way possible from the most basic concept of what blockchain is to the future of business through the various applications thereof. Well written and presented. Whether you are an absolute newbie or an expert on blockchain, this guide will suffice for your need to grow within the Blockchain space.

Thank you Blockgeeks

Vote Up3Vote Down 4 years ago

Ben Fox#6763Thanks for this!

Vote Up2Vote Down 4 years agoRobert Kroos#6706The article was completely helpful for beginners and newbies. With the drastic implementation of Blockchain Technology, most of the industries such as Hospital, banking, finance has reaped profits. You can check more about this here!

Vote Up2Vote Down 4 years agoMark Silen#6594Great article….thanx !!!!!!!

Vote Up4Vote Down 4 years ago

Tiffany Mccullar#6543This was such a simple way of explaining this technology. I enjoyed reading this.

Vote Up4Vote Down 4 years ago

LISS#6497Great introduction. I have a much clearer understanding of blockchain now.

Vote Up4Vote Down 4 years agoMarko Ceki#6446Thank you for creating easy to understand education on blockchain technology! Your article helped me gain a deeper understanding of blockchain and has benefited me greatly on my journey of studying crypto. All the best!

Vote Up5Vote Down 4 years ago

FUK VEW#6054I can find out how it works

Vote Up4Vote Down 4 years ago

FUK VEW#6053how it works

Vote Up2Vote Down 4 years ago

Karthik Shanmugam#6035Really Impressive Writing! I myself being working in one of the leading Blockchain development company(Zab Technologies) I was able to identify all my queries with your answers!

Vote Up3Vote Down 4 years ago

Nazeh Abel#6012I love how things are outlined here for easier understanding… love this guide it’s my first reading for blockchain

Vote Up10Vote Down 4 years ago

https://twitter.com/SashaBaksht#6034So much more to L+Earn!

Vote Up5Vote Down 4 years ago

Fenglian Xu#6011Nice article, it’s a bit unclear on how a change in block 3 will cause the entire backward block chain changed.

Vote Up5Vote Down 4 years ago

https://twitter.com/SashaBaksht#6033The hash of block 3 is included in block 4 and so on.

Vote Up4Vote Down 4 years agoธณวัฒน์ ประวันตา#6008Thankâ€‹ Flowâ€‹ youâ€‹

Vote Up4Vote Down 4 years agoCrystal To#5985Thank you so much for the work, the article has so much information in it. Its gonna be even better if the team can point out the key points for beginners to have a clearer mind. Thank you so much

Vote Up3Vote Down 4 years ago

Kevin Wright#5984This is a good, comprehensive introductory guide to blockchain. I have looked for something that provides a good summary of blockchain to use as an example for those new to the technology. This might be a bit too much information to digest all at once for people, but it covers a lot of good ground.

Vote Up2Vote Down 4 years agoSandra Douglas#5946I never knew I’d be able to make profits after losing so much. Mrs Rose helped me to recover all that I lost trading on my own. I really don’t think I can be able to thank her enough. she’s a lifesaver.

Vote Up3Vote Down 4 years agoGeorge Walker#5945Thanks for sharing this great information, I will contact Mrs Rose Parker to get started.

Vote Up5Vote Down 4 years agoeclature technologies#5942This is a very nice article on Blockchain. Thanks for sharing this article. I understand that Blockchain authenticates digital transformation but is it a trusted approach?

Vote Up8Vote Down 4 years ago

pravinr.rwltz@gmail.com#5872Nice blog. We are also working in blockchain development and blockchain is having a great future.http://bit.ly/2KjUNUj

Vote Up4Vote Down 4 years agoeclature technologies#5850Thank you for the blog post. The need to implement blockchain has drastically risen over the years and ee eclaturetechnologies@gmail.com

know the value of having blockchain services.

Vote Up2Vote Down 4 years ago

Daniel Pereira#5848Hi. I’ve enjoyed reading this step-by-step guide. Thanks!

Vote Up9Vote Down 4 years agoSphinx Solution#5771Blockchain in simple language is a database based and managed on a peer-to-peer network of computers often referred as nodes. You can also call it as a distributed ledger, which is a decentralized way of documenting transactions in chronological order. Every participant in the blockchain has uninterrupted access to the blockchain and its history.

Vote Up9Vote Down 4 years agoWebcom Systems#5764Very helpful blog post. Thanks for sharing valuable information. I am a blockchain developer at webcom systems and understand the importance of blockchain technology and how it works. Videos are as good as the content of the blog.

Vote Up8Vote Down 4 years ago

https://twitter.com/SashaBaksht#5802Thanks, Webcom!

Vote Up4Vote Down 4 years ago

Neelima d#5714Good course

Vote Up5Vote Down 4 years ago

t z#5683Keep in mind that Bitcoin blockchain does not use encryption. The security is provided by digital signatures and hashing algorithms (ECDSA and SHA-256).

https://bitcoin.stackexchange.com/questions/81493/is-encryption-really-needed-for-blockchain-to-work

Vote Up5Vote Down 5 years ago

Rama Ranabothu#5578Good one

Vote Up4Vote Down 5 years ago

Purnima Ratra#5576Nice One

Vote Up5Vote Down 5 years ago

Edwin Qi#5572cool

Vote Up4Vote Down 5 years ago

Firozsha Makandar#5565Cool

Vote Up4Vote Down 5 years agoNoor Khan#5557Thank you for sharing this detailed article with us. I love the way you cover the topic with expert opinion. Great article and I love to get engage with such an article.

I’m learning blockchain technology. Really curious about blockchain technology.

Keep posting!!

Vote Up4Vote Down 5 years ago

Britney Jolie#5538Useful and interesting intro to blockchain.

I have a few thoughts:

1- Distributed ledgers: don’t all the nodes get swamped with all the data as it is updated every ten minutes and that could mean lots and lots of storage space required?

2- What happens (as with peers in torrents) when some nodes are offline? Every node has to have a copy of all the information? I guess this is another storage space question.

3- Blockchain is advantageous because it is secure yet hacking has been mentioned a couple of times. Human error and bad intent are also present with other technologies. The public and private keys can be stolen?

4- Criminal activity: in a free decentralized system, reputation is the only force keeping people honorable? Can reputation be smeared (ok, just thinking of the different things that happen in the world.) Safeguards, protections?

Very exciting concepts; I have heard the terms cryptocurrency and blockchain thrown around but never really looked at it. Very interesting. Thank you for the information.

Vote Up4Vote Down 5 years ago

saranya balasubramanian#5518informative article

Vote Up4Vote Down 5 years ago

Rajesh Puli#5491Good article it’s useful everyone

Vote Up4Vote Down 5 years ago

Jay Suguru#5478Nice one

Vote Up4Vote Down 5 years ago

Sreenivas Aghoramurthy#5475Pretty interesting the cases and applicability that Don Tapscott spoke through and available on TED.. helped realize that our everyday lives are significantly influenced by “middlemen/operators” who probably have been doing great but now we have faster approaches based on the block-chain technology

Vote Up4Vote Down 5 years ago

ritesh soni#5473Useful

Vote Up4Vote Down 5 years ago

Rajesh Murugiah#5455Its great to learn

Vote Up4Vote Down 5 years ago

Sangeetha Pandimeyyappan#5444Good and useful

Vote Up4Vote Down 5 years ago

Neil James#5439Indeed a very informative article for beginner to advance level crypto lover.

Vote Up4Vote Down 5 years ago

Banupriya RamakrishnaYoganandhan#5427It was useful.

Vote Up4Vote Down 5 years ago

Roman Gernovski#5347This is going to come off rude but may I suggest you perform some basic proof-reading of your article prior to publication to fix all the grammatical errors (of which there are many) if you wish to teach your audience something new without insulting their intelligence by forcing them to fix your ill-structured sentences to clarify your own writing.

Vote Up4Vote Down 5 years ago

Michael Kelem#5353Yes! And this was written two years ago, updated in Sept 2018, and they still haven’t found or corrected any errors. It’s painful to read at times. Informative, yes? Painful, also yes.

Vote Up4Vote Down 5 years ago

Bardia Pourvakil#5360Roman

Hi thanks for the feedback, can you please give us some details, as we are currently going over the guide to fix any outstanding grammatical errors.

Vote Up3Vote Down 5 years ago

jay rickaba#5415I would like to second the motion that some time be spent cleaning up the grammar. Great opportunities to educate about great topics can be squandered through inattention to the quality of presentation. I’ve tried reading this several times and have to agree that it’s quite painful to get through–not because it’s inaccurate, but simply because it’s garbled in critical spots. One suggestion is to let a skilled copy editor review text prior to its release. Sites that don’t proofread their content run the risk of being dismissed as less than reliable. Often I want to refer others interested in learning about CC to specific information sites but can’t yet recommend this one.

Vote Up3Vote Down 5 years ago

IKENNA MICHAEL#5336The summary was informative. Blockchain technology is the future and I really hope all the value creations listed above will help developing countries such as mine.

Vote Up3Vote Down 5 years ago

Joshua Ntsioa#5320This seems to be a much better platform to transect and share documents over the internet.

Is there anyone who can share their experience of implementing this and the use thereof!

Vote Up3Vote Down 5 years ago

Sean Brunnock#5293The image has a bunch of typos.

legder, partipates, permision

Vote Up4Vote Down 5 years ago

https://twitter.com/SashaBaksht#5295Good find, Sean!

Vote Up3Vote Down 5 years ago

qwerty12343 #5242n called â€œdigPotential

Vote Up3Vote Down 5 years ago

qwerty12343 #5241Is blockchain technology the new internet?Main Topic

Vote Up3Vote Down 5 years ago

Lehman Heaviland#5237Is this similar to dropbox only in a much more complex way? I was wondering if this could be used in language learning-teaching format some how.

Vote Up3Vote Down 5 years ago

Nathaniel Oamhen#5233Excellent breakdown. I have learnt so much from this article. Welcome to the decentralized future!

Vote Up3Vote Down 5 years ago

Jamal #5188shared documents analogy is a powerful one.This analogy may not be as accurate. Google Docs are still maintained centrally. Blockchain, on the other hand, is completely decentralized.

Vote Up3Vote Down 5 years ago

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What is blockchain? | McKinsey

is blockchain? | McKinsey

Skip to main contentWhat is blockchain?December 5, 2022 | ArticleSharePrintDownloadSaveBlockchain is a secure database shared across a network of participants, where up-to-date information is available to all participants at the same time." "

(6 pages)

Blockchain is one of the major tech stories of the past decade. Everyone seems to be talking about it—but beneath the surface chatter there’s not always a clear understanding of what blockchain is or how it works. Despite its reputation for impenetrability, the basic idea behind blockchain is pretty simple. And it has major potential to change industries from the bottom up.

Blockchain is a technology that enables the secure sharing of information. Data, obviously, is stored in a database. Transactions are recorded in an account book called a ledger. A blockchain is a type of distributed database or ledger—one of today’s top tech trends—which means the power to update a blockchain is distributed between the nodes, or participants, of a public or private computer network. This is known as distributed ledger technology, or DLT. Nodes are incentivized with digital tokens or currency to make updates to blockchains.

Get to know and directly engage with senior McKinsey experts on blockchain

Michael Chui is a partner at the McKinsey Global Institute and is based in McKinsey’s Bay Area office, where Marie-Claude Nadeau is a senior partner.

Blockchain allows for the permanent, immutable, and transparent recording of data and transactions. This, in turn, makes it possible to exchange anything that has value, whether that is a physical item or something less tangible.

A blockchain has three central attributes. First, a blockchain database must be cryptographically secure. That means in order to access or add data on the database, you need two cryptographic keys: a public key, which is basically the address in the database, and the private key, which is a personal key that must be authenticated by the network.

Next, a blockchain is a digital log or database of transactions, meaning it happens fully online.

And finally, a blockchain is a database that is shared across a public or private network. One of the most well-known public blockchain networks is the Bitcoin blockchain. Anyone can open a Bitcoin wallet or become a node on the network. Other blockchains may be private networks. These are more applicable to banking and fintech, where people need to know exactly who is participating, who has access to data, and who has a private key to the database. Other types of blockchains include consortium blockchains and hybrid blockchains, both of which combine different aspects of public and private blockchains.

Research from the McKinsey Technology Council suggests that by 2027, up to 10 percent of global GDP could be associated with blockchain-enabled transactions. But in the world of blockchain, what is real and what is just hype? And how can companies use blockchain to increase efficiency and create value? Read on to find out.

Learn more about McKinsey’s Financial Services Practice.

How does blockchain work?

A deeper dive may help in understanding how blockchain and other DLTs work.

When data on a blockchain is accessed or altered, the record is stored in a “block” alongside the records of other transactions. Stored transactions are encrypted via unique, unchangeable hashes, such as those created with the SHA-256 algorithm. New data blocks don’t overwrite old ones; they are appended together so that any changes can be monitored. And since all transactions are encrypted, records are immutable—so any changes to the ledger can be recognized by the network and rejected.

These blocks of encrypted data are permanently “chained” to one another, and transactions are recorded sequentially and indefinitely, creating a perfect audit history that allows visibility into past versions of the blockchain.

When new data is added to the network, the majority of nodes must verify and confirm the legitimacy of the new data based on permissions or economic incentives, also known as consensus mechanisms. When a consensus is reached, a new block is created and attached to the chain. All nodes are then updated to reflect the blockchain ledger.

In a public blockchain network, the first node to credibly prove the legitimacy of a transaction receives an economic incentive. This process is called “mining.”

Here’s a theoretical example to help illustrate how blockchain works. Imagine that someone is looking to buy a concert ticket on the resale market. This person has been scammed before by someone selling a fake ticket, so she decides to try one of the blockchain-enabled decentralized ticket exchange websites that have been created in the past few years. On these sites, every ticket is assigned a unique, immutable, and verifiable identity that is tied to a real person. Before the concertgoer purchases her ticket, the majority of the nodes on the network validate the seller’s credentials, ensuring that the ticket is in fact real. She buys her ticket and enjoys the concert.

What is proof of work and how is it different from proof of stake?

Remember the idea of consensus mechanisms mentioned earlier? There are two ways blockchain nodes arrive at a consensus: through private blockchains, where trusted corporations are the gatekeepers of changes or additions to the blockchain, or through public, mass-market blockchains.

Most public blockchains arrive at consensus by either a proof-of-work or proof-of-stake system. In a proof-of-work system, the first node, or participant, to verify a new data addition or transaction on the digital ledger receives a certain number of tokens as a reward. To complete the verification process, the participant, or “miner,” must solve a cryptographic question. The first miner who solves the puzzle is awarded the tokens.

Originally, people on various blockchains mined as a hobby. But because this process is potentially lucrative, blockchain mining has been industrialized. These proof-of-work blockchain-mining pools have attracted attention for the amount of energy they consume.

In September 2022, Ethereum, an open-source cryptocurrency network, addressed concerns around energy usage by upgrading its software architecture to a proof-of-stake blockchain. Known simply as “the Merge,” this event is seen by cryptophiles as a banner moment in the history of blockchain. With proof-of-stake, investors deposit their crypto coins in a shared pool in exchange for the chance to earn tokens as a reward. In proof-of-stake systems, miners are scored based on the number of native protocol coins they have in their digital wallets and the length of time they have had them. The miner with the most coins at stake has a greater chance to be chosen to validate a transaction and receive a reward.

Introducing McKinsey Explainers: Direct answers to complex questionsExplore the series

How can businesses benefit from blockchain?

Research suggests that blockchain and DLTs could create new opportunities for businesses by decreasing risk and reducing compliance costs, creating more cost-efficient transactions, driving automated and secure contract fulfillment, and increasing network transparency. Let’s break it down further:

Reduced risk and lower compliance costs. Banks rely on “know your customer” (KYC) processes to bring customers on board and retain them. But many existing KYC processes are outdated and drive costs of as much as $500 million per year, per bank. A new DLT system might require once-per-customer KYC verification, driving efficiency gains, cost reduction, and improved transparency and customer experience.

Cost-efficient transactions. Digitizing records and issuing them on a universal ledger can help save significant time and costs. In a letter-of-credit deal, for example, two companies opted for a paperless solution and used blockchain to trade nearly $100,000 worth of butter and cheese. By doing so, a process that previously took up to ten days was reduced to less than four hours—from issuing to approving the letter of credit.

Automated and secure contract fulfillment. Smart contracts are sets of instructions coded into tokens issued on a blockchain that can self-execute under specific conditions. These can enable automated fulfillment of contracts. For example, one retailer wanted to streamline its supply-chain-management efforts, so it began recording all processes and actions, from vendor to customer, and coding them into smart contracts on a blockchain. This effort not only made it easier to trace the provenance of food for safer consumption but also required less human effort and improved the ability to track lost products.

Learn more about McKinsey’s Financial Services Practice.

How are blockchain, cryptocurrency, and decentralized finance connected?

Blockchain enables buyers and sellers to trade cryptocurrencies online without the need for banks or other intermediaries.

All digital assets, including cryptocurrencies, are based on blockchain technology. Decentralized finance (DeFi) is a group of applications in cryptocurrency or blockchain designed to replace current financial intermediaries with smart contract-based services. Like blockchain, DeFi applications are decentralized, meaning that anyone who has access to an application has control over any changes or additions made to it. This means that users potentially have more direct control over their money.

What else can blockchain be used for?

Cryptocurrency is only the tip of the iceberg. Use cases for blockchain are expanding rapidly beyond person-to-person exchanges, especially as blockchain is paired with other emerging technology.

Examples of other blockchain use cases include the following:

With blockchain, companies can create an indelible audit trail through a sequential and indefinite recording of transactions. This allows for systems that keep static records (of land titles, for example) or dynamic records (such as the exchange of assets).

Blockchain allows companies to track a transaction down to its current status. This enables companies to determine exactly where the data originated and where it was delivered, which helps to prevent data breaches.

Blockchain supports smart contracts, which are programs that trigger transactions automatically upon fulfillment of contract criteria.

What are some concerns around the future of blockchain?

While blockchain may be a potential game changer, there are doubts emerging about its true business value. One major concern is that for all the idea-stage use cases, hyperbolic headlines, and billions of dollars of investment, there remain very few practical, scalable use cases of blockchain.

One reason for this is the emergence of competing technologies. In the payments space, for example, blockchain isn’t the only fintech disrupting the value chain—60 percent of the nearly $12 billion invested in US fintechs in 2021 was focused on payments and lending. Given how complicated blockchain solutions can be—and the fact that simple solutions are frequently the best—blockchain may not always be the answer to payment challenges.

Looking ahead, some believe the value of blockchain lies in applications that democratize data, enable collaboration, and solve specific pain points. McKinsey research shows that these specific use cases are where blockchain holds the most potential, rather than those in financial services.

Learn more about McKinsey’s Financial Services Practice.

How might blockchain evolve over time?

In the next five years, McKinsey estimates that there will be two primary development horizons for blockchain:

Growth of blockchain as a service (BaaS). BaaS is a cloud-based service that builds digital products for DLT and blockchain environments without any setup requirements for infrastructure. This is currently being led by Big Tech companies.

Interoperability across blockchain networks and outside systems. Increased interoperability will mean that disparate blockchain networks and external systems will be able to view, access, and share one another’s data while maintaining integrity. Hardware standardization and scalable consensus algorithms will enable cross-network use cases—such as the Internet of Things on blockchain infrastructure.

These trends will be enabled partly because of increased pressure from regulators and consumers demanding greater supply chain transparency, and partly because of economic uncertainty, as consumers seek out independent, centrally regulated systems. And large corporations launching successful pilots will build confidence for consumers and other organizations.

Potential growth could be inhibited by a few factors: for one, several well-known applications have inherently limited scalability, including energy or infrastructure requirements. Further, uncertainty about regulatory or governance developments could keep consumers shy—for instance, if there is a lack of clarity on who will enforce smart contracts. And, finally, the unresolved threat of cyberattacks remains a fear for potential blockchain users.

What do NFTs have to do with blockchain?

Nonfungible tokens (NFTs) are minted on smart-contract blockchains such as Ethereum or Solana. NFTs represent unique assets that can’t be replicated—that’s the nonfungible part—and can’t be exchanged on a one-to-one basis. These assets include anything from a Picasso painting to a digital lolcat meme. Because NFTs are built on top of blockchains, their unique identities and ownership can be verified through the ledger. With some NFTs, the owner receives a royalty every time the NFT is traded.

The NFT market is extremely volatile: in 2021, one NFT created by the digital artist Mike Winkelmann, also known as Beeple, was sold at Christie’s for $69.3 million. But NFT sales have shrunk dramatically since summer 2022.

Learn more about McKinsey’s Financial Services Practice.

How secure is blockchain?

Blockchain has been called a “truth machine.” While it does eliminate many of the issues that arose in Web 2.0, such as piracy and scamming, it’s not the be-all and end-all for digital security. The technology itself is essentially foolproof, but, ultimately, it is only as noble as the people using it and as good as the data they are adding to it.

A motivated group of hackers could leverage blockchain’s algorithm to their advantage by taking control of more than half of the nodes on the network. With this simple majority, the hackers have consensus and thus the power to verify fraudulent transactions.

In 2022, hackers did exactly that, stealing more than $600 million from the gaming-centered blockchain platform Ronin Network. This challenge, in addition to the obstacles regarding scalability and standardization, will need be addressed. But there is still significant potential for blockchain, both for business and society.

For a more in-depth exploration of these topics, see McKinsey’s “Blockchain and Digital Assets” collection. Learn more about McKinsey’s Financial Services Practice—and check out blockchain-related job opportunities if you’re interested in working at McKinsey.

Articles referenced include:

“McKinsey Technology Trends Outlook 2022,” August 24, 2022

“Forward Thinking on tech and the unpredictability of prediction with Benedict Evans,” April 6, 2022, Janet Bush and Michael Chui

“Seven technologies shaping the future of fintech,” November 9, 2021, Dick Fong, Feng Han, Louis Liu, John Qu, and Arthur Shek

“CBDC and stablecoins: Early coexistence on an uncertain road,” October 11, 2021, Ian De Bode, Matt Higginson, and Marc Niederkorn

“Blockchain and retail banking: Making the connection,” June 7, 2019, Matt Higginson, Atakan Hilal, and Erman Yugac

“Blockchain 2.0: What’s in store for the two ends—semiconductors (suppliers) and industrials (consumers)?,” January 18, 2019, Gaurav Batra, Rémy Olson, Shilpi Pathak, Nick Santhanam, and Harish Soundararajan

“Blockchain’s Occam problem,” January 4, 2019, Matt Higginson, Marie-Claude Nadeau, and Kausik Rajgopal

“Blockchain explained: What it is and isn’t, and why it matters,” September 28, 2018

Want to know more about blockchain?Talk to usRelated ArticlesArticleBlockchain’s Occam problemArticleBlockchain beyond the hype: What is the strategic business value?PodcastBlockchain explained: What it is and isn’t, and why it matt

What Is Blockchain? The Complete WIRED Guide | WIRED

Is Blockchain? The Complete WIRED Guide | WIREDSkip to main contentOpen Navigation MenuMenuStory SavedTo revisit this article, visit My Profile, then View saved stories.Close AlertThe WIRED Guide to the BlockchainSecurityPoliticsGearBackchannelBusinessScienceCultureIdeasMerchMoreChevronStory SavedTo revisit this article, visit My Profile, then View saved stories.Close AlertSign InSearchSearchSecurityPoliticsGearBackchannelBusinessScienceCultureIdeasMerchPodcastsVideoWired WorldArtificial IntelligenceClimateGamesNewslettersMagazineEventsWired InsiderJobsCouponsWIRED StaffBusinessFeb 2, 2023 1:24 PMThe WIRED Guide to the BlockchainThe idea of creating tamper-proof databases has captured the attention of everyone from anarchist techies to staid bankers.Play/Pause ButtonPauseIllustrations: RadioSave this storySaveSave this storySaveAt this stage, when you say “blockchain,” you get two reactions: eye-rolling and dismissal or excited fervor at the potential for quick money. But it doesn’t have to be either/or. The system that powers Bitcoin could yank power from central banks, build trust into supply chains, and manage ownership in the metaverse, but it could also shrivel into nothing amid chaos and hype, a technology looking for a use case. The original blockchain is the decentralized ledger behind the digital currency bitcoin. The ledger consists of linked batches of transactions known as blocks, with an identical copy stored on each of the roughly 60,000 computers that make up the Bitcoin network. Each change to the ledger is cryptographically signed to prove that the person transferring bitcoins is the actual owner. No one can spend coins twice because once a transaction is recorded in the ledger, every node in the network will know about it.Who paved the way for blockchains?DigiCash (1989)DigiCash was founded by David Chaum to create a digital-currency system that enabled users to make untraceable, anonymous transactions. It was perhaps too early for its time. It went bankrupt in 1998, just as ecommerce was finally taking off.E-Gold (1996)E-gold was a digital currency backed by real gold. The company was plagued by legal troubles, and its founder Douglas Jackson eventually pled guilty to operating an illegal money-transfer service and conspiracy to commit money laundering.B-Money and Bit-Gold (1998)Cryptographers Wei Dai (B-money) and Nick Szabo (Bit-gold) each proposed separate but similar decentralized currency systems with a limited supply of digital money issued to people who devoted computing resources.Ripple Pay (2004)Now a cryptocurrency, Ripple started out as a system for exchanging digital IOUs between trusted parties.Reusable Proofs of Work (RPOW) (2004)RPOW was a prototype of a system for issuing tokens that could be traded with others in exchange for computing intensive work. It was inspired in part by Bit-gold and created by bitcoin's second user, Hal Finney.The upshot: No Bitcoin user has to trust anyone else because no one can cheat the system.Other digital currencies have imitated this basic idea, often trying to solve perceived problems with Bitcoin by building cryptocurrencies on new blockchains. But some think the real innovation isn’t digital currency but the decentralized, cryptographically secure ledger, believing the blockchain could usher in a new era of online services that would be impossible to censor; transparently track the provenance of fish, minerals, and Rolex watches; and securely digitize voting, contracts and, with the advent of the metaverse, everything else. Immutable ledgers have benefits in business too. Major banks are testing private blockchains to boost trading efficiency while maintaining trust, corporations are tracking internal compliance, and retailers are cleaning up supply chains. But with a few notable exceptions, these use cases remain limited trials or experiments rather than real shifts to using blockchain for business. And no wonder. Everything that touches the world of cryptocurrency has a sheen of chaos. The value of bitcoin leapt from $5,600 in 2020 to $48,000 in 2021 before crashing down to $13,600 in 2022; whether it’s soaring or spiraling changes month to month, though its value is unquestionably higher than many expected just a few years ago. Some cryptocurrencies turned out to be little more than pyramid schemes, while hackers have successfully stolen millions from crypto traders. Even stablecoins pegged to the dollar have stumbled, as have those backed by industry giants—Facebook’s Libra was shut down in 2022 after flailing for years. Meanwhile, ideas like ICOs and NFTs make millions for some and crash amid accusations of fraud before fading from the limelight. And then scandals like FTX hit. The cryptocurrency exchange collapsed in November 2022, with billions of customer funds missing, and sparked a criminal fraud investigation that has led to the arrest of cofounder Sam Bankman-Fried. Even before the FTX scandal, the crypto industry was hit by a crisis of confidence, with crashing values sparking layoffs at industry leaders like Coinbase. Some may argue that this is the death throes of an idea that never really found its feet, but it may just be growing pains before cryptocurrencies and the distributed ledger that powers them settle down and find some real purpose. It’s too early to say which experiments, if any, will stick: decentralized money or corporate compliance? Automated secure contracts or supply-chain tracking? Digital voting or virtual art in the metaverse? Private corporate ledgers or public decentralized blockchains? But the idea of creating tamper-proof databases has captured the attention of everyone from anarchist techies to staid bankers.The First BlockchainThe original Bitcoin software was released to the public in January 2009. It was open source, meaning anyone could examine the code and reuse it. What's an "ICO"?Ethereum and other blockchain-based projects have raised funds through a controversial practice called an "initial coin offering," or ICO: The creators of new digital currencies sell a certain amount of the currency, usually before they’ve finished the software and technology that underpins it. The idea is that investors can get in early while giving developers the funds to finish the tech. The catch is that these offerings have traditionally operated outside the regulatory framework meant to protect investors. Since the first tidal wave of ICOs in 2017, the SEC has said that virtually all violated securities law. Newer companies are increasingly looking for regulatory loopholes: a more common practice these days to raise money the traditional way (through VCs) and “airdrop” coins to users for free.And many have. At first, blockchain enthusiasts sought to simply improve on Bitcoin. Litecoin, another virtual currency based on the Bitcoin software, seeks to offer faster transactions. One of the first projects to repurpose the blockchain for more than currency was Namecoin, a system for registering “.bit” domain names that dodges government censorship. Namecoin tries to solve this problem by storing .bit domain registrations in a blockchain, which theoretically makes it impossible for anyone without the encryption key to change the registration information. To seize a .bit domain name, a government would have to find the person responsible for the site and force them to hand over the key. Other coins, also known as altcoins, were less serious in nature—notably the popular meme-based DogeCoin.In 2013, a startup called Ethereum published a paper outlining an idea that promised to make it easier for coders to create their own blockchain-based software without having to start from scratch or rely on the original Bitcoin software. That sparked a shift away from currency-only applications. Two years later, Ethereum unveiled its platform for “smart contracts,” software applications that can enforce an agreement without human intervention. For example, you could create a smart contract to bet on tomorrow’s weather. You and your gambling partner would upload the contract to the Ethereum network and then send a little digital currency, which the software would essentially hold in escrow. The next day, the software would check the weather and send the winner their earnings. A number of “prediction markets” have been built on the platform, enabling people to bet on more interesting outcomes, such as which political party will win an election.As long as the software is written correctly, there’s no need to trust anyone in these transactions. But that turns out to be a big if. In 2016, a hacker made off with about $50 million worth of Ethereum’s custom currency intended for a democratized investment system in which investors would pool their money and vote on how to invest it. A coding error allowed a still unknown person to make off with the virtual cash. Lesson: It’s hard to remove humans from transactions, with or without a blockchain.ICO Boom and CrashAnd then came the ICO gold rush. Ethereum and other blockchain-based projects raised funds through a controversial practice called an “initial coin offering.” In an ICO, creators of new digital currencies sell a certain amount of the currency, usually before they’ve finished the software and technology that underpins it. The idea is that investors can get in early while giving developers the funds to finish the tech. The catch is that these offerings have traditionally operated outside the regulatory framework meant to protect investors. Most PopularBusinessFor Bitcoin Mines in Texas, the Honeymoon Is OverJoel KhaliliBusinessGoogle Used a Black, Deaf Worker to Tout Its Diversity. Now She’s Suing for DiscriminationParesh DaveSecurityMeta Abandons Hacking Victims, Draining Law Enforcement Resources, Officials SayDell CameronCultureThe 16 Sci-Fi Movies You Need to Watch Before You DieJennifer M. WoodSince the first tidal wave of ICOs in 2017, the US Securities and Exchange Commission has said that virtually all of them violated securities law, while research revealed that nearly half of ICOs from that era failed—no surprise, given so many were outright scams, with developers faking projects and disappearing with funds. The ICO market subsequently crashed, halving in value from its peak to the next year, though they continue to be a fundraising vehicle in the world of crypto. Business BlockchainThere’s more to the blockchain than cryptocurrency. Startups are leveraging the ledger technology to track the provenance of everything from fish to diamonds and even watches and whiskey. Everledger tracks luxury goods, such as art and diamonds, and has worked with the Australian government on a pilot to regulate critical minerals. Provenance uses the blockchain to track fish from catch to sale; if a fisherman, distributor, or retailer attempts to alter the origin of a single filet, their actions will be obvious, as each party holds its own versions of the data. Because of that ability to reveal fraud, blockchain has been touted as a way to secure voting; manage property sales and other contracts; and track identity, qualifications, or even concert tickets. But none of that has yet to go truly mainstream. Walmart Canada turned to blockchain to address payment disputes with freight carriers by automatically sending payments rather than manually reconciling invoices, and the company has since expanded its use of blockchain. But it’s still early days for blockchain, with such business applications often described as a solution without a problem. One challenge is that some businesses aren’t excited about the decentralized architecture that’s at the heart of blockchain, instead choosing to act as a central trusted party and control the ledger themselves. When such a “private blockchain” is preferred, a database could perhaps do the trick without the added complexity.Beyond FinanceMore recently, the idea of tokens has taken off. These are assets that can be traded on a blockchain, most famously as NFTs (nonfungible tokens). Like cryptocurrency, they’re managed, tracked, and traded via blockchains. Unlike Bitcoin and its ilk, they’re unique digital content—anything from a tweet to a song to art or, again, a bottle of whiskey—that can be bought and owned like a painting hung on a wall.The idea is to confer ownership of a digital item or track ownership of a physical object. Anyone can screenshot and download a digital picture, but whoever holds the NFT actually owns it. That means artists have a new way of selling their work, whether an established artist like Damien Hirst or a digital creator like Beeple, who sold an NFT of his work for $69 million at Christie’s auction house. The heat around NFTs has cooled—Jack Dorsey’s first tweet sold for $2.9 million in 2021 but was removed from auction after stalling at $14,000 a year later—but they could find their footing in the metaverse, with Nike buying NFT studio RTFKT and selling virtual shoes on the Polygon blockchain. Sustainable StakeBut when NFTs, ICOs, and digital currencies are successful, the planet suffers. Bitcoin is “mined” by tasking computers with solving equations for no reason other than to show they’ve done the work. In the early days, bitcoin mining could be done efficiently enough with a robust desktop, but the difficulty of proof-of-work equations increases with every bitcoin that’s mined, so the home mining setup long ago gave way to professional, bespoke systems running thousands of high-end graphics cards, often in highly customized data centers built for the task. All of that eats through incredible amounts of energy and results in equally significant carbon emissions. Bitcoin consumes more electricity annually than the entire nation of Belgium, according to one piece of research from the University of Cambridge. And that’s just bitcoin, with Ethereum chewing through about a third as much. NFTs, for example, require at least 35 kWh of electricity each, emitting as much as 20 kg of CO2 apiece. Most PopularBusinessFor Bitcoin Mines in Texas, the Honeymoon Is OverJoel KhaliliBusinessGoogle Used a Black, Deaf Worker to Tout Its Diversity. Now She’s Suing for DiscriminationParesh DaveSecurityMeta Abandons Hacking Victims, Draining Law Enforcement Resources, Officials SayDell CameronCultureThe 16 Sci-Fi Movies You Need to Watch Before You DieJennifer M. WoodThere is a solution: switching from proof of work to proof of stake. Rather than crunching arbitrary algorithms to earn a reward, you “stake” a chunk of cryptocurrency in the network. That buys you a chance of being selected to earn cryptocurrency by validating a block, sort of like a lottery. Try to meddle with the system by changing a block and the network will take some or all of your stake. Ethereum shifted its original network, Mainnet, to proof of stake in September 2022. Etherum says the change, dramatically dubbed “the merge,” slashes energy consumption by 99.95 percent. It should also make it harder to hack blockchain networks by dominating a chain, known as a 51 percent attack—with proof of stake running Ethereum’s Mainnet, that would cost billions of dollars. Such benefits may not be enough to convince other blockchains, including Bitcoin, to move to proof of stake, not least because so many miners have invested heavily in computing infrastructure. So blockchains—and the cryptocurrencies and other digital innovations that live on them—will continue to churn through electricity and exacerbate the climate crisis. The Future of BlockchainDespite the blockchain hype—and many experiments—there’s still no “killer app” for the technology beyond speculation and (maybe) payments. Blockchain proponents admit that it could take a while for the technology to catch on. After all, the internet’s foundational technologies were created in the 1960s, but it took decades for the internet to become ubiquitous. ICOs were scammy. NFTs are bewildering. Bitcoin remains too unstable for payments. And FTX shows that chaos still lurks at the heart of cryptocurrency. But there’s no question venture capital investment, art sales, and global finance were, and still are, in need of democratization and decentralization. Blockchain proves there could be another way. And it is maturing, as shown by Ethereum’s move to more sustainable operations. Most PopularBusinessFor Bitcoin Mines in Texas, the Honeymoon Is OverJoel KhaliliBusinessGoogle Used a Black, Deaf Worker to Tout Its Diversity. Now She’s Suing for DiscriminationParesh DaveSecurityMeta Abandons Hacking Victims, Draining Law Enforcement Resources, Officials SayDell CameronCultureThe 16 Sci-Fi Movies You Need to Watch Before You DieJennifer M. WoodBlockchain doesn’t need a killer app: It needs thousands of small useful ones. ICOs could reemerge as a decentralized funding mechanism for local projects. NFTs could evolve into virtual products for the metaverse. And if the crypto Wild West settles down, it could upend who controls the world’s money. Give it time—blockchain might do better out of the spotlight. Learn MoreThe Future of Digital Cash Is not on the BlockchainIf you want the privacy of paper money, you need something that leaves no paper trail.Public Blockchains Are the New National Economies of the MetaverseThe “fiscal” and “monetary” policy tools of smart contract blockchain platforms may work even better than the economic policy tools of governments.Blockchains Have a ‘Bridge’ Problem, and Hackers Know ItBlockchain bridges are a crucial piece of the cryptocurrency ecosystem, which makes them prime targets for attacks.What's Blockchain Actually Good for, Anyway? For Now, Not MuchNot long ago, blockchain technology was touted as a way to track tuna, bypass banks, and preserve property records. Reality has proved a much tougher challenge.EOS Was the World’s Most Hyped Blockchain. Its Fans Want It BackBlock.One created the EOS blockchain and raised $4 billion in a record-breaking ICO. Now, its members have taken over.Paradise at the Crypto Arcade: Inside the Web3 RevolutionThe new movement wants to free us from Big Tech and exploitative capitalism—using only the blockchain, game theory, and code. What could possibly go wrong?Sure, Crypto Is Crashing, but Everything Is Perfectly FineCryptocurrencies are behaving exactly like the rest of the stock market, but the faithful say that's no reason to jump ship.This guide was last updated on February 2, 2023. Klint Finley, Gregory Barber, and Nicole Kobie contributed reporting.Enjoyed this deep dive? Check out more WIRED Guides.TopicsWired GuideBlockchaincryptocurrencybitcoinFinancemoneyMore from WIREDFor Bitcoin Mines in Texas, the Honeymoon Is OverThe energy demands of bitcoin mining have sparked controversy in a state that once welcomed those companies with open arms.Joel KhaliliBitcoin Royalty Descends on the Satoshi Nakamoto TrialCraig Wright has claimed for years to be Satoshi Nakamoto, creator of Bitcoin. This week in the UK High Court, Nakamoto's early collaborators took the stand.Joel KhaliliLondon Underground Is Testing Real-Time AI Surveillance Tools to Spot CrimeIn a test at one station, Transport for London used a computer vision system to try and detect crime and weapons, people falling on the tracks, and fare dodgers, documents obtained by WIRED show.Matt BurgessFacebook, Instagram, and Threads Are Coming Back Online After a 2-Hour OutagePeople around the world reported that Meta’s social platforms Facebook, Instagram, and Threads suffered outages for about two hours this morning.Amanda HooverHow to Turn Off Facebook’s Two-Factor Authentication ChangeWith Meta’s updated 2FA process, the company now automatically trusts devices you often use.Reece RogersMeta Abandons Hacking Victims, Draining Law Enforcement Resources, Officials SayA coalition of 41 state attorneys general says Meta is failing to assist Facebook and Instagram users whose accounts have been hacked—and they want the company to take “immediate action.”Dell CameronBluesky CEO Jay Graber Says She Won’t ‘Enshittify the Network With Ads’WIRED spoke with Bluesky CEO Jay Graber about the X competitor opening signups to all, how to crowdsource deepfake porn moderation, Jack Dorsey, and more.Kate KnibbsThe US Supreme Court Holds the Future of the Internet in Its HandsIf the court backs provocative laws from Texas and Florida that limit social platforms’ ability to moderate content online, life could become radically different.Amanda HooverWIRED is where tomorrow is realized. It is the essential source of information and ideas that make sense of a world in constant transformation. The WIRED conversation illuminates how technology is changing every aspect of our lives—from culture to business, science to design. The breakthroughs and innovations that we uncover lead to new ways of thinking, new connections, and new industries.More From WIREDSubscribeNewslettersFAQWIRED StaffEditorial StandardsArchiveRSSAccessibility HelpReviews and GuidesReviewsBuying GuidesCouponsMattressesElectric BikesFitness TrackersStreaming GuidesAdvertiseContact UsCustomer CareJobsPress CenterCondé Nast StoreUser AgreementPrivacy Policy & Cookie StatementYour California Privacy Rights© 2024 Condé Nast. All rights reserved. WIRED may earn a portion of sales from products that are purchased through our site as part of our Affiliate Partnerships with retailers. 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Blockchain, explained

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Like the early internet, blockchain is hard to understand and predict, but could become ubiquitous in the exchange of digital and physical goods, information, and online platforms. Figure it out now.

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What is a blockchain?

Blockchain is a term widely used to represent an entire new suite of technologies. There is substantial confusion around its definition because the technology is early-stage, and can be implemented in many ways depending on the objective.

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“At a high level, blockchain technology allows a network of computers to agree at regular intervals on the true state of a distributed ledger,” says MIT Sloan assistant professor Christian Catalini, an expert in blockchain technologies and cryptocurrency. “Such ledgers can contain different types of shared data, such as transaction records, attributes of transactions, credentials, or other pieces of information. The ledger is often secured through a clever mix of cryptography and game theory, and does not require trusted nodes like traditional networks. This is what allows bitcoin to transfer value across the globe without resorting to traditional intermediaries such as banks.”

On a blockchain, transactions are recorded chronologically, forming an immutable chain, and can be more or less private or anonymous depending on how the technology is implemented. The ledger is distributed across many participants in the network — it doesn’t exist in one place. Instead, copies exist and are simultaneously updated with every fully participating node in the ecosystem. A block could represent transactions and data of many types — currency, digital rights, intellectual property, identity, or property titles, to name a few.

“The technology is particularly useful when you combine a distributed ledger together with a cryptotoken,” Catalini says. “Suddenly you can bootstrap an entire network that can achieve internet-level consensus about the state and authenticity of a block’s contents in a decentralized way. Every node that participates in the network can verify the true state of the ledger and transact on it at a very low cost. This is one step away from a distributed marketplace, and will enable new types of digital platforms.”

How is blockchain related to bitcoin?

Bitcoin, with a market cap of more than $40 billion, is the largest implementation of blockchain technology to date. While a lot of media attention has shifted from bitcoin to blockchain, the two are intertwined.

“When The Economist put blockchain on the cover in 2015, it wasn’t really about its use to support a digital currency anymore. It was all about the other applications this technology will unleash within the next 5 to 10 years,” Catalini says. “For example, in finance and accounting there is excitement about the ability to settle and reconcile global transactions at a lower cost using the technology. In logistics the attention is all on how you can use the immutable audit trail generated by a blockchain to improve the tracking of goods through the economy. Others are fascinated by the possibility to use this as a better identity and authentication system.”

There are two types of costs blockchain could reduce for you: the cost of verification and the cost of networking.

So what’s the big deal? In a recent paper, Catalini explains why business leaders should be excited about blockchain — it can save them money and could upend how business is conducted.

Every business and organization engages in many types of transactions every day. Each of those transactions requires verification. In many cases, that verification is easy. You know your customers, your clients, your colleagues, and your business partners. Having worked with them and their products, data, or information, you have a pretty good idea of their value and trustworthiness.

“But every so often, there’s a problem, and when a problem arises, we often have to perform some sort of audit,” Catalini says. “It could be actual auditors coming into a firm. But in many other cases, you’re running some sort of process to make sure the person claiming to have those credentials did have those credentials, or the firm selling you the goods did have the certification. When we do that, it’s a costly, labor-intensive process for society. The marketplace slows down and you have to incur additional costs to match demand and supply.”

“The reason distributed ledgers become so useful in these cases is because if you recorded those attributes you now need to verify securely on a blockchain, you can always go back and refer back to them at no cost,” he says. “It’s costless verification. So when you think about why bitcoin works, it’s because it can cheaply verify that the funds are actually there. You can transfer value from here to anywhere on the globe at almost zero transaction cost. Sending secure messages that carry value does not require a bank or PayPal in the middle anymore.”

In short: Because the blockchain verifies trustworthiness, you don’t have to. And the friction of the transaction is reduced, resulting in cost and time savings.

Using a blockchain can also reduce the cost of running a secure network. This will happen over a longer timeline, Catalini says, perhaps a decade. The internet has already allowed for a faster, less stilted exchange of goods and services. But it still needs intermediaries, however efficient they may be — think eBay, Airbnb, and Uber.

“Those intermediaries are costly and earn rents for processing payments, maintaining a reputation system, matching demand and supply,” Catalini says. “This is where blockchain technology, combined with a cryptotoken, allows you to rethink an entire value chain from the ground up. That’s where incumbents should be slightly worried, because in the long run the way you may be delivering value to your customers and competing against other companies could be fundamentally different.”

Blockchain technology could mean greater privacy and security for you and your customers.

Catalini calls it data leakage. When you give a bartender your driver’s license, all that person needs to know is your age. But you’re revealing so much more — your address, your height, whether you’re an organ donor, etc.

The same thing happens in commercial transactions.

“As your business partner, I need to know that you’re trustworthy and reliable, but for simple transactions I don’t really need to know many other things about you,” Catalini says. “Information disclosure is increasingly becoming a cost because of data breaches. We can’t keep our data private and it’s becoming increasingly complex to do so within large organizations. So imagine a model where you can verify certain attributes are true or false, potentially using a decentralized infrastructure, but you don’t have to reveal all these attributes all the time.”

In a business transaction context, Catalini says, a blockchain could be used to build a reputation score for a party, who could then be verified as trustworthy or solvent without having to open its books for a full audit.

“Reputation scores both for businesses and individuals are today siloed into different platforms, and there is very little portability across platforms. Blockchain can improve on this,” he says.

Which industries could blockchain disrupt?

“All of them,” Catalini says. “The technology is what economists call a general purpose technology, and we will see many applications across different verticals.”

Here are a few to keep an eye on.

Central banks: Many central banks — including those in Canada, Singapore, and England — are studying and experimenting with blockchain technology and cryptocurrencies. The potential applications include lower settlement risk, more efficient taxation, faster cross-border payments, inter-bank payments, and novel approaches to quantitative easing. Imagine a central bank stimulating the economy by delivering digital currency automatically to citizens. Don’t expect big moves from big countries soon. The risk is too high, Catalini says. But expect to see smaller, developed countries with a high tolerance for technology experimentation lead the way and possibly experiment with a fiat-backed, digital currency for some of their needs.

Finance: The busiest area of application so far, blockchain is being used by companies seeking to offer low cost, secure, verifiable international payments and settlement. Ripple is one of the leaders in this space on the banking side. Meanwhile, companies like Digital Asset and Chain seek to create a faster, more efficient financial infrastructure for tracking and exchanging financial assets of any type.

Money transfer: In 2014, two MIT students raised and distributed $100 worth of bitcoin to every MIT undergraduate. They wanted to see what would happen and generate interest on campus. Catalini, together with professor Catherine Tucker, designed the experiment and studied the results. While 11 percent immediately cashed out their bitcoin, 49 percent were still holding on to some bitcoin. Some students used the funds to make purchases at local merchants, some of whom accepted bitcoin. Others traded with each other. Meanwhile, startups around the world competed to become the consumer trading application for bitcoin. Then PayPal bought Venmo, a payment platform that trades cash. PayPal’s own mobile app allows for peer-to-peer transactions, as well. The bitcoin-based consumer payment industry cooled down. But the application of blockchain remains attractive because of the lower costs it could offer parties in global, peer-to-peer transactions. Rapid payment company Circle, which advertises itself as “Like a text filled with cash,” stopped allowing users to exchange bitcoin last year, but is building a protocol that allows digital wallets to exchange value using a blockchain.

Web browser company Brave uses a blockchain to verify when users have viewed ads and, in turn, pays publishers when those same users consume content.

Micropayments: What if, instead of subscribing to a news site online, you paid only for the articles you read? As you click through the web, your browser would track the pages and record them for payment. Or what if you could get small payments for doing work — completing surveys, working as a freelance copy editor — for a variety of clients.

By reducing the cost of the transaction and verifying the legitimacy of parties on either end, blockchain could make these micropayments, new types of cross-platform subscriptions, and forms of crowdsourcing possible and practical.

A company called Brave is already attempting this, with potential ramifications for the digital advertising industry.

Identity and privacy: In October 2013, the arrest of the founder of Silk Road, a deep web marketplace where users paid for illegal goods with bitcoin, showed just how anonymous bitcoin really wasn’t. Nor was it ever intended to be — bitcoin addresses function much as a pseudonym does for a writer, Catalini says. Users can never completely mask their transactions. But others are trying. Zcash promises to be a fully private cryptocurrency. There are significant downsides to the anonymity a blockchain could offer, such as the ability to fund terrorism or facilitate money laundering. But there are many virtuous applications too — Google’s DeepMind is attempting to use blockchain to layer privacy and security in electronic health care records.

Smart contracts: This application is still in the early stages, Catalini says, but by recording information on a blockchain, contracts could use that information to make themselves self-executing if certain conditions are met. This idea backfired last year when code was exploited to steal $60 million from The DAO, a blockchain-based venture capital firm.

Provenance and ownership: A blockchain could be used to record details about physical products, helping to verify authenticity and prevent fraud and counterfeiting. London-based EverLedger is tracking diamonds and envisions doing the same for fine wines. At the same time, for all these applications, a blockchain is only as useful as the quality of the information recorded on it in the first place.

Internet of things, robotics, and artificial intelligence: Your appliances are already talking to each other — think smart home technologies like Nest thermostats and security systems. What if they could barter or acquire resources? What if a highway could verify the identity of and accept payment from a self-driving car, opening up a pay-per-use fast lane to commuters in a rush? At the outer edge of application, but not outside the realm of possibility, Catalini says.

When will this disruption happen?

Over a period of more than ten years. Catalini is convinced blockchain has internet-level disruption potential, but like the internet it will come over a multi-decade timeline with fits and starts, and occasional setbacks. Some industries, especially finance, will see drastic change soon. Others will take longer.

“A lot of the work in this space is experimental,” Catalini says. “We are at the infrastructure building stage. Bitcoin has a market capitalization of $42 billion, which is nothing compared to the mainstream financial platforms and exchanges that move trillions of dollars every day. But the technology is maturing and growing. At some point, one of the startups in this space may reveal itself to be the Netscape of cryptocurrencies. What would follow is something we have seen play out many times before in history.”

Ready to go deeper?

New research, writing, and videos from Catalini and other MIT Sloan faculty members is available at blockchain.mit.edu. Sign up there to receive updates with the latest and most important MIT work about blockchain.

The expert

Christian Catalini is the Fred Kayne (1960) Career Development Professor of Entrepreneurship, and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at MIT Sloan. He is an expert in blockchain technology and cryptocurrencies, equity crowdfunding, the adoption of technology standards, and science and technology interactions. He is one of the principal investigators of the MIT Digital Currency Study, which gave all MIT undergraduate students access to bitcoin in Fall 2014. He is also part of the MIT Initiative on the Digital Economy. His work has been featured in Nature, the New York Times, the Wall Street Journal, the Economist, WIRED, NPR, Forbes, Bloomberg, the Chicago Tribune, the Boston Globe, and VICE News, among others.

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What Is Blockchain and How Does It Work? | Britannica Money

Is Blockchain and How Does It Work? | Britannica MoneyHistory & SocietyScience & TechBiographiesAnimals & NatureGeography & TravelArts & CultureGames & QuizzesVideosOn This DayOne Good FactDictionaryLifestyles & Social IssuesPhilosophy & ReligionPolitics, Law & GovernmentWorld HistoryHealth & MedicineScienceTechnologyBrowse BiographiesBirds, Reptiles & Other VertebratesBugs, Mollusks & Other InvertebratesEnvironmentFossils & Geologic TimeMammalsPlantsGeography & TravelEntertainment & Pop CultureLiteratureSports & RecreationVisual ArtsCompanionsDemystifiedImage GalleriesInfographicsListsPodcastsSpotlightSummariesThe ForumTop Questions#WTFact100 WomenBritannica KidsSaving EarthSpace Next 50Student CenterSubscribe NowMoney HomeHousehold FinanceInvestingRetirementHistory & TheoryTable of ContentsIntroductionHow does blockchain technology work?What makes blockchain technology so revolutionary?How can blockchain be used?What are the risks?How can a person invest in blockchain technology?The bottom lineTable Of ContentsInvestingWhat is blockchain and how does it work?Decentralized and immutable. Written byKarl MontevirgenKarl MontevirgenKarl Montevirgen is a professional freelance writer who specializes in the fields of finance, cryptomarkets, content strategy, and the arts. Karl works with several organizations in the equities, futures, physical metals, and blockchain industries. He holds FINRA Series 3 and Series 34 licenses in addition to a dual MFA in critical studies/writing and music composition from the California Institute of the Arts.Fact-checked byDoug AshburnDoug AshburnDoug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago.Table of ContentsIntroductionHow does blockchain technology work?What makes blockchain technology so revolutionary?How can blockchain be used?What are the risks?How can a person invest in blockchain technology?The bottom lineTable Of ContentsOpen full sized imageLinking the nodes to make a distributed ledger.© Vadim Shechkov—iStock/Getty ImagesBlockchain may be among the buzziest technologies to disrupt the world of finance, tied to the rise of cryptocurrency, but it’s refashioning perhaps the most archaic of all financial tech: the ledger. Yes, the system that originated from the clay tablets ancient Mesopotamians used thousands of years ago to record transactions and balances.This latest iteration, however, has bells and whistles that make the ledger capable of overturning the entire financial environment that once brought it into existence. How’s that for an upgrade?Learn more about blockchain technology.Encyclopædia Britannica, Inc.Blockchain is a digital ledger database whose recorded contents are encrypted into a sequence of blocks and distributed throughout a network of participating computers (nodes).Key PointsBlockchain is a distributed ledger database system whose technologies can change the way businesses and governments operate. The capacity to make transactions without intermediaries and the immutability of all recorded data are among blockchain’s most unique and defining features. Although blockchain’s impact can be likened to the advent of the Internet, so too can its level of risk and uncertainty.It’s really that simple. So, what’s with all the buzz? It sounds like a slightly upgraded, shareable spreadsheet with tracked changes, right?Blockchain’s functionalities may seem plain and straightforward. But given its tweaks to the old ledger tech, it now sports a few features that would be considered impossible in the soon-to-be old world of today.Blockchain is:Immutable. Entries can’t be changed once they’re recorded. Decentralized. It’s capable of operating without third-party entities, human or not. Distributed. All participating computers have a copy of the ledger. Consensus. All transactions are verified and updated in consensus. Secure. All recorded content is individually encrypted.In short, blockchain has the potential to revolutionize almost every digital operation we know today, from sending payments and issuing contracts to undergirding complex industrial and government operations.Something this large in scale is likely to present a wide range of opportunities—but also plenty of risks—for users and investors alike.How does blockchain technology work?The critical aspect that separates blockchain from all other ledgers and databases is that it’s designed to distribute and record information on a peer-to-peer basis that, once completed, is unchangeable and incorruptible.Immutable verification is one of blockchain’s key features. All data contents are “set in stone,” so to speak, but digitally. And blockchain networks accomplish this goal using strict consensus verification procedures. So, how does it work?Digital transactions are stored in a digital “block” (sort of like a ledger entry) that’s added to a previous “chain” of blocks; hence the term blockchain. Each block has a unique “hash,” like a signature or identification code, and a time stamp to show the exact time it was validated or mined. Each block contains the previous block’s hash, forming the chain.Once a block is added to the blockchain, all nodes (participating computers) update their copy of the blockchain. This is what makes the blockchain a secure system. Any changes to the contents of a single block have to be recorded in a new block, making it nearly impossible to rewrite a block’s history.If a hacker tried to tamper with an existing block, then they would have to change all copies of that block on all participating computers in the network. That’s virtually impossible—the number of participating computers across the globe can number in the high thousands. Unless every single node in the network agrees with a change to a block, the change is discarded.What makes blockchain technology so revolutionary?There are many potential benefits that come with the adoption of blockchain technology. Here are three to consider:Blockchain can drastically reduce or nearly eliminate data tampering. Blockchain can significantly increase data security. This is why the technology is often called a “trustless network.” It means you don’t have to trust anyone to be certain that a given exchange or transaction is accurate and accurately recorded.Blockchain can make transactions more transparent and traceable. Because it’s a distributed ledger, all participating computers on a network have access to the same database (the blockchain itself). This increases transparency and access, and the hash history makes every exchange and transaction traceable.Blockchain can eliminate the need for centralized third parties. An automated network that allows for peer-to-peer transactions does away with the need for intermediaries. That may include the elimination of third-party service fees and any lag time caused by paper-based or human-driven processes.How can blockchain be used?Any industry that can use a peer-to-peer transaction system with an immutable ledger can benefit from blockchain technology. It’s easy to imagine how expansive blockchain applications can be.The cryptocurrency industry made blockchain something of a household term; decentralized and traditional finance may soon follow crypto’s cue. Other fields that may adopt blockchain technologies include non-fungible token (NFT) markets, supply chain and logistics, energy, health care, e-commerce, media, voting systems, and government and public sector operations. A key to innovation may be smart contracts—blockchain-based computer programs or transaction protocols that function as digital contracts—and the decentralized applications (dApps) that use them.Again, we’re still at the beginning stages of blockchain development. Although its potential use cases are many and various, it’s important to remember that wide-scale adoption hasn’t quite begun.What are the risks?Every unique technology comes with its own unique set of risks. Blockchain is no exception.Although the blockchain itself may not be hackable—remember, it’s an immutable ledger—the systems surrounding the blockchain can be hacked.The simplest example is that of a bad actor obtaining passwords and credentials to access digital assets. Unsecured and exposed goods can be stolen.A more sophisticated risk is that of a 51% attack. In cryptocurrency applications, this means a single entity could gain control of more than 50% of all cryptocurrency mining or staking. Once in control, the entity may not be able to alter previous blocks on the chain, but it can alter future blocks. For instance, it may be able to prevent or reverse transactions, possibly even double-spending any cryptocurrency pending a slot in the block.For large networks like Bitcoin and Ethereum, a 51% attack may be too difficult and too costly to attempt. But for smaller networks, it may be possible.How can a person invest in blockchain technology?Probably the most direct and regulated way to invest in blockchain tech is by investing in stocks of publicly traded companies that are developing blockchain networks.You can also gain indirect exposure by investing in companies involved in decentralized finance, financial technology (FinTech), metaverse technologies, cryptocurrency exchanges, or hardware designed for crypto, blockchain, or decentralized finance (DeFi) purposes.Your other options are to purchase digital assets such as cryptocurrencies or NFTs. Note that the crypto world is largely unregulated, so scams and fraudulent activity are frequently reported. Plus, cryptocurrencies and their underlying investments are highly volatile (i.e., prices tend to swing violently).The bottom lineBlockchain is an emerging technology that has the potential to disrupt and revolutionize the way we conduct business, make commercial transactions, enforce legal contracts, and even enact government policy. Its impact on today’s world can be likened to the advent of the Internet back in the 1990s.Like the early tech boom, the blockchain movement is generating plenty of innovations. They may all be unique, but they won’t all succeed or gain mass adoption. Blockchain presents investors with exciting new opportunities, but it also comes with a number of risks. Proceed with caution.Britannica MoneyHousehold FinanceInvestingRetirementHistory & TheoryAbout UsPrivacy PolicyTerms & Conditions© 2024 Encyclopædia Britannica, Inc.

What is Blockchain? - Blockchain Technology Explained - AWS

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Blockchain

What is Blockchain Technology?

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What is blockchain technology?

Why is blockchain important?

How do different industries use blockchain?

What are the features of blockchain technology?

What are the key components of blockchain technology?

How does blockchain work?

What are the types of blockchain networks?

What are blockchain protocols?

How did blockchain technology evolve?

What are the benefits of blockchain technology?

What is the difference between Bitcoin and blockchain?

What is the difference between a database and a blockchain?

How is blockchain different from the cloud?

What is Blockchain as a Service?

What are AWS Blockchain services?

What is blockchain technology?

Blockchain technology is an advanced database mechanism that allows transparent information sharing within a business network. A blockchain database stores data in blocks that are linked together in a chain. The data is chronologically consistent because you cannot delete or modify the chain without consensus from the network. As a result, you can use blockchain technology to create an unalterable or immutable ledger for tracking orders, payments, accounts, and other transactions. The system has built-in mechanisms that prevent unauthorized transaction entries and create consistency in the shared view of these transactions.

Why is blockchain important?

Traditional database technologies present several challenges for recording financial transactions. For instance, consider the sale of a property. Once the money is exchanged, ownership of the property is transferred to the buyer. Individually, both the buyer and the seller can record the monetary transactions, but neither source can be trusted. The seller can easily claim they have not received the money even though they have, and the buyer can equally argue that they have paid the money even if they haven’t.

To avoid potential legal issues, a trusted third party has to supervise and validate transactions. The presence of this central authority not only complicates the transaction but also creates a single point of vulnerability. If the central database was compromised, both parties could suffer.

Blockchain mitigates such issues by creating a decentralized, tamper-proof system to record transactions. In the property transaction scenario, blockchain creates one ledger each for the buyer and the seller. All transactions must be approved by both parties and are automatically updated in both of their ledgers in real time. Any corruption in historical transactions will corrupt the entire ledger. These properties of blockchain technology have led to its use in various sectors, including the creation of digital currency like Bitcoin.

How do different industries use blockchain?

Blockchain is an emerging technology that is being adopted in innovative manner by various industries. We describe some use cases in different industries in the following subsections:

Energy

Energy companies use blockchain technology to create peer-to-peer energy trading platforms and streamline access to renewable energy. For example, consider these uses:

Blockchain-based energy companies have created a trading platform for the sale of electricity between individuals. Homeowners with solar panels use this platform to sell their excess solar energy to neighbors. The process is largely automated: smart meters create transactions, and blockchain records them.

With blockchain-based crowd funding initiatives, users can sponsor and own solar panels in communities that lack energy access. Sponsors might also receive rent for these communities once the solar panels are constructed.

Finance

Traditional financial systems, like banks and stock exchanges, use blockchain services to manage online payments, accounts, and market trading. For example, Singapore Exchange Limited, an investment holding company that provides financial trading services throughout Asia, uses blockchain technology to build a more efficient interbank payment account. By adopting blockchain, they solved several challenges, including batch processing and manual reconciliation of several thousand financial transactions.

Media and entertainment

Companies in media and entertainment use blockchain systems to manage copyright data. Copyright verification is critical for the fair compensation of artists. It takes multiple transactions to record the sale or transfer of copyright content. Sony Music Entertainment Japan uses blockchain services to make digital rights management more efficient. They have successfully used blockchain strategy to improve productivity and reduce costs in copyright processing.

Retail

Retail companies use blockchain to track the movement of goods between suppliers and buyers. For example, Amazon retail has filed a patent for a distributed ledger technology system that will use blockchain technology to verify that all goods sold on the platform are authentic. Amazon sellers can map their global supply chains by allowing participants such as manufacturers, couriers, distributors, end users, and secondary users to add events to the ledger after registering with a certificate authority.

What are the features of blockchain technology?

Blockchain technology has the following main features:

Decentralization

Decentralization in blockchain refers to transferring control and decision making from a centralized entity (individual, organization, or group) to a distributed network. Decentralized blockchain networks use transparency to reduce the need for trust among participants. These networks also deter participants from exerting authority or control over one another in ways that degrade the functionality of the network.

Immutability

Immutability means something cannot be changed or altered. No participant can tamper with a transaction once someone has recorded it to the shared ledger. If a transaction record includes an error, you must add a new transaction to reverse the mistake, and both transactions are visible to the network.

Consensus

A blockchain system establishes rules about participant consent for recording transactions. You can record new transactions only when the majority of participants in the network give their consent.

What are the key components of blockchain technology?

Blockchain architecture has the following main components:

A distributed ledger

A distributed ledger is the shared database in the blockchain network that stores the transactions, such as a shared file that everyone in the team can edit. In most shared text editors, anyone with editing rights can delete the entire file. However, distributed ledger technologies have strict rules about who can edit and how to edit. You cannot delete entries once they have been recorded.

Smart contracts

Companies use smart contracts to self-manage business contracts without the need for an assisting third party. They are programs stored on the blockchain system that run automatically when predetermined conditions are met. They run if-then checks so that transactions can be completed confidently. For example, a logistics company can have a smart contract that automatically makes payment once goods have arrived at the port.

Public key cryptography

Public key cryptography is a security feature to uniquely identify participants in the blockchain network. This mechanism generates two sets of keys for network members. One key is a public key that is common to everyone in the network. The other is a private key that is unique to every member. The private and public keys work together to unlock the data in the ledger.

For example, John and Jill are two members of the network. John records a transaction that is encrypted with his private key. Jill can decrypt it with her public key. This way, Jill is confident that John made the transaction. Jill's public key wouldn't have worked if John's private key had been tampered with.

How does blockchain work?

While underlying blockchain mechanisms are complex, we give a brief overview in the following steps. Blockchain software can automate most of these steps:

Step 1 – Record the transaction

A blockchain transaction shows the movement of physical or digital assets from one party to another in the blockchain network. It is recorded as a data block and can include details like these:

Who was involved in the transaction?

What happened during the transaction?

When did the transaction occur?

Where did the transaction occur?

Why did the transaction occur?

How much of the asset was exchanged?

How many pre-conditions were met during the transaction?

Step 2 – Gain consensus

Most participants on the distributed blockchain network must agree that the recorded transaction is valid. Depending on the type of network, rules of agreement can vary but are typically established at the start of the network.

Step 3 – Link the blocks

Once the participants have reached a consensus, transactions on the blockchain are written into blocks equivalent to the pages of a ledger book. Along with the transactions, a cryptographic hash is also appended to the new block. The hash acts as a chain that links the blocks together. If the contents of the block are intentionally or unintentionally modified, the hash value changes, providing a way to detect data tampering.

Thus, the blocks and chains link securely, and you cannot edit them. Each additional block strengthens the verification of the previous block and therefore the entire blockchain. This is like stacking wooden blocks to make a tower. You can only stack blocks on top, and if you remove a block from the middle of the tower, the whole tower breaks.

Step 4 – Share the ledger

The system distributes the latest copy of the central ledger to all participants.

What are the types of blockchain networks?

There are four main types of decentralized or distributed networks in the blockchain:

Public blockchain networks

Public blockchains are permissionless and allow everyone to join them. All members of the blockchain have equal rights to read, edit, and validate the blockchain. People primarily use public blockchains to exchange and mine cryptocurrencies like Bitcoin, Ethereum, and Litecoin.

Private blockchain networks

A single organization controls private blockchains, also called managed blockchains. The authority determines who can be a member and what rights they have in the network. Private blockchains are only partially decentralized because they have access restrictions. Ripple, a digital currency exchange network for businesses, is an example of a private blockchain.

Hybrid blockchain networks

Hybrid blockchains combine elements from both private and public networks. Companies can set up private, permission-based systems alongside a public system. In this way, they control access to specific data stored in the blockchain while keeping the rest of the data public. They use smart contracts to allow public members to check if private transactions have been completed. For example, hybrid blockchains can grant public access to digital currency while keeping bank-owned currency private.

Consortium blockchain networks

A group of organizations governs consortium blockchain networks. Preselected organizations share the responsibility of maintaining the blockchain and determining data access rights. Industries in which many organizations have common goals and benefit from shared responsibility often prefer consortium blockchain networks. For example, the Global Shipping Business Network Consortium is a not-for-profit blockchain consortium that aims to digitize the shipping industry and increase collaboration between maritime industry operators.

What are blockchain protocols?

The term blockchain protocol refers to different types of blockchain platforms that are available for application development. Each blockchain protocol adapts the basic blockchain principles to suit specific industries or applications. Some examples of blockchain protocols are provided in the following subsections:

Hyperledger fabric

Hyperledger Fabric is an open-source project with a suite of tools and libraries. Enterprises can use it to build private blockchain applications quickly and effectively. It is a modular, general-purpose framework that offers unique identity management and access control features. These features make it suitable for various applications, such as track-and-trace of supply chains, trade finance, loyalty and rewards, and clearing settlement of financial assets.

Ethereum

Ethereum is a decentralized open-source blockchain platform that people can use to build public blockchain applications. Ethereum Enterprise is designed for business use cases.

Corda

Corda is an open-source blockchain project designed for business. With Corda, you can build interoperable blockchain networks that transact in strict privacy. Businesses can use Corda's smart contract technology to transact directly, with value. Most of its users are financial institutions.

Quorum

Quorum is an open-source blockchain protocol that is derived from Ethereum. It is specially designed for use in a private blockchain network, where only a single member owns all the nodes, or in a consortium blockchain network, where multiple members each own a portion of the network.

How did blockchain technology evolve?

Blockchain technology has its roots in the late 1970s when a computer scientist named Ralph Merkle patented Hash trees or Merkle trees. These trees are a computer science structure for storing data by linking blocks using cryptography. In the late 1990s, Stuart Haber and W. Scott Stornetta used Merkle trees to implement a system in which document timestamps could not be tampered with. This was the first instance in the history of blockchain.

The technology has continued to evolve over these three generations:

First generation – Bitcoin and other virtual currencies

In 2008, an anonymous individual or group of individuals known only by the name Satoshi Nakamoto outlined blockchain technology in its modern form. Satoshi's idea of the Bitcoin blockchain used 1 MB blocks of information for Bitcoin transactions. Many of the features of Bitcoin blockchain systems remain central to blockchain technology even today.

Second generation – smart contracts

A few years after first-generation currencies emerged, developers began to consider blockchain applications beyond cryptocurrency. For instance, the inventors of Ethereum decided to use blockchain technology in asset transfer transactions. Their significant contribution was the smart contracts feature.

Third generation – the future

As companies discover and implement new applications, blockchain technology continues to evolve and grow. Companies are solving limitations of scale and computation, and potential opportunities are limitless in the ongoing blockchain revolution.

What are the benefits of blockchain technology?

Blockchain technology brings many benefits to asset transaction management. We list a few of them in the following subsections:

Advanced security

Blockchain systems provide the high level of security and trust that modern digital transactions require. There is always a fear that someone will manipulate underlying software to generate fake money for themselves. But blockchain uses the three principles of cryptography, decentralization, and consensus to create a highly secure underlying software system that is nearly impossible to tamper with. There is no single point of failure, and a single user cannot change the transaction records.

Improved efficiency

Business-to-business transactions can take a lot of time and create operational bottlenecks, especially when compliance and third-party regulatory bodies are involved. Transparency and smart contracts in blockchain make such business transactions faster and more efficient.

Faster auditing

Enterprises must be able to securely generate, exchange, archive, and reconstruct e-transactions in an auditable manner. Blockchain records are chronologically immutable, which means that all records are always ordered by time. This data transparency makes audit processing much faster.

What is the difference between Bitcoin and blockchain?

Bitcoin and blockchain might be used interchangeably, but they are two different things. Since Bitcoin was an early application of blockchain technology, people inadvertently began using Bitcoin to mean blockchain, creating this misnomer. But blockchain technology has many applications outside of Bitcoin.

Bitcoin is a digital currency that operates without any centralized control. Bitcoins were originally created to make financial transactions online but are now considered digital assets that can be converted to any other global currency, like USD or euros. A public Bitcoin blockchain network creates and manages the central ledger.

Bitcoin network

A public ledger records all Bitcoin transactions, and servers around the world hold copies of this ledger. The servers are like banks. Although each bank knows only about the money its customers exchange, Bitcoin servers are aware of every single Bitcoin transaction in the world.

Anyone with a spare computer can set up one of these servers, known as a node. This is like opening your own Bitcoin bank instead of a bank account.

Bitcoin mining

On the public Bitcoin network, members mine for cryptocurrency by solving cryptographic equations to create new blocks. The system broadcasts each new transaction publicly to the network and shares it from node to node. Every ten minutes or so, miners collect these transactions into a new block and add them permanently to the blockchain, which acts like the definitive account book of Bitcoin.

Mining requires significant computational resources and takes a long time due to the complexity of the software process. In exchange, miners earn a small amount of cryptocurrency. The miners act as modern clerks who record transactions and collect transaction fees.

All participants across the network reach a consensus on who owns which coins, using blockchain cryptography technology.

What is the difference between a database and a blockchain?

Blockchain is a special type of database management system that has more features than a regular database. We describe some significant differences between a traditional database and a blockchain in the following list:

Blockchains decentralize control without damaging trust in the existing data. This is not possible in other database systems.

Companies involved in a transaction cannot share their entire database. But in blockchain networks, each company has its copy of the ledger, and the system automatically maintains consistency between the two ledgers.

Although in most database systems you can edit or delete data, in blockchain you can only insert data.

How is blockchain different from the cloud?

The term cloud refers to computing services that can be accessed online. You can access Software as a Service (SaaS), Product as a Service (PaaS), and Infrastructure as a Service (IaaS) from the cloud. Cloud providers manage their hardware and infrastructure and give you access to these computing resources over the internet. They provide many more resources than just database management.If you want to join a public blockchain network, you need to provide your hardware resources to store your ledger copy. You could use a server from the cloud for this purpose too. Some cloud providers also offer complete Blockchain as a Service (BaaS) from the cloud.

What is Blockchain as a Service?

Blockchain as a Service (BaaS) is a managed blockchain service that a third party provides in the cloud. You can develop blockchain applications and digital services while the cloud provider supplies the infrastructure and blockchain building tools. All you have to do is customize existing blockchain technology, which makes blockchain adoption faster and more efficient.

What are AWS Blockchain services?

AWS Blockchain services provide purpose-built tools to support your requirement. You can use them to build everything from a centralized ledger database that maintains an immutable record of transactions to a multi-party, fully managed blockchain network that helps eliminate intermediaries. AWS has numerous validated blockchain solutions from partners who support all major blockchain protocols, including Hyperledger, Corda, Ethereum, Quorum, and more. As a result, you can develop blockchain and ledger applications more easily, quickly, and efficiently with AWS. Some useful AWS Blockchain services are as follows:

Amazon Quantum Ledger Database (QLDB) is a fully managed ledger database that provides a transparent, immutable, and cryptographically verifiable transaction log. It has a built-in journal that stores an accurate and sequenced entry of every data change. The journal is append-only, meaning that users can add data to the journal but cannot overwrite or delete it.

Amazon Managed Blockchain is a fully managed service that makes it easy to join public networks or create and manage scalable private networks using Hyperledger Fabric and Ethereum. Get started with blockchain by creating an AWS account today.

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What Is Blockchain? | IBM

Blockchain Facts: What Is It, How It Works, and How It Can Be Used

What Is Blockchain Technology? How Does It Work? | Built In

What is Blockchain Technology? A Step-by-Step Guide For Beginners

What is blockchain? | McKinsey

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tokenpocket最新版下载|blockchain technology

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What Is Blockchain? | IBM

Blockchain Facts: What Is It, How It Works, and How It Can Be Used

What Is Blockchain Technology? How Does It Work? | Built In

What is Blockchain Technology? A Step-by-Step Guide For Beginners

What is blockchain? | McKinsey

What Is Blockchain? The Complete WIRED Guide | WIRED

Blockchain, explained | MIT Sloan

What is Blockchain? Definition, Examples and How it Works | TechTarget

What Is Blockchain and How Does It Work? | Britannica Money

What is Blockchain? - Blockchain Technology Explained - AWS

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