Blockchain Explained: What is Blockchain?

The potential of blockchain technology could be compared to the potential of the internet itself. It’s a game-changer that goes beyond cryptocurrency. Blockchain has been discussed enough in the past decade that the word has become familiar for many, but without fully understanding what it means. Because of its most common context, it’s often thought to be synonymous with cryptocurrency, like Bitcoin. But when we take a closer look at the question of “What is blockchain?” we see that there is so much more to this technology, particularly in its potential uses for the future.

What Is Blockchain Technology?

Blockchain is a decentralized and distributed ledger technology that enables the secure and transparent recording of transactions. Unlike traditional centralized systems, where a single authority controls the data, blockchain operates on a network of computers, known as nodes, that collectively maintain and validate the integrity of the ledger.

At its core, a blockchain consists of a series of blocks, each containing a list of transactions. These blocks are linked together using cryptographic hashes, forming a chain of information. Once a block is added to the chain, it becomes immutable, meaning that it cannot be altered or tampered with without the consensus of the network.

Key Features of Blockchain

  1. Decentralization: One of the defining characteristics of blockchain is its decentralized nature. Instead of relying on a central authority, blockchain networks are maintained by a distributed network of participants, ensuring transparency and reducing the risk of fraud or manipulation.
  2. Security: Blockchain employs advanced cryptographic techniques to secure transactions and data. Each transaction is verified by multiple nodes in the network, making it extremely difficult for malicious actors to alter the information stored on the blockchain.
  3. Transparency: Blockchain provides a transparent and auditable record of transactions. Every participant in the network can view the entire transaction history, promoting trust and accountability.
  4. Immutability: Once a transaction is recorded on the blockchain, it becomes virtually impossible to modify or delete. This immutability ensures the integrity of the data and prevents unauthorized changes.

How Digital Security Works With Blockchain

The “blocks” are pieces of data. One megabyte of data is contained in one block. Because the data is text, this block size will actually contain a lot of information. These blocks are distributed throughout a great deal of computers in a network. In the case of Bitcoin, the software allows private users to prove the integrity of their devices through a proof of work system and then join the network. This means the information inside the blocks is recorded in all of these places across the network. Each block is marked with a hash. A hash is a cryptographic code.

These hashes are assigned in an order. The order of the hash codes puts the blocks into a recognizable chain.So now we know that the first block should be A, the second block should be B, and the third block should be C.If a hacker were to successfully change data on a single block, that block would be assigned a new code. Now, the block that should be labeled B is labeled H. This makes it obvious the block has been tampered with. While a hacker could potentially attempt to hack the following blocks in the chain, they would have to continue to every block as each one they tampered with would be marked. Because of this system, data stored using this technology is considered more secure.

What Is Blockchain Used For

Blockchain technology has the potential to disrupt numerous industries, including finance, supply chain management, healthcare, and more. Here are a few examples of how blockchain is being utilized:

  1. Cryptocurrencies: Blockchain is the underlying technology behind cryptocurrencies like Bitcoin and Ethereum. It enables secure and transparent peer-to-peer transactions without the need for intermediaries.1
  2. Supply Chain Management: Blockchain can enhance supply chain transparency by providing a tamper-proof record of every transaction and movement of goods. This helps to prevent counterfeiting, improve traceability, and streamline logistics processes.1
  3. Healthcare: Blockchain has the potential to revolutionize healthcare by securely storing and sharing patient data, ensuring privacy, interoperability, and reducing medical fraud.2
  4. Smart Contracts: Blockchain enables the execution of self-executing smart contracts, which are programmable agreements that automatically execute when predefined conditions are met. This eliminates the need for intermediaries and increases efficiency in various industries.2

How Blockchain Records Transactions

When this technology is used to secure transactions with cryptocurrency, a sequence of events happens. First, a transaction happens using a Bitcoin (or other cryptocurrency) account. The network of computers verify the data you submitted so the transaction occurs successfully.The data used in the transaction is recorded in the block. This includes information like the digital signature of your Bitcoin account, the digital signature of the store where you made the purchase, and the amount of money spent.Then the block containing this transaction, and thousands of others, is given the hash code and added to the chain of blocks.

Doesn’t That Mean Your Private Information Is Made Public?

This technology is all about transparency, so yes, the data is made public across the network. However, the recorded data in a transaction is selected with privacy in mind. Your Bitcoin account would include your username, or a digital signature. This is the information that will be recorded in the block. For this reason, many people prefer the security of cryptocurrency specifically because their digital signature isn’t necessarily connected to their identity in the real world, unless they choose to make that information public somehow. So, for example, if a public figure used cryptocurrency, they could make secure financial transactions associated with a username not connected to their very public life.

The Advantages of Distributed Ledger Technology

For one thing, blockchain can save companies and individuals money. By making third party trust organizations obsolete, cryptocurrency becomes a more affordable way to maintain the financial system. Potentially, this technology can be used as an affordable means of data security in a variety of ways, many of which we have yet to put into application.

This technology reduces the need for a lot of record keeping, which streamlines the type of information we need to store. This simplifies things for bookkeeping and makes data more accessible. The security of data contained in a blockchain is often considered its biggest advantage.Transparency is a large advantage in today’s world, where people care more about the privacy and security of their data and the values of the companies they choose to do business with.

By having a trusted system for data greater transparency is achieved, making data and therefore companies more trustworthy. The ability to perform more anonymous transactions is a large advantage for adopters of Bitcoin. In truth, many of the biggest advantages for blockchain have yet to be discovered. How will people use this tech in the future? Only time will tell. As it becomes more accepted and trusted as a resource, blockchain technology has the potential to change IT in ways we can only currently make guesses about.

Frequently Asked Questions

No, blockchain is not only used for cryptocurrencies. While cryptocurrencies like Bitcoin are the most well-known applications of blockchain technology, its potential extends far beyond that. Blockchain has the ability to revolutionize various industries, including finance, supply chain management, healthcare, and more. It provides a decentralized and transparent platform for secure transactions and data storage, making it applicable to a wide range of sectors. So, blockchain is much more than just cryptocurrencies. It's a transformative technology with diverse applications.

Blockchain ensures the security of transactions through its unique features and mechanisms. First and foremost, blockchain uses cryptographic techniques to encode transaction information, making it extremely difficult for unauthorized parties to access or alter the data. Each transaction is recorded in a block, which is then added to a chain of blocks, creating an immutable and transparent ledger.Additionally, blockchain relies on consensus mechanisms to validate transactions. In the case of cryptocurrencies like Bitcoin, this is achieved through a process called proof-of-work, where miners compete to solve complex mathematical problems to validate transactions and add them to the blockchain. This decentralized validation process ensures that transactions are verified by multiple participants, making it highly secure and resistant to tampering.Furthermore, the distributed nature of blockchain adds an extra layer of security. Instead of relying on a single central authority, the blockchain network consists of multiple nodes that maintain copies of the entire blockchain. This redundancy makes it difficult for malicious actors to manipulate the data, as they would need to control a majority of the network's computational power, known as a 51% attack, which is highly unlikely and costly to execute.

Blockchain technology is designed to be highly secure and resistant to tampering. The decentralized nature of blockchain, combined with cryptographic techniques and consensus mechanisms, makes it extremely difficult for malicious actors to tamper with the data stored on the blockchain. However, it's important to note that no system is entirely immune to hacking or tampering. While blockchain has proven to be robust, it's crucial to implement best practices and security measures to mitigate potential risks.

Currently, the Bitcoin network can process between three and six transactions per second, with transactions being logged in the blockchain approximately every 10 minutes. Now, compare that to Visa, which can handle around 65,000 transactions per second. There have been efforts to address the scalability issue. One such solution is the Lightning Network, which was introduced to improve processing times, enhance scalability, and lower transaction fees. The Lightning Network operates as a second layer on top of the Bitcoin blockchain, allowing for faster and more efficient transactions.

Layer-2 solutions are being developed to address the scalability issue in blockchain. Some examples include the Lightning Network for Bitcoin, which enables faster and cheaper transactions by operating as a second layer on top of the Bitcoin blockchain.

Footnotes

  1. European Parliament. “Crypto-Assets: Green Light to New Rules for Tracing Transfers in the EU.”
  2. The White House. “FACT SHEET: White House Releases First-Ever Comprehensive Framework for Responsible Development of Digital Assets.”