What Is Blockchain? The Tech Behind Crypto Explained
A chain of blocks? Yes, in short, and a science that’s changing the way we live our lives in almost every sphere. Read on as we demystify blockchain.
Updated June 28, 2022 • 3 min read
Blockchain technology is a distributed ledger that connects a decentralized network on which users can send transactions and build applications without the need for a central authority or server. Blockchain underpins networks like Bitcoin and Ethereum as well as thousands of applications that have utility and provide value in industries as diverse as finance, fashion, and gaming. With continued innovation, blockchain could very well be a foundational technology in our digital future.
Blockchain Technology Explained
Put simply, a blockchain is a shared ledger of data — e.g., transactions or code — that are batched into blocks, verified, and subsequently accepted as part of the blockchain by a network of distributed users (nodes) through a consensus mechanism. Because each block of verified data contains a unique signature of data from the previous block, they are inextricably linked together into a “block-chain.” A network-based consensus mechanism is the way a blockchain protocol agrees on how its underlying technical architecture will operate.
The decentralized nature of blockchain networks makes industries like cryptocurrency and decentralized finance (DeFi) possible — as evidenced by Bitcoin and Ethereum — and supports thousands of applications across the spectrum of business and human interaction.
Blockchain networks are driven by systems of aligned incentives. A well-functioning public blockchain requires a community of users, node operators, developers, and miners, who all play roles in a mutually beneficial network ecosystem. For example: In many blockchain networks, rewards like newly minted cryptocurrency or transaction fees motivate network participants to compete to validate transactions and create new blocks. This incentive and validation structure also secures the network from criminal or fraudulent activity.
Blockchain’s intellectual roots can be traced back to cryptographers in the early 1980s. However, the modern blockchain industry began with Bitcoin, a peer-to-peer (P2P) digital payments protocol released in January 2009 by pseudonymous creator Satoshi Nakamoto. Bitcoin’s native cryptocurrency, bitcoin (BTC), is the largest cryptocurrency by market capitalization and the most well-known application of blockchain technology. Ethereum, launched in 2015, is the second largest cryptocurrency by market capitalization, and has evolved the technology further. Ethereum builds on the core tenets of Bitcoin’s blockchain technology toward a different goal: supporting an ecosystem of decentralized applications (dApps), platforms, and digital assets.
There are several different kinds of blockchains, each suited to different use cases. For instance, Bitcoin and Ethereum are public blockchains, which are open-source and allow anyone to use or build on their technology while eliminating the need for a trusted third party to facilitate transactions. Alternatively, there are private blockchains, which limit who can participate in the network via a system of permissions, and are frequently used by corporations seeking to make intracompany operations more efficient.
Key Features of Blockchain Technology
Blockchain relies on a decentralized network of users to validate and record transactions instead of a central authority. This characteristic makes blockchain transactions constant, fast, secure, inexpensive, and tamper-proof.
Constant: Blockchain networks operate globally, 24/7.
Fast: Transactions are sent peer-to-peer directly from the sender to the receiver without needing to go through one or more intermediaries.
Secure: The distributed network of nodes that underpins a blockchain offers collectivized security against hacks and outages.
Inexpensive: Without centralized, rent-seeking intermediaries, blockchain platforms operate at lower costs.
Tamper-proof: Tamper-proof data is transparent and is practically impossible to modify once it is timestamped to the ledger, thus helping to secure the blockchain from fraud and other malicious activity. Likewise, anyone can view the transactions present on public blockchain networks.
Industries That Benefit From Blockchain Networks
Blockchain technology has proven useful for a variety of industries — from finance to supply chain to real estate to gambling. By using smart contracts — i.e., self-executing code stored and accessible on an immutable blockchain — companies and individuals can avoid the expense and often the ambiguity of engaging with third parties to accomplish routine business.
Blockchain technology is also well-suited for payments, as evidenced by bitcoin, bitcoin cash (BCH), litecoin (LTC), and numerous other payments-focused cryptocurrencies. Blockchain is in many ways more efficient and globally accessible than traditional third-party payments providers.
Additionally, industries that rely on efficient and secure mechanisms of data ownership and control, such as healthcare, the Internet of Things (IoT), and digital identity, are finding new cutting-edge solutions facilitated in large part on blockchain network protocols. Through public-key cryptography (PKC) — which gives users a public key for receiving transactions and a private key for sending transactions — blockchains allow users to remain pseudonymous and for the transfer of data to remain secure.
Concerns Surrounding Blockchain Technology
Still, blockchains aren’t entirely immune to hacks or centralized control, particularly those that lack a robust ecosystem of network participants or a proven consensus mechanism. Blockchains also vary in their level of decentralization and throughput — i.e., the amount of data they can process in a given period of time. A significant amount of attention is directed toward resolving what’s known as the Blockchain Trilemma — balancing and maximizing scalability, decentralization, and security in one network.
Other concerns about blockchain touch on environmental issues. For example, the Proof-of-Work (PoW) consensus mechanism typically requires enormous amounts of electricity to run. Yet other worries center on the technological complexity and intimidation factor that blockchain technology can pose to businesses and individuals, respectively.
The rapid emergence of cryptocurrency on the global financial stage was just the first step in blockchain technology becoming an integral part of business and our daily lives. Increasingly more industries are experimenting with the technology and more individuals are becoming familiar with the utility and benefits that blockchain-based products and services can offer to their daily lives. The growth of the blockchain industry shows no signs of slowing, and the technology exhibits great promise toward becoming part of, or supplanting entirely, our world’s digital architecture going forward.
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