Blockchain is ubiquitous in our world, and it will be even more present in the coming decades, yet many people still don’t understand what it is. Unless you are in IT, you don’t need to learn to write code or know all the details, but it’s important to grasp a basic idea of how blockchain technology is changing our world, from finance and business to cybersecurity and space exploration.
We live in the age of information, and storing it safely is one of the keys to how the modern world works and evolves. Blockchain can store all kinds of data. Also described as a digital ledger, blockchain can record information about cryptocurrency transactions, smart contracts, and NFT ownership.
How Does Blockchain Work?
A blockchain is a kind of database. But it is unique in that it is not controlled by a central authority or administrator. Instead of existing on a single server, a blockchain is a database that exists on many computers spread across a massive network. Each of these terminals is known as a node.
This model of identical copies maintained on multiple computers makes it very difficult for hackers to cheat the system. For this reason, since its creation, blockchain technology has been seen as ideal for the development of secure digital currency.
Each record of a transaction in the blockchain database builds a block, and various blocks are linked together to form a chain, hence the technology’s name.
Who Created Blockchain?
The creator of blockchain, Satoshi Nakamoto, originally developed the technology as a digital ledger to support Bitcoin, the first-ever cryptocurrency. To this day, nobody knows for certain who Nakamoto is or whether they are even a single individual. What we do know is that the applications of blockchain have likely surpassed Nakamoto’s wildest dreams.
What Are The Identifying Characteristics of Blockchain?
Decentralized
The easiest way to think about this is that the data is not stored in one “central” place/server. It is instead distributed across many places/nodes via a peer-to-peer network. You may recall that “Napster” worked similarly. Here, users would host songs for others to share, which evolved into the “BitTorrent” file distribution system. It is still quite active today.
Distributed
One can think of this as the way that the nodes work together across the network to achieve the intended goal. In the case of BitTorrent, a file is broken into pieces and stored across nodes.
When a user wants to download a file to their device, the BitTorrent protocol enables all nodes to collaborate, allowing them to download their portions of the file simultaneously. This results in a single, usable file instead of a fragmented, out-of-sequence data mass. In the case of a blockchain, the nodes follow protocols to confirm the validity of transactions.
Digital Ledger
Think of a physical accounting ledger. It is a log that records information about transactions (date, description, credit amount, debit amount), building a fully traceable and auditable history of all transactions.
Roughly speaking, a digital ledger is a digital version of an accounting ledger. The transaction attributes are different, though, which is why it seems more accurate to equate a digital ledger to a virtual “accounting journal.”
The important thing about this type of ledger is that it’s a running list of transactions. There are no edits or strikethroughs; corrections are made on the next transaction or when discovered, so there is always a full history of all transactions.
Blocks
There are many established blockchains out there. Each one of them is structured based on the storage limitations of its blocks. If the digital ledger is an endless overview of all transactions of a blockchain, then the blocks themselves are like the individual finite ledgers that “fill up,” creating the need for a new one.
Much like with physical ledgers, you start a new one from where the old one left off, and blocks are no different, with each new one linking directly back to the previous one (forming the “chain”).
The interesting thing about blocks in the chain is that each block contains a hash (or signature) of the entirety of the previous block. This makes the chain extremely secure, preventing any edits without everyone on the chain knowing/agreeing.
How Are New Blocks Created on The Blockchain?
A majority of nodes need to verify the legitimacy of the new transaction data before a new block can be integrated into the ledger. In the case of crypto, nodes must validate transaction data, for example, confirming that digital coins were only spent once.
As soon as there is consensus, the new block is added to the ledger, and the relevant transactions are recorded on the blockchain. Cryptography is used to secure the process, as nodes must solve complex equations in order to process and validate transactions.
What Is Cryptocurrency Mining?
Whenever a new block of information is added to the chain, participants who contributed their computing power to maintain the blockchain are rewarded with a small amount of the cryptocurrency supported by the blockchain.
In the case of Bitcoin, the process of validating a transaction takes a few minutes. In the case of the Ethereum blockchain and others, transactions can be completed much faster, sometimes in just a few seconds.
What Is The Difference Between Private and Public Blockchains?
A blockchain can be either public or private. In the case of public blockchains, anyone can read, write, or audit the data recorded on the blockchain. For this reason, it is nearly impossible to alter logged transactions, as there is no central authority controlling the nodes.
Private blockchains are similar to traditional data storage systems, except for the fact that they are spread over multiple nodes. A private blockchain is controlled by a central authority, which decides who can access the system. The organization controlling the blockchain also has the power to alter it, which is not possible in the case of public blockchains.
What Are The Main Applications of Blockchain Technology?
Blockchain technology is arguably the most secure data storage system known to man. For this reason, it has countless applications.
Cryptocurrency
What is cryptocurrency – Any type of digital or virtual currency that uses blockchain technology to securely process and track transactions without the need for centralized oversight.
If it were not for crypto, probably only tech-savvy people would be talking about blockchain today. Blockchain is the backbone of Bitcoin, Ethereum, and other digital currencies. Every time someone buys, spends, or exchanges crypto, the transaction is recorded on the corresponding blockchain.
Banking and Transfers
Blockchain is also used to process transactions involving fiat currency (regular non-digital money). As crypto use spreads, we will no longer need banks to keep or facilitate the transfer of our assets. When a bank is involved, some transactions must be processed during business hours, which is not the case with a blockchain, which operates 24/7.
Transferring assets is fast and secure with blockchain technology. For example, people are already using the blockchain to transfer ownership of NFTs (digital works of art). And this is only the beginning.
Ownership of real estate could also be securely recorded and transferred using blockchain technology. This would be another way to render central authorities redundant, as people wouldn’t need to register property deeds with local governments.
Smart Contracts
This is one of the most popular applications of blockchain technology. Smart contracts are automatically enacted when the parties involved meet the established conditions. For example, goods can be released automatically as soon as payment has been made.
Self-executing legal contracts recorded on the blockchain have massive potential to simplify and secure legal contract processes. Again, there is no need for a central authority or third party to verify that the contract’s conditions have been met.
Voting Systems
In the current political climate, a technological solution that could help prevent fraud in elections sounds like a godsend. Using blockchain for voting would mean that each vote could be securely tracked, and nobody could tamper with it. Once the technology is in place, it could save significant resources. For example, by eliminating the need for the collection and processing of paper ballots.
Digital IDs
Just as blockchain can be used to record crypto transactions securely, it can be used to record digital identifications. Companies like Microsoft are already experimenting with blockchain-supported digital identities.
Copyright Protection and Royalty Payments
Musicians, painters, and even software developers could use blockchain technology to register and manage their intellectual property and collect royalties. This would be more transparent than it is today because it would not require the involvement of intermediaries. These collect royalties in the name of creators and are paid a percentage for their services.
Medical Records
The applications of blockchain in the healthcare sector are varied. When it comes to storing medical records securely, the technology’s efficiency is unrivaled.
Blockchain 101
There is more to learn about blockchain, but we’ve covered the basics. When you think of blockchain, hopefully, you will be able to visualize a digital ledger made of one or more blocks. Each block contains transaction information and fully links all transactions in chronological order.
Since blockchain provides a digital, transparent, accurate, and permanent ledger at a reduced cost because it’s decentralized (you don’t pay someone to manage it). It is often used for the secure sharing of medical data, financial and real estate transactions, artist royalty tracking, global shipping tracking, and, of course, cryptocurrency exchange and money transfers.
Check our blog often to keep up to date with developments in blockchain technology and information about promising blockchain applications and cryptocurrency investments. Have questions? Feel free to contact your friendly GLI representative. We are here to help.