What if you could bypass powerful banks and instantly send money across the world with almost zero fees? Or what if you could find out the entire journey of how a tomato arrived at your supermarket – down to the field it was harvested from and whether it’s pesticide-free like the label claims?
That technology exists. It’s called ‘blockchain.’ This is the tech that powers cryptocurrencies like Bitcoin and Ethereum and has a limitless range of applications that could disrupt every global industry.
Blockchain matters, and it’s more important than ever to understand what it is and what it means for our future. Let’s get started.
What is a blockchain?
A blockchain is a record of information. To be more precise, it’s a digital ledger that is immutable and distributed. Since the records cannot be altered and are shared among the entire network, blockchain preserves data integrity and security.
Blockchains can store any kind of data, whether tangible or intangible. They’re popularly used to record cryptocurrency transactions. However, they can also track things like supply chains, property records, or voting records.
How is blockchain technology different from a traditional payment ledger?
Blockchain technology ensures that a record of transactions is accurate, transparent, and decentralized. Unlike a traditional payment ledger, a public blockchain ledger cannot be tampered with.
Even if there is an error, it cannot be altered without a network majority consensus. Instead, a new transaction will be added so that a transparent, permanent record of all actions is recorded.
While institutions like banks keep their ledgers private, public blockchains are decentralized and available for all to see. Moreover, since no single party controls the ledger, blockchains are independently verifiable and increase trust in the system.
How is it different from Bitcoin or other cryptocurrencies?
Although many people associate blockchains exclusively with cryptocurrency, they are not interchangeable. Bitcoin is a form of digital currency. Blockchain is the technology that digital currencies are built upon, and it has many other use cases outside of cryptocurrency.
Blockchains are a core feature of the decentralized platforms that require cryptocurrencies to interact with the network. The blockchain forms the consensus mechanism that keeps track of all the transactions that occur. These transactions are conducted using cryptocurrency tokens, which transfer value or serve different utilities such as digitizing asset ownership.
Blockchain key terms and elements
To get a handle on blockchain technology, you need to understand some key terminology.
· Block
Blocks group together sets of information, such as transaction data. Individual blocks are then linked together to form the blockchain. Each new block of data is added to the end of this chain, which establishes an irreversible timeline and immutable ledger.
· Node
A node is an electronic device that connects to the network of blockchain validators. Nodes help guarantee the decentralization of a blockchain. Individual nodes keep a copy of the chain and verify that each new block added to the chain is legitimate. Since a majority of nodes are required to reach a consensus on the validity of a block, it makes it extremely difficult to introduce false information.
· Token
Tokens are digital assets built onto an existing blockchain. They are distinct from cryptocurrencies, which are the native assets on their blockchains. For example, the cryptocurrency, ETH, is the Ethereum blockchain’s native token. However, many other tokens utilize the Ethereum blockchain as well, such as LINK or DAI. Each token is built to serve a specific purpose for use on its own platform.
· Miners
Each new block must be ‘mined’ before it can be added to a blockchain. Miners use special hardware and software to solve incredibly complex mathematical problems. When a miner solves this problem and creates a new block added to the chain, they receive a financial reward. Different cryptocurrencies have different mining rates. In the case of Bitcoin, a new block is mined every ten minutes.
· Ledger
A blockchain is also referred to as a digital ledger. Like a bank ledger, it holds all of the records of transactions on a particular network. However, unlike a bank ledger, the data is stored by many independent parties verifying the information to prevent it from being altered.
· Sidechain
A sidechain is a blockchain linked to another blockchain – the ‘main chain.’ Sidechains allow assets from the ‘main chain’ to be securely used on a separate chain before moving back to the ‘main chain.’ This mechanism makes blockchains more efficient and scalable.
How does blockchain work?
Blockchain works like bookkeeping. It’s a complete record of transactions. However, unlike standard bookkeeping, these transactions are verified by an extensive network of external validators that confirm each transaction and write it into a permanent, sometimes public, ledger.
For example, in terms of Bitcoin, here’s a simplified explanation of how blockchain works.
1. A new transaction is initiated.
2. The transaction is distributed to a network of computer validators, also known as nodes. A small fee is paid to the network to confirm the transaction.
3. This network uses complex algorithms to reach a majority consensus regarding the transaction’s validity.
4. Several verified transactions are grouped into a block.
5. This new block is added to the end of the chain of previously validated blocks, establishing it as a permanent record.
Since no single actor can solve the challenge of validating a block more consistently than others, it’s almost impossible to force the blockchain to accept an entry that others disagree on.
Furthermore, it would take immense financial and physical resources even to attempt an attack on a network as large as Bitcoin. So, blockchains are considered one of the most secure technologies for verifying and storing data.
Types of blockchains
There are several different types of blockchain networks. The two most common are public and private blockchains.
Public blockchains
In a public blockchain, no permission is required to participate in the open, decentralized network. Essentially, anyone with an internet connection can access the network and participate in block creation and validation or read and write data on the public ledger.
For example, Bitcoin operates on a public blockchain. That means all transactions are published, and anyone can access these transaction details. You can even go back and view the very first block transaction ever recorded.
Private blockchains
As their name suggests, private blockchains are not accessible by everyone. A single organization controls who can participate in the network and maintain the ledger. Permission is required to gain entry to the network and view transaction data.
Enterprises often use private blockchains to perform high-speed, efficient local transactions or maintain secure databases.
Blockchain use cases
Blockchain became popular through its use in new monetary systems like cryptocurrency, but its potential extends far beyond financial assets. The technology is a reliable way of storing any kind of transaction data, so we’ll likely see blockchain integrated into almost every industry in some way or another.
Here are the most common use cases for blockchain technology.
· Cryptocurrency
Blockchain is the foundation for cryptocurrencies like Bitcoin or Ethereum. Cryptocurrency tokens are used to send money across borders, buy goods and services, and perform functions on different crypto platforms. All of these actions can be executed without involving any intermediaries like banks. The blockchain makes this vast digital currency network possible and stores irrefutable records of each transaction on a public ledger.
· Banking
Even though cryptocurrencies were developed to reduce the need for banks, the banking system still has many use cases for blockchain technology itself. Blockchain makes it possible to process and track fiat currency transactions quickly and securely, especially outside of business hours.
· Asset transfers
Due to its trustless consensus mechanism, blockchain facilitates the transfer of digital and physical assets. Digital assets like NFTs would be easy to duplicate otherwise, but public records on the blockchain ensure that original ownership is verifiable. In terms of physical assets, such as automobiles, reliable history of ownership and previous sales could be established.
· Smart contracts
Smart contracts are one of the most revolutionary developments resulting from blockchain technology. These digital contracts are self-executed once the different parties have satisfied all of the predetermined conditions. As a result, smart contracts have potential applications for anything from insurance to the music industry. For example, royalties could be immediately credited to a musician upon the use of their song in a commercial.
Blockchains outside of cryptocurrency
Aside from cryptocurrency, blockchain has a vital role to play in many other industries and applications. Here are just a few examples:
· Supply chain monitoring
Global supply chains contain enormous amounts of data, and it’s complicated to track it all. Blockchain integration would make it possible to trace goods from origin to destination. For example, regulatory bodies could locate the source of contaminated foods or verify claims such as ‘organic’ and ‘fair trade.’
· Elections
By integrating blockchain into a voting system, votes could not be tampered with. As a result, human error and bad actors would all but be eliminated from the counting process, ensuring accurate and immediate voting results.
· Healthcare records
Instead of being held by private institutions, healthcare records could be recorded on the blockchain. Patients would be sure that their records are accurate, secure, and could be accessed privately through the use of private keys.
· Real estate
Blockchain allows both buying and selling parties to verify each other. All records of sales and ownership would be recorded securely on the blockchain, eliminating the possibility of future disputes.
· Electricity smart grid
Blockchain enables a mechanism of automatically and autonomously distributing power to individual points on the power grid. This increases efficiency by adjusting to the needs of the grid on a real-time basis.
Benefits of blockchain
Blockchain is a complex technology, but its power to simplify and optimize different processes is immeasurable. Here are some of blockchain’s most significant benefits:
· Lower transactional cost due to elimination of third-party intermediaries
· Immutable records cannot be altered, which limits the potential for human error
· Decentralized, peer-to-peer network ensures a high level of security
· Efficient transactions can occur 24/7 without bank involvement
· Transparent public records allow anyone to access information
· Trustless system facilitates secure interaction between different parties, even if they don’t know each other
· Universal banking for those without access to traditional financial institutions
· Privacy and anonymity is preserved for individuals, even though transactions are public
Disadvantages of blockchain
Despite the massive potential for blockchain technology adoption, there are still some potential drawbacks. These include:
· High energy consumption due to the electricity requirements of mining and maintaining blockchain networks
· Limit on transactions per second presents scalability challenges
· Potential for illegal activity due to privacy and anonymity
· Personal responsibility of digital assets presents a risk to individuals, as there is no centralized authority that can reverse errors or protect against losing a private key
· Regulation around cryptocurrencies is constantly changing and is potentially a hindrance to greater adoption of blockchain technology
Future of blockchain technology
There are so many applications for blockchain technology, and more use cases are being developed every day. In the future, every industry will likely be changed in some way by blockchain integration.
Blockchain has already demonstrated that it can disrupt global financial systems. Cryptocurrency is steadily moving towards mass-market adoption and has revolutionized the investment sector and borderless digital payment systems. In the future, machines may have their own crypto wallets and initiate commercial transactions autonomously.
Blockchain adoption has the potential to replace all middlemen, making every transaction more efficient, more secure, and more accurate. Perhaps you’re most excited by the financial opportunity of cryptocurrencies. Or maybe you’re intrigued by the flexibility of smart contracts. Either way, blockchain technology is a game-changer that will only be a bigger part of our lives in the future.