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.
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.
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.
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.
To get a handle on blockchain technology, you need to understand some key terminology.
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.
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.
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.
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.
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.
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.
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.
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.
There are several different types of blockchain networks. The two most common are public and private 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.
As their name suggests, private blockchains are not accessible to 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 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.
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.
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.
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, a reliable history of ownership and previous sales could be established.
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.
Aside from cryptocurrency, blockchain has a vital role to play in many other industries and applications. Here are just a few examples:
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.’
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.
Instead of being held by private institutions, healthcare records could be recorded on the blockchain. Patients would be sure that their records are accurate, and secure, and could be accessed privately through the use of private keys.
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.
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.
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:
Despite the massive potential for blockchain technology adoption, there are still some potential drawbacks. These include:
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.