What Is Blockchain? Here's Everything You Need to Know

Trust is like a plant. It needs to be nurtured and tended to grow and flourish.

People have always exchanged goods and services to ease trade. The risk here is that buyers don't know who they’re buying from, and sellers don't know who they’re selling to. However, in traditional trade, we cut the risk of fraud by using cash as it has no identity.

But with the arrival of counterfeit currency and the push toward a digital economy, most transactions take place online. When it comes to transferring money online, we all want to ensure our transactions are secure and our information is safe.

In a world of increasing digitization, trust is the new gold. But how can we trust what we can't see?

Blockchain is a decentralized network of trust that enables new ways for people and organizations to interact. Distributed ledger technology (DLT) like blockchain transforms how we transact, record, and share information. The structure, security, and privacy-enhancing attributes of blockchain make it a potential game-changer for activities of all shapes and sizes.

With the rise of blockchain platforms, the word itself is getting a lot of airtime lately. But what does it mean? And more importantly, how do you know if this "blockchain" thing is right for your organization?

Blockchain is an important technology because it fills the need for an efficient, reliable, and secure transaction system. Blockchain's novelty is that it ensures the accuracy and security of a data record and eliminates the need for a trusted third party.

In recent years, blockchain technology has become a hot topic of conversation, primarily among market leaders. While cryptocurrencies are just one use case for blockchain technology, this incredible medium also has major implications across the IT realm.

The technology's seemingly infinite uses generate interest in its ability to decentralize certain aspects of business structures. This includes financial services, property ownership, Internet of Things (IoT), voting systems, national identity systems, healthcare, food supply chains, and decentralized government services.

Blockchain explained

In our increasingly technology-dependent world, larger transactions occur over digital networks. These trades are susceptible to cyber crime since transactions tend to take a long time to complete. This is due to the need for a mediator that must confirm the action.

This is where blockchain thrives. Blockchain is distributed, decentralized, and peer-to-peer (P2P) monitored. Each transaction is immutable, meaning it's irreversible. Transactions are nearly immediate and recorded on the blockchain, but the identities of senders and receivers are virtually masked.

Simply put, this technology lets two parties participate in secure digital transactions without a third party. A blockchain is a ledger that records these events completely encrypted to protect users from cybercriminals.

Blockchain is also sometimes seen as a database. However, it differs significantly from traditional databases in terms of how it collects and handles information. Instead of maintaining data in rows, columns, tables, and files, blockchain stores data in blocks that are digitally linked together.

A blockchain gathers data in groupings known as "blocks" that store sets of data. Blocks have precise storage capacities and, when full, are closed and attached to the previously filled block. This presents a data chain known as the "blockchain." All further information that follows a newly added block is compiled into a newly built block and added to the chain after it's filled.

When deployed in a distributed model, this data structure creates an irreversible chronology of data. When a block joins the chain, it's assigned a precise timestamp.

The first notable application to effectively employ blockchain was the cryptocurrency Bitcoin. As a result, blockchain has become synonymous with Bitcoin and its equivalents, such as Dogecoin and Bitcoin Cash (BTC).

What is a blockchain platform?

A blockchain platform allows users to create novel services on the current blockchain infrastructure. One example is the Ethereum blockchain. Vitalik Buterin, a Russian-Canadian engineer, published a white paper in late 2013 introducing a platform that combines standard blockchain features with code execution. As a result, the Ethereum Project was conceived.

The Ethereum platform enables users to build software applications that can connect with one another on the network. Ethereum also has its own cryptocurrency called ether (ETH). Ethereum developers can build tokens to depict any type of digital asset, monitor who owns it, and use it according to a set of programming instructions. Music files, contracts, concert tickets, and even medical information are used as tokens.

Non-fungible tokens (NFTs) have lately gained popularity because of their diverse use. NFTs are one-of-a-kind blockchain-based tokens used to store digital content like video, music, or art. Each NFT can validate a piece of digital media's validity, history, and single ownership.

NFTs have exploded in popularity because they allow a new generation of digital producers to purchase and sell their works while receiving correct credit and a fair portion of the earnings. These are all built around the Ethereum technology and safeguarded by Ethereum network nodes.

Why is blockchain important?

Trust is a crucial component of any relationship. The ability to trust one another is the foundation on which we enter into deals and exchanges and how we expect others to fulfill for us to mutually benefit.

In an increasingly digital and digitized society where we often seamlessly transfer value through the internet, how can we trust what we cannot see? Today, people experience online threats such as identity theft, credit card fraud, and financial hacks. As such, the need for a network that allows us to transfer value in a trustless environment has become more apparent.

Since blockchain eliminates intermediaries and fully automates operations, it has the potential to save organizations money on IT and labor, accelerate e-commerce and accounting, and provide new streams of revenue. It can also help companies expand their user pools, reach users more effectively, and grow their world of partners and stakeholders.

The benefits of blockchain stem mostly from the trust it promotes and its built-in features, such as transparency, privacy, security, and data integrity. Trust allows users to engage with unknown parties, broaden markets, and increase demand for products and services, thus boosting their earnings.

In recent years, major organizations like IBM, Walmart, and Visa loudly declared flourishing blockchain implementations, giving the technology a second shot for business use. IT goliaths such as Amazon Web Services (AWS), IBM, Oracle, and SAP have thrown their support behind it wholeheartedly.

With the advancement in fintech, financial institutions and government central banks are exploring blockchain technology as a foundation for virtual currency exchange. It's also the foundation for smart contracts to transfer and preserve intellectual property rights in various industries, such as the legal and entertainment industries.

Indeed, several businesses are considering blockchain-based applications as a safe and cost-effective solution to create and manage a distributed system that retains records of all digital transactions. As a result, blockchain is rapidly seen as a solution for securely recording and exchanging data among numerous organizations.

History of blockchain

American engineer and cryptographer David Chaum first described a blockchain protocol in his 1982 dissertation "Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups". By 1991, Stuart Haber and W. Scott Stornetta were working on expanding the description of a chain of blocks secured using cryptography.

Their initial project included creating a cryptographically secure chain of blocks so no one could tamper with document timestamps. In 1992, they improved their system to include Merkle trees, which improved productivity and allowed them to collect more documents on a single block.

In 2008, a programmer or group operating under the alias Satoshi Nakamoto published a white paper proposing the blockchain paradigm, including the hash algorithm used to date blocks. Satoshi Nakamoto established a blockchain with the currency Bitcoin a year later, in 2009. No one knows for certain who Satoshi Nakamoto is to this very day.

Since then, interest in blockchain business applications has risen as technology evolves and blockchain-based software for enterprise users comes to market.

Features of blockchain technology

Blockchain technology has gained popularity in recent years. It remains one of the most promising innovations to date, despite the immense controversy surrounding it. While there are numerous pros and cons surrounding blockchain technology, one cannot deny that this innovation is undoubtedly unique.

Below are the basic features of this new technology.

Decentralization

In traditional finance, the system is entirely centralized. Customers give banks complete control of their assets, from personal documents to the assets themselves, and centralized networks store data in a single location. 

Blockchain, however, relies heavily on decentralization. 

Decentralized networks distribute data among several hubs with equal authority. Blockchain employs a decentralized P2P network, meaning everyone in the network performs the same function and has the same degree of control. 

Centralized networks frequently use a client-server architecture with a defined hierarchy of responsibilities and ultimate authority: one central provider rather than a larger number of receivers. In general, client-server architecture is significantly slower and more prone to failure than dispersed P2P networks.

Decentralized systems are essential because they provide permissionless ownership, allowing users to access and create on the platform. Consensus is used to make decisions, implying that transactions are accepted by a group of nodes rather than an individual node.

The vulnerability of centralized networks to attacks and outages is a significant drawback. If one storage area is tampered with, it impacts all data stored in the database. If a centralized database goes down, nobody can access data stored in that location.

Decentralization separates data among distributed nodes. This ensures that prospective hacks or breaches don’t affect the entire system at once. Even if one node fails, it doesn’t affect the remainder of the network, continually serving its users. As a result, decentralized data transit has a higher level of integrity than data in a centralized system.

Immutability

Since blockchain is immutable, it’s hard to tamper with once a link between data blocks is created. The different blocks in a network are linked by unique identities, making it impossible for malicious agents to tamper with a single block without disrupting the blockchain.

It's also important to note that immutability doesn’t imply that the data contained within a blockchain is unchangeable. However, it's challenging to tamper with data without disrupting the system. The cryptographic signatures of a data block link one data block to another, forming a complicated chain. The integrity of a blockchain is heavily reliant on the nodes on the network.

Transparency

One of the most intriguing aspects of blockchain technology is its ability to be both private, even anonymous, yet visible for anyone to view and use. Blockchain is private and safe, but it's also transparent. Although the stored data and identities are practically impossible to tamper with, all data pertaining to copies of the record of transfers and transactions is visible to everyone in the network.

Blockchain technology is also the foundation for smart contracts. Smart contracts allow users to securely exchange and transfer funds, shares, assets, and anything with a monetary value.

Since blockchain technology is distributed, it eliminates the need for a third party or mediator. All transactions take place directly between the sending and receiving parties. Transparency is essential for smart contracts because it solves the problem of trust between parties that may not know each other. Issues like trustworthiness, incorruptibility, and traceability are becoming increasingly relevant today. Blockchain is a powerful technology emphasizing the future of data transfer.

How does blockchain work?

A blockchain is essentially a ledger of transactions. These transactions can involve the transfer of money, commodities, or secure data, such as a grocery purchase or the issue of a government ID number. In essence, it's similar to a distributed database.

Imagine a massive spreadsheet that operates on millions of devices. Since it's open-source, anyone can edit the source code and see what's being changed. It's fully peer-to-peer, and no significant intermediaries are required to validate or resolve transactions.

When a transaction is recorded in the blockchain’s publicly shared ledger, it’s theoretically tamper-proof.

A transaction is also recorded quicker than ever because no third party must verify it. The transactions are interdependent. Each transaction and independent nodes verify the previous transaction, preventing fraudulent requests from altering the blockchain or completing the process. Removing the middleman in this process can save businesses money, as well.

The data block and transaction verification procedures make it mathematically impossible to alter data or impair transactions on a blockchain. There’s no central body for hostile actors to attack and no single participant who can make data private, rewrite the rules unilaterally, and whose failure may bring the entire network down. Data redundancy and openness are provided via numerous copies. This is how blockchain achieves its immutability: the ledger is trustworthy because it’s irreversible and tamper-proof.

Cryptographic keys consist of two elements: a private key and a public key. These keys aid in the completion of successful transactions between two parties. Each person possesses these two keys, which they use to generate a secure digital identity reference. 

The essential component of blockchain technology is its secure identification. This identification is known as a digital signature and is used for authorizing and managing transactions.

The digital signature is integrated into the P2P network. The members act as regulators and use the digital signature to obtain agreement on transactions and other problems. It’s validated mathematically when they approve a transaction, resulting in a successful secured transaction between the two network-connected parties.

Structure of blockchain

Blockchain is made up of three key elements: blocks, nodes, and miners. Let's look at each three in detail.

Block

A block is a data structure that stores a series of transactions dispersed to all network nodes. Blocks contain groups of valid transactions that are hashed and encoded. Every blockchain has a variable block size, time, and triggering event. 

The block includes a digital signature, a timestamp, and other crucial and relevant data. The identity of the specific participant in the transaction is not included in the block.

This block is then broadcast to all network nodes, and the transaction is fulfilled when the correct person uses their private key and matches it with the block.

Node

Decentralization is an integral function of blockchain technology. A single computer or entity cannot run the entire chain. Instead, a distributed ledger is executed across the chain's nodes. 

A node is a computing device that runs blockchain software and aids in transmitting data throughout the blockchain network. Nodes include laptops, phones, routers, and other devices. Anyone can download and operate blockchain software for free.

Every node has its own copy of the blockchain. The network must algorithmically validate every freshly mined block to maintain, trust, and verify the chain. As blockchains are open, every transaction in the ledger is quickly confirmed and inspected. Each participant is assigned a unique alphanumeric ID number which is used to track their transactions.

Miner

Mining is the process through which miner nodes add new blocks to the chain, and when there are multiple miners it is known as pool mining. Though the phrase is connected with digital currency such as Bitcoin, it also refers to other blockchain systems.

To choose legitimate transactions to create a new block, a miner must always operate a full node. Miners cannot identify whether proposed transactions are fair based on the current blockchain's transaction history without a full node since it doesn’t have access to the whole blockchain history. As a result, a miner is also a full node.

Every block has a specific nonce and hash, but it also refers to the previous block’s hash in the chain. This makes mining a block difficult, especially on big chains.

Miners employ custom software to solve the exceedingly complicated arithmetic challenge of generating an acceptable hash. As the nonce is only 32-bits long and the hash is 256-bits long, users must mine approximately four billion nonce-hash combinations before the correct one is identified. When this occurs, miners receive the golden nonce, and their block is added to the chain.

Modifying any previous block in the chain demands re-mining not only the revised block but all subsequent blocks. This is why manipulating blockchain technology is tough. Hence, identifying golden nonces takes a significant amount of time and computational power. When a block is successfully mined, the change is acknowledged by all of the network's nodes and the miner is monetarily compensated.

Blockchain transaction

Blockchain operates in a multistep process, which is summarized as follows:

• A transaction is entered by an approved participant and is validated by the technology. For example, two parties, A and B, can exchange a unit of value like digital currency or a digital asset and initiate the transaction.
• That operation generates a block that reflects the particular transaction or data. The transaction is packaged with other pending transactions to create a block.
• The block is then sent to the blockchain network of participating devices or nodes.
• The participating nodes evaluate the transactions and through mathematical calculations determine whether they are valid based on agreed-upon rules. When consensus is achieved the transactions are verified. Once verified, the block is then added to the current blockchain. Nodes on public blockchain networks are known as miners. They are frequently compensated for their activity, often through a mechanism known as proof of work (PoW).
• Each verified block of a transaction is time stamped with hash details.
• The update is transmitted across the network, completing the transaction. The unit of value moves from the account of party A to the account of party B.

Individual transactions and blocks are the two types of entries in a blockchain ledger. The first block comprises a header and data pertaining to transactions that occurred during a specific time period. 

The timestamp of the block is required to contribute to the generation of a hash identifier. Following the creation of the initial block, each successive block in the ledger leverages the previous block's hash to compute its own hash.

A new block's legitimacy is confirmed by a computational process, known as consensus, before adding it to the chain. At this stage, a proportion of nodes must agree that the new block's hash is calculated correctly. Consensus guarantees that all instances of the distributed ledger on the blockchain network are in the same state.

Once a block is added, it's addressed in succeeding blocks, but no malicious party can alter the data. If someone tries to swap out a block, the hashes for preceding and future blocks will also change, causing the ledger's shared state to be disrupted. 

When consensus is no longer feasible, other computers in the network are notified that a violation has emerged, and no new blocks are considered valid until the problem is resolved. Typically, the error-causing block is deleted and the consensus process restarts.

Types of blockchain

There’s a lot of confusion and speculation when it comes to the world of blockchain. Many people don't know that many different types of blockchains exist and that it gives them all sorts of advantages and disadvantages. A blockchain network is built in a variety of ways.

Private blockchain

Private blockchains run on closed networks and are best suited for private organizations. Businesses can leverage them to tailor their accessibility and authorization choices, network characteristics, and other critical security features. A single authority manages a private blockchain network. It is deployed behind a company firewall and even hosted on-premises.

Public blockchain

A public blockchain is one in which anyone can join and engage. A consensus technique is used to validate the accuracy of information. Proof of stake (PoS) and proof of work are commonly applied consensus approaches. 

Bitcoin and other cryptocurrencies sprang from public blockchains, which also aided in spreading DLT. Public blockchains also eliminate some obstacles and issues, such as the centralization of authority.

The disadvantages include the need for a large amount of computational power, almost no transaction privacy, and poor security. These are critical concerns for business use cases.

Permissioned blockchain

Permissioned blockchain networks, also known as hybrid blockchains, are private blockchains that grant privileged access to authorized individuals. Companies that create a private blockchain often make a permissioned blockchain network to get the best of both worlds. It offers a better structure when determining who can join the network and which transactions can be made.

It's worth noting that public blockchain networks can become permissioned as well. This limits who is allowed to join the network, as participants must have an invite or permission to participate.

Consortium blockchain

Consortium blockchains, like permissioned blockchains, feature both public and private components. However, many companies operate a single consortium blockchain network. The upkeep of a blockchain is shared among multiple entities. These pre-selected institutions control who can submit transactions and access information.

A consortium blockchain is suited for business situations where all parties are approved and carry responsibility for the blockchain network. Although these blockchains are more challenging to set up at first, they can provide more security once operational. Furthermore, consortium blockchains are ideal for collaboration across various enterprises.

Blockchain vs. Bitcoin

The world is tumbling headlong into blockchain mania.

Some people believe blockchain is synonymous with Bitcoin, but that's not the case. These two terms are often used interchangeably, but they're not quite the same thing. They have a few stark differences that make them unique, individually powerful, and aid businesses in different capacities.

Satoshi Nakamoto conceived Bitcoin as a form of unregulated cryptocurrency. It was developed to bypass government currency regulations, simplify internet transactions by eliminating third-party payment mediators, and create a decentralized blockchain economy.

Bitcoin transactions are maintained and processed via a decentralized system on an open, public, and anonymous P2P network. Blockchain is the underlying technology that keeps the Bitcoin transaction record up to date.

The blockchain that enables Bitcoin was designed exclusively for cryptocurrency. That's one of the reasons it took this long for people to acknowledge that businesses could apply blockchain technology in other areas. The technology was extensively updated to meet the criteria set by enterprises. 

There are three critical differences between the Bitcoin blockchain and a blockchain geared for business.

1. Bitcoin usage is flourishing because of its anonymity. Anyone with access to the Bitcoin ledger can view every activity, but the account details are a random string of numbers. But businesses must comply with know your customer (KYC) and anti-money laundering (AML) regulations that require them to know who they are interacting with.
2. There is a continuous debate regarding whether a token-free shared ledger, or a blockchain without cryptocurrencies, has value. Blockchain is now leveraged for far more than simply bitcoin. Tangible goods like vehicles, real estate, and processed foods are all fair game, as are intangible assets like bonds, private equity, and investments. Blockchain companies, such as Everledger, employ blockchain technology to trace the origin of luxury items to reduce fraud, record manipulation, and increase clarity in global supply chains.
3. Enterprise blockchain sets a consensus protocol through selective endorsement rather than mining. It's more about regulating who checks transactions, much like how business is done now. This is in contrast to Bitcoin, where the entire network must cooperate in verifying transactions.

Advantages of blockchain

Blockchain technology has received a lot of hype the past couple of years as one of the most awaited technologies globally. However, there are still some people whose idea of blockchain is limited to bitcoin, ethereum, and other cryptocurrencies. Very few know that blockchain is much more than just cryptocurrencies.

Besides being an innovative technology that can boost many sectors, blockchain also has its own advantages.

• Trustless: Since blockchain is irreversible, it can automate trustworthy transactions between parties who don’t need to know one other. Transactions are only carried out when both parties meet the predefined parameters.
• Improved security: All network participants must agree on data accuracy, and all confirmed transactions are immutable since they are permanently recorded. Deletion of a transaction is not possible, not even by a system admin.
• Lower cost: In the traditional financial system, intermediaries such as banks are paid to handle transactions. The blockchain removes the middleman and lowers costs, with some systems even repaying fees to miners and stakeholders.
• Efficient transactions: Transactions processed by a central authority sometimes take several days to settle. Unlike financial institutions, which only function during business hours five days a week, blockchain operates 24/7,365 days a year. Transactions are executed in just ten minutes and are declared secure after only a few hours. This is especially important for cross-border transactions, which often take substantially longer due to time zone differences and all participants must verify payment processing.

Disadvantages of blockchain

There are some disadvantages of blockchain we can’t deny. While we believe that every coin has two sides, in this case, it's more like a double-edged sword. 

Blockchain is not perfect, but it's here to stay. So, let’s consider the flaws of blockchain.

• Regulation: Many people in the cryptocurrency community are concerned about government regulation of crypto. While it's becoming increasingly difficult, if not impossible, to stop a blockchain system like Bitcoin, governments could conceivably make it illegal to hold cryptocurrency or operate in their networks.
• Environmental impact: Blockchain networks, such as Bitcoin, consume a great deal of electricity to validate transactions, which raises environmental concerns. For example, a recent study found that bitcoin mining is jeopardizing China's climate change aims.

Blockchain applications

Now, let's get into some of the most common applications of blockchain today. These include cryptocurrency, healthcare, voting, music, and the internet of things.

Cryptocurrency

Blockchain is used in several different kinds of transactions, the most common of which is Bitcoin. Bitcoin is a P2P electronic cash system. Owners choose a preferred blockchain “wallet” in the form of installed software or a third-party-hosted web platform. This stores, receives, and sends currency to others in the form of unique, coded addresses.

Transactions are performed within encrypted blocks on the internet, with new blocks constantly being generated to meet the growing need. Bitcoin transactions are recorded and timestamped in a blockchain, which acts as shared ledgers for these transactions. While Bitcoin is the first use of blockchain, there are so many more uses for this piece of technology.

Healthcare

One of the most essential elements about blockchain is the encryption it offers for digital transactions. An industry like healthcare, which requires extreme privacy for records, can significantly benefit from this added level of security. Blockchain helps verify prescriptions and the supply management of pharmaceuticals.

Voting

Blockchain can completely change our understanding of voting. Integrating blockchain into our voting processes means we’d hear a lot less about voter fraud accusations. 

When a vote is recorded in the blockchain, it can't be deleted or changed without evidence of tampering. Each of these entries would have its own unique lock and key attached to it, which authorities can use to authenticate a voter's identity. That means foul play would be virtually impossible.

Music

The introduction of music streaming has made ownership rights and royalty distribution prominent issues in the music industry. Blockchain can help to create a complete and accurate decentralized database of music rights.

This ledger would provide transparent transmission of artist royalties. Studios would pay musicians with digital currency according to the specified terms of the contract.

Internet of things

As it turns out, the internet of things (IoT) and blockchain are a match made in heaven. IoT is the term for embedding the internet in everyday devices like watches, televisions, and phones. Doing so makes IoT devices capable of sending and receiving data.

IoT devices are slowly infiltrating our homes under the pseudonym of intelligent appliances, presenting new security risks. Blockchain systems add an extra level of security to these appliances.

Let's say you have a smart washing machine. It could send a text message straight to your phone, notifying you that your load of laundry is done. There are many benefits to this, including the ability to control appliances from home and lower your energy bill. Blockchain allows that remote ownership to stay secure.

The power of blockchain

Blockchain is here to stay.

Industry leaders herald blockchain technology as revolutionary. The deployment of a blockchain can help businesses become more innovative, reduce costs, and remain secure from cyber attacks.

The decentralization of data and assets enables the creation of new ecosystems that serve customers without bearing unnecessary costs or engaging in rent-seeking behavior. At the same time, it helps incumbents like banks and brokerages improve their services by reducing costs and building better products.

These benefits make blockchain a unique platform for innovation and entrepreneurship and a promising tool to help solve major challenges such as climate change, sustainability, and financial inclusion.

Interested to know more about crypto? Learn how cryptocurrencies are changing the world of finance.