What is Blockchain?

What is blockchain?

While Bitcoin – the cryptocurrency that popularised blockchain – has been around since 2008, blockchain remains an oft-confused and misunderstood technology. Here, we dig into the details: what is blockchain, how it works, its benefits and its controversies.

Blockchain is best thought of as a distributable database (or ledger) that can be shared across a computer or group of computersโ€™ networked nodes or over a peer-to-peer network. Most commonly, blockchains are discussed in terms of how they facilitate cryptocurrency transactions, but they’re also used in supply chain management, digital identification, cybersecurity and logistics – to name but a few use cases.

Blockchains are especially good at ensuring data integrity. The information stored in a blockchain database is immutable, which means that it cannot be changed or deleted without an โ€œagreementโ€ from the network. The data is stored in blocks, which are connected through cryptographic means into a chain (hence the name blockchain).

All types of information can be stored in this way, but the most common form is financial, making it ideal for tasks such as making or receiving payments, tracking orders and record keeping.

How does a blockchain work?

The simplest way to understand how a blockchain works is to think of a database or a spreadsheet, such as Microsoft Excel. Both can be used to store information, but a blockchain differs in how it stores data, structures it, and how that info can be accessed.

Data stored in a blockchain is stored in blocks alongside other records. These records are permanently chained to each other and encrypted through unique hashes, which are unchangeable. If new data is entered, it does not overwrite old records – instead, it gets chained to existing records, creating a visible history and allowing any changes to be viewed.

Prior to new information being stored, the nodes of a network (the connected computers) have to verify and confirm the validity of the new data based on a series of consensus mechanisms.

Consensus mechanisms are a protocol that helps the nodes of the network agree (or come to a consensus) on whether a single set of data is legitimate or not. They are best thought of as a verification standard.

A simple example of a consensus mechanism at work is a transaction being processed trying to use previously spent funds; since the blockchain has a stored history of transactions, it would show those funds were no longer available. The network would not be in consensus and deny the transaction.

What are the benefits of a blockchain?

Traditional databases are vulnerable to fraud and malicious attacks, making them a less ideal means of storage for sensitive information. Since transactions on a blockchain are approved by a multitude of other devices (in most cases, numbering in the thousands), in an automated process, they are less vulnerable to human error and inaccuracy. Other benefits of a blockchain include:

  • Reduced costs: Blockchains can remove fees from a transaction, as they do not require third-party verification. For instance, every time you use a credit or debit card to make a purchase, the proprietor is charged a transaction fee from the issuing financial institution. These costs can be greatly reduced via blockchains.
  • Decentralization: Information stored on a blockchain is not kept at a central location; it is shared across a series of networked computers. This makes data more difficult to manipulate, helping to ensure data integrity.
  • Transactions: Transactions that occur through traditional means can take several days to settle or resolve. For instance, depositing a check after hours might mean you have to wait a few days to see an updated balance or have the ability to use those funds. Blockchains operate continuously, on a 24/7 premise, making it possible for transactions to resolve in minutes, even across different regions and time zones.
  • Increased security: Due to the immutable nature of stored data and transactions and the requirement for consensus among networked devices, blockchains offer an enhanced level of security over traditional databases and ledgers. Not even a system or database administrator can remove or alter a transaction record. Blockchains also use cryptography, decentralization, and consensus, adding additional security layers and removing the possibility of a single point of failure.

Controversies around blockchain

There are also controversies around blockchain. Part of its appeal is that it sits independent of governments, but that means it’s hard to govern. We’ve seen high-profile failures for Bitcoin exchange platforms such as Mt. Gox and FTX (run by Sam Bankman-Fried).

Questions remain about its environmental impact, too, and while it has seen sporadic success outside of cryptocurrency – perhaps most famously, Walmart using blockchain to solve its supply chain challenges – this remains its strongest area by far.

What’s also striking from our series of interviews with innovators in blockchain is their different views. Bart de Bruijn, Co-Founder and Director of EstateX, told us that “blockchain is set to disrupt industries that rely on middlemen, outdated systems, or lack transparency”, while Lea Petrรกลกovรก, CEO at Vexl was equally vehement in her opposing view: โ€œthere are no truly promising non-financial applications of blockchainโ€.

But let’s remember that this is a relatively young technology. While its theoretical roots date back to the 1980s, it has only been in active use for less than two decades. The next two decades will be extremely interesting to watch.

James Payne
James Payne

James Payne is a writer, editor and content strategist with more than 20 years of experience. In addition to writing about all things tech, in his free time James writes adult horror short stories and novels, as well as fantasy novels and fiction for young adults.