Updated: Jan 13
What is blockchain?
A blockchain is a special kind of database where data can only be added (and not removed or changed). True to its name, a blockchain resembles a chain of blocks – these are what we call the chunks of information added to the database. Every block holds a pointer back to the previous one and generally contains some combination of transaction information, timestamps, and other metadata to confirm its validity.
As they’re linked in this manner, entries cannot be edited, deleted or modified in any way, as this would invalidate all of the blocks that follow them.
How does a blockchain work?
A blockchain may all appear somewhat underwhelming at this point – you may be wondering what kind of advantage this system offers over a regular spreadsheet. Where blockchains thrive is in allowing users to coordinate around a shared source of truth, without necessarily trusting each other. With a distributed network, there is no single party that can hijack a well-built blockchain.
To run and independently verify the state of a blockchain, a user must download specific software. Once up and running on the user’s machine, this software interfaces with instances on other machines, with the purpose of uploading/downloading information (such as transactions or blocks). A new user downloads a block, check that it was created within the rules of the system, and relay this information to peers.
What we now have is an ecosystem that can be made up of hundreds, thousands, or tens of thousands of entities that all run and synchronize an identical copy of the database (we call them nodes). This renders it highly redundant and available around the clock.
How is information added to a blockchain?
A blockchain's integrity is undermined if false financial information can be recorded. At the same time, there is no administrator or leader in the distributed system that maintains the ledger – so how do we ensure that participants are acting honestly?
Satoshi proposed a Proof-of-Work system, which allowed anyone to propose a block to append to the network. To propose a block, they must sacrifice computational power to guess at a solution set out by the protocol (this involved repeatedly hashing data to produce a number that falls below a particular value).
We call this process mining. If the miner correctly guesses the solution, the block they had constructed (made up of unconfirmed transactions sent to them by peers) would extend the chain. As a result, they would receive a reward denominated in the blockchain’s native token.
Hashing with a one-way function means that given the output, it is virtually impossible to guess the input. But given the input, it is trivial to verify the output. In this way, any participant can verify that the miner has produced a ‘correct’ block, and rejects those that are invalid. In this case, the miner receives no reward, and has wasted capital in trying to forge an invalid block.
In cryptocurrency systems, a reliance on public/private key cryptography also ensures that parties cannot spend funds that they do not own. Coins are tied to private keys (known only to the owner), and only a valid signature certifying their movement allows them to be spent.
Proof-of-Work is the most tried-and-tested scheme for achieving consensus amongst users, but it is by no means the only one. Alternatives such as Proof-of-Stake are increasingly being explored, although they have yet to see proper implementation in their true form (though hybrid consensus mechanisms have been around for some time).
Who invented blockchain?
The basic idea behind an immutable chain of data can be traced back to the early 90s. Researchers W. Scott Stornetta and Stuart Haber published a paper entitled How to Time-Stamp a Digital Document, which discussed efficient practices for timestamping files such that they could not be edited or otherwise tampered with.
Stornetta and Haber’s approach was imperfect, however, and still required trust in third parties to implement. Blockchain technology incorporates innovations from other computer scientists, and Satoshi Nakamoto is credited as the father of the system we described in previous paragraphs.
Interested in learning more about blockchain history? Read our article on the History of Blockchain.
What can blockchains do?
Cryptocurrency was the tip of the iceberg. Many saw the potential for decentralized computing following the advent of decentralized money. Just as first-generation blockchains like Bitcoin introduced a shared database of transactions, second-generation offerings like Ethereum brought about smart contracts. These are programs that run atop of blockchains, to manage the conditional movement of tokens.
With smart contracts, no central server runs the code, meaning that the central point of failure at the hosting level is disintermediated. Users can audit the software (given its public availability), and developers can design contracts in such a way that they cannot be shut down or modified.
Some applications for blockchains may include:
Cryptocurrencies – digital currencies are a tremendously powerful medium for wealth transfer with no single point of failure, no gatekeepers, and no middlemen. Users can send and receive funds to peers around the globe within a fraction of the time (and often at a fraction of the cost) that it would take for a bank transfer to settle. Coins cannot be confiscated, and transactions cannot be reversed or frozen.
Conditional Payments – Alice and Bob do not trust each other, but they wish to make a bet on the outcome of a sports match. Both send 10 ETH to a smart contract, which is fed data via an oracle. At the end of the match, the contract assesses which team has won, and pays out the 20 ETH to the winner.
Distributed Data – blockchains face some scalability issues, but they can integrate with distributed storage mediums for file management. Access controls can be managed through a smart contract, whereas the data itself is hosted in an off-chain container.
Securities – though they introduce a degree of counterparty risk, blockchain-based security tokens are thought to be a much-needed improvement to the financial sector. They inject fresh liquidity and portability into today’s security space and allow for the tokenization of assets (such as property or equity).
What is blockchain used for?
Blockchain technology caters to a vast range of use cases.
Supply chains: efficient supply chains are at the core of many successful businesses and concern themselves with the handling of goods from the supplier to the consumer. The coordination of multiple stakeholders in a given industry has traditionally proven difficult, however. Using blockchain technology, an interoperable ecosystem that revolves around an immutable database could bring new levels of transparency to innumerable industries.
Gaming: gamers are at the mercy of the companies that control the servers. There is no real ownership insofar as the end-user is concerned, and in-game assets exist solely within the parameters of a given title. By opting instead for a blockchain-based approach, users would own their assets (in the form of fungible/non-fungible tokens) and gain the ability to transfer them between games or markets.
Healthcare: the transparency and security of blockchain technology make it an ideal platform on which to store medical records. The medical landscape (made up of hospitals, clinics, and other health service providers) is incredibly fragmented, and a reliance on centralized servers leaves sensitive information in a vulnerable position. In cryptographically securing their records on a blockchain, patients maintain their privacy, while being able to trivially share the information with any institution that taps into a global database.
Remittance: sending money internationally is a hassle with traditional banking. Fees and settlement times make it both expensive and unreliable for urgent transactions, due chiefly to a convoluted network of intermediaries. Cryptocurrencies and blockchains eliminate this ecosystem of middlemen, and a range of projects are currently harnessing the technology to allow for cheap, rapid transfers.
Digital identities: the world is sorely in need of an identity solution for the digital age. Physical identities are susceptible to counterfeiting and are unavailable to many individuals. A so-called ‘self-sovereign identity’ would be anchored in a blockchain ledger and tied to its owner, who could selectively reveal information about themselves to third parties, without sacrificing their privacy.
The Internet of Things: some speculate that the growing list of internet-connected physical devices could be significantly augmented with blockchain technology, both in home and industrial settings. It’s thought that the proliferation of these devices will require a new economy of ‘machine-to-machine’ (or M2M) payments, which necessitates a system capable of high throughput for micropayments.
Governance: given that distributed networks implement their own form of regulation, it’s unsurprising that they may have applications in disintermediating governance processes at local, national, or even international levels. Blockchain governance ensures that all participants can be involved in decision-making, and provides a transparent overview of which policies are being implemented.
Charity: charitable organizations are often impeded by limitations on how they can accept funds. ‘Crypto-philanthropy’ concerns itself with the use of blockchain technology to circumvent these limitations. Relying on the tech’s inherent properties to ensure greater transparency, global participation and reduced expenses, the emerging field seeks to maximize the impact of charities.
Public blockchains are permissionless systems, meaning that there is no authentication procedure to go through before you can become a participant. With Bitcoin and other cryptocurrencies, the user needs only to download open-source software to join the network.
Given the accessibility of these ledgers, it’s incredibly challenging to ban participation, and near-impossible for the entire network to be taken offline. Such accessibility makes them an attractive tool for users of all kinds.
While their most popular applications lie in financial transactions, there are many other sectors where their deployment may be beneficial in the future.