Cryptocurrency continues to be a hot topic in financial circles. Whether you hear about it via news headlines or in one subreddit you check dailyyou may be considering investing in it … even if you are unsure how it works.
If this sounds like you, learning about blockchain can be a great place to start. Blockchain is the core technology behind Bitcoin and several (but not all) cryptocurrencies. With its ever-expanding list of uses, blockchain has the potential to change the financial world and beyond.
Read more: What is cryptocurrency? Decoding of digital currencies
Blockchain explained
A blockchain is a decentralized digital ledger that records transactions in one continuous record (hence “chain”). It is maintained across multiple computers (aka nodes) that are connected in a connected network and can be operated by institutions or individuals. This network of connected nodes helps to make the blockchain difficult to hack or change, and thus offers a relatively secure way for individuals to relate directly to each other, without an intermediary such as the government, the bank or a third party.
Although developed to support Bitcoin, blockchain technology is also the power behind many cryptocurrencies, and it has many applications outside of digital currency. You may have heard of real estate sales blockchain, medical records, legal contracts and any other industry that requires you to register and authorize a variety of actions or transactions.
Ok, but how does blockchain work?
Blockchain technology allows you to record and distribute digital information (and transactions) without being able to edit them. The transaction sequence usually consists of the following steps:
- A new transaction is requested
- The transaction is then communicated to the network of computers (nodes) that maintain the blockchain
- Each node on the network must validate the transaction
- After validation, a “data block” is created, which contains all transaction information (sender, receiver, time, etc.).
- The data block is then “linked” to the rest of the existing blockchain, creating an unchanging record of the transaction
- The transaction is complete
What is the difference between blockchain and Bitcoin?
Blockchain and Bitcoin are two separate things, but they are closely related. Without getting into the rough, Bitcoin is a type of digital currency, while blockchain is a ledger for recording and tracking transactions and assets. Bitcoin is powered by blockchain technology, but blockchain has found many uses beyond Bitcoin.
When Bitcoin was released as open source back in 2008, blockchain was fundamental to the technology. Since Bitcoin was the first application of blockchain, people often confuse the two, using “Bitcoin” to mean blockchain. But don’t let that put you off! Remember that you have just learned the difference between the two.
What is blockchain technology?
Simply put, blockchain is a record-keeping technology, and its use is constantly growing across a number of industries. It is a decentralized, digital ledger that records transactions and tracks assets, and is maintained by a connected network of computers (“nodes”). This network of nodes also helps keep the ledger secure because each separate node must validate a transaction before it can be registered on the blockchain.
Why “blockchain”? Once a transaction is validated by each computer on the network, the information is contained in a “block” of data. Each block is then linked together, creating a chronological “blockchain” of historical transactions.
Distributed Ledger technology
All network participants have access to this shared ledger and its transaction history, which cannot be changed. With this distributed ledger, transactions are recorded only once, ensuring that there are no version control issues that sometimes exist with traditional business networks.
Related: What is an NFT?
Unchangeable items
You can not change or interfere in a blockchain transaction after it has been registered. This is because the other computers on the network will reject any changes as invalid since the changes would not match the existing records. In the event of a true error, a new transaction will be added and validated by the network of computers to reverse the error, and both the new and old transactions will then be visible across the shared ledger.
Smart contracts
This set of rules stored on the blockchain and executed automatically speeds up transactions. Smart contracts are simply programs stored on a blockchain that run when predefined conditions are met.
Unauthorized versus permitted blockchains
You can characterize all blockchains as unauthorized, permitted, or both.
Unauthorized blockchains allow some uses to join the blockchain and become a “node” in the network. These types of blockchains do not limit the rights to nodes on the blockchain network.
Professional tips: You may have heard that unauthorized blockchains are completely anonymous, but this is only the case if there is absolutely no link between you and your wallet address (such as your IP or email).
On the other hand, allowed blockchains control access to the network and can also restrict access to nodes that join. The identity of the users of a allowed blockchain is known to other users on that network.
What are the different types of blockchains?
Public, hybrid, private and consortium are the four types that describe the different ways you can build a blockchain network.
Public blockchains
One of the most innovative things about public blockchains is that everyone in the world has equal rights to view, submit transactions, be included and participate in the verification process. It is worth noting that they are also completely decentralized.
The many supporters of public blockchains are attracted to them because of their anonymity. Since they are open, many organizations are likely to use them without third-party verification. At present, public blockchains are primarily used for the exchange and recovery of cryptocurrencies. Some popular public blockchain you have probably heard of include the networks behind Bitcoin and Ethereum.
Private blockchains
Also known as managed blockchains, private blockchains are permitted blockchains controlled by a single organization. The central authority decides who can join the network and gives each member of the network equal functional access and rights. Private blockchains are only partially decentralized as public access is limited.
Consortium blockchains
Unlike private blockchains, consortium blockchains are permitted blockchains governed by a group of organizations rather than a single institution. They enjoy more decentralization, which gives them higher levels of security.
Establishing a consortium is not easy, however, as it requires cooperation between several organizations.
Hybrid blockchains
Hybrid blockchains are digital registers controlled by a single organization, but with a level of oversight from the public blockchain required for specific transaction validations.
Is blockchain technology safe? Advantages and disadvantages of blockchain and cryptocurrency
The more decentralized and widely distributed the blockchain becomes, the safer it is. With many digital “eyes” seeing and validating, the shared record is harder to manipulate.
What are the benefits of blockchain?
- Decentralization: The lack of a central authority in a public blockchain helps to ensure that there is not a single point of error.
- Accuracy and security: Decentralization also makes transaction registration incredibly accurate and challenging to corrupt. Because each node in the network must validate a transaction before it is registered, it would be incredibly difficult to fool the entire network.
- Traceability and transparency: Because data in the blockchain is essentially immutable, it is a reliable record-keeping tool for tracking a chronological history of transactions.
What are some of the risks of crypto?
- Hack or lose your digital wallet: Just like all electronic information, the digital wallet is subject to hacking and must be kept secure via encryption and strong passwords. You can choose to store your cryptocurrency offline on a hard drive instead, but be careful not to misplace or damage it … or forget the password!
- Cryptocurrency is volatile: Crypto is still very speculative, and it is not uncommon to see fluctuations in value. It has shown high levels of volatility over time, and its novelty makes risk less understood.
- Environmental considerations: Bitcoin mining requires a good deal of power. However, some mining companies are looking for ways to use recycled or creative energy sources to reduce carbon emissions. For example, El Salvador builds mining powered by heat from volcanoes.
Read more: What do experts think about crypto? 3 investors weigh in
Blockchain is moving and growing.
By offering transparency and affirmed trust, the use of blockchain technology continues to grow far beyond the world of cryptocurrency. Blockchain technology is already being used across industries – for example in healthcare to maintain patient information, in supply chain management to track shipments, and even in property planning to register wills.
This ever-growing list of uses for this innovative digital ledger shows that blockchain is changing the way we live and work.
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