What is a blockchain and how does it work? Definition and applications
Blockchains are public and immutable, so they are a way to facilitate and store digital transactions.
Shubham Dhage via Unsplash; Canva
What is a blockchain in simple terms?
A blockchain, at its most basic level, is a digital ledger of transactions stored on many different computers (called nodes) that are connected by a network. It is composed of a series of “blocks”, which are mainly digital curves that can be filled with records of transactions. When the transactions in a block are verified via a consensus between nodes in the network, that block is “closed” and added to the existing, immutable, chronological chain of previous blocks.
Blockchain is most often used to buy, sell, trade and register ownership of cryptocurrencies (such as Bitcoin, Ethereum and Solana) or other digital assets such as NFTs. They can also be used for other purposes, but we will get to them later.
You can think of a blockchain in a way as a chain-of-custody record for a piece of evidence in an investigation. Each time the proof (or in the case of a blockchain, a digital asset such as a Bitcoin or an NFT) changes hands, this transaction is recorded in an unchanged general ledger.
While a chain of evidence logs can be altered or falsified, a blockchain cannot because there are many copies of it on many different networked computers that must verify the legitimacy of a transaction in order for it to be permanently written to the blockchain in the first place.
The appeal of a blockchain is that it is a secure, unchanging record of transactions that are not dependent on any central authority, such as a bank. In other words, no person, entity or institution must be trusted or trusted for the blockchain to remain safe and secure.
Anyone who runs a blockchain node (or uses a blockchain explorer application) can see all the transactions ever recorded on that blockchain, so the history and ownership chain of any digital asset traded on it is a matter of public registration.
How do blockchains work?
Blockchains do two main things – simplify transactions and keep track of these transactions.
Each blockchain user has their own cryptographic keys – one public and one private. When a transaction takes place, one party sends an asset to another party using the latter’s public key as a sort of address. The recipient’s private key is then used to prove their identity so that they can “unlock” and accept the asset.
The nodes in the peer-to-peer network then work to verify the validity of this transaction according to a protocol agreed by the users of the network. When all the transactions in a block have been verified and there is agreement on the order in which they took place, the block is closed and connected to the previous block in the chain, and each node’s copy of the block chain is updated.
How are blockchains used?
Blockchains are mostly used to complete and record transactions involving cryptocurrencies such as Ethereum and Bitcoin, but blockchain technology can also be useful in many other contexts.
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TheStreet Dictionary Terms
In cryptocurrency
When individuals make purchases using cryptocurrency, their transactions are simplified via a blockchain. A buyer uses a seller’s public key to send them crypto, and the seller’s private key unlocks the funds. This transaction is verified by nodes in the network which are then permanently embedded in the blockchain.
In NFT Trading
An NFT, or non-fungible token, is in a way like a certificate of ownership and authenticity for a digital or physical collectible – often a work of art. Once an NFT is created, it is “embossed” on a blockchain and can then be sold by its creator.
When purchased, the ownership is associated with the buyer’s identity on the blockchain, and this ownership remains intact, publicly visible and irrevocable until NFT is sold again, whereupon the sale and the new owner are registered on the blockchain, and so on.
Outside decentralized finance (DeFi)
Blockchains are currently used primarily for the transmission of cryptocurrencies and NFTs, but they have many other potential applications and may become popular in a number of industries in the near future.
One possible use of blockchain technology is warehouse and freight management. Because blockchains are good at tracking assets over time and between parties, they will undoubtedly be useful for large companies that do a lot of production and shipping work, especially when products or product components have to change hands many times between manufacturer and consumer.
Another area many DeFi enthusiasts believe can benefit from blockchain is voting. Voter fraud is very uncommon, but it does not prevent savvy people from worrying about it and even making accusations, and this situation has not helped to buy the fact that today’s voting technology is somewhat vulnerable. Whether used in state or federal elections, internally in organizations or across shareholders in public companies, blockchains can allow votes to be easily registered, chronicled and verified via public and private keys.
Medical records present another area of use – Most people move several times, and occasionally records slip through the cracks between different cities, states, facilities, doctors and insurance providers. If each person’s medical record was embedded in a blockchain, everyone’s information could be recorded chronologically, permanently protected, and accessed by any physician or provider with access to a patient’s account via their private key.
Many other potential blockchain applications exist, and we will probably see technology increase in prominence in a number of industries in the years to come.
Are blockchains infallible? Can they be hacked?
Blockchain technology is new enough to continue to explore vulnerabilities, but it is clear that money can be stolen in certain cases. According to an article from the MIT Technology Review, cryptocurrencies worth more than $ 2 billion were stolen between early 2017 and February 2019, but most of these attacks have targeted crypto exchanges, where users can trade crypto without interacting directly with a blockchain.
When it comes to exploiting a blockchain in itself, the main threat is a so-called 51% attack. This happens when more than half of the nodes on a blockchain work in joints to split or “fork” a blockchain and fraudulently rewrite history, which can allow dual use of cryptocurrency.
51% attack is possible because, in most cases, only a single majority of a network’s nodes need consensus to make changes. For larger, more popular blockchains, this is very unlikely to happen, as so many different users operate so many different nodes that it is extremely unlikely that one party can gain control of more than half of them. However, for smaller blockchains with fewer users, 51% of attacks represent a real threat.
When was the first blockchain created and by whom?
The first popular, decentralized and well-known blockchain was created as a transaction book for the cryptocurrency Bitcoin by an anonymous person or group that used the name “Satoshi Nakamoto” in 2009.
