What is the blockchain and what is it used for?

At this point, most people have at least heard of blockchain, but it has become something of an ongoing joke how complex the technology can be to understand. Chances are you’ll connect the technology to Bitcoin, but even if it was the first real application of blockchain technology, it’s far from the only use case.

What is Blockchain?

(Illustration: Jonathan Kitchen / Getty Images)

While some people equate the invention of the blockchain with Bitcoin’s pseudonymous founder Satoshi Nakomota, the concept has existed since 1991, first created in an article by researchers Stuart Haber and W. Scott Stornetta called “How to Timestamp a Digital Document(Opens in a new window). “

Also known as distributed ledger technology(Opens in a new window) (DLT), the blockchain is a record that anyone can add, that no one can change, and that is not controlled by a person or entity. The core concept is a public ledger with copies scattered in several places called nodes, which usually refers to individual computers with copies of the ledger.

This is what people mean when they refer to the blockchain as decentralized. No person or entity has control over the information stored in the record. Instead, it is distributed among the many nodes that make up the network.

To change the general ledger, these changes must first be verified by everyone on the network. As long as all copies of the record match, the system knows it can update the information. This increases the difficulty of changing everything stored in the blockchain while building trust in the information being recorded.

As journalist Mike Orcutt said in the MIT Technology Review(Opens in a new window)“The whole point of using a blockchain is to let people – especially people who do not trust each other – share valuable data in a secure, tamper-proof way.”

Blockchain’s decentralized nature also means that there is no single fault point that can take down the entire database. A company that stores all of its clients’ information on a server farm in one building may lose this data if the building was destroyed. Because a copy of the blockchain exists on each computer on the network at the same time, it can continue to function if one or even multiple nodes go offline.

When new information is added to the general ledger, it is registered in a group called a block. These blocks are put together to form a chain of records, hence the name block chain. Once the data is registered, it cannot be changed – you just have to keep adding new blocks.

The blockchain is in a way like a Google document distributed among team members. The person who gets access can add and edit the document. Everyone can also see changes made in real time, who made those changes, and a history of all the changes made for full transparency. The biggest difference is that data is not stored on Google’s servers. Each contributor has their own local copy that can communicate directly with the other copies.

Not just cryptocurrency

While cryptocurrencies such as Bitcoin and Dogecoin are the most well-known uses for blockchain technology, they are not one and the same. Digital currencies use blockchains as a means of recording transactions and maintaining trust, but they are not blockchains per se.

In theory, any system that requires transactions or data points to be registered can use a blockchain to do so. It includes everything from agricultural supply chains to land title records. IBM, for example, uses blockchain technology for supply chain registration(Opens in a new window) and other industries such as healthcare and food safety(Opens in a new window).

Chef Aaron Sanchez talks about the use of blockchain technology for food tracking. (Photo: David McNew / AFP via Getty Images)

All types of data can be stored in a blockchain, not just financial transactions. Writer for The Verge(Opens in a new window)Mitchell Clark explains how he created one that saved the entire text The Great Gatsby in each block.

A blockchain differs from a typical database in that, instead of storing information in tables, it stores it in bits of data. As each block fills up, it is added to the previous blocks in the chain. Because data is stored in this linear fashion and is time-stamped, blockchain data can form a timeline for transactions as well as a trusted record.

It is especially useful in cases such as land titles, because anyone looking at the blockchain could see when ownership of a piece of land was transferred from one person to another over time. And these records would be constantly checked against the other copies of the general ledger to weed out inconsistencies, which would mean that it would be much more difficult to make a false registration of ownership. Countries that Georgia already uses(Opens in a new window) blockchain-based country title systems.

More security on the blockchain

(Credit: N. Hanacek / NIST)

By its nature, blockchain acts as a hedge(Opens in a new window) against tampering and system errors. If a node on a network is hacked and someone changes or deletes transaction data on that computer, the other nodes on the network will reject the corrupted record because it does not match their copies of the general ledger.

Security can even be increased by restricting who has access to the data. Private blockchains, such as those used by IBM, allow only certain individuals access to the blockchain network.

Since data written to the blockchain is immutable and time-stamped, it provides a transparent overview of everything that is added to the system. Anyone with a node on the network can see every transaction. Blockchain explorer(Opens in a new window) programs even allow people who are not part of the network to view transaction data in real time to increase transparency. So even if someone stole your Bitcoin, you can track how it was used and see where it went.

The use of blockchain technology helps prevent duplicate records and makes third-party validation unnecessary, saving both time and effort. The most important thing is that this provides a solution to the digital currency’s unique problem of double consumption.

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Anything that can go wrong

Although the security of blockchain technology is quite robust, there are ways it can be circumvented. Should someone steal the security credentials of a person with access to the network, they can steal data or digital cryptocurrency such as Bitcoin.

Phishing scams can and have stolen people’s crypto wallet credentials and used them to clear accounts. This is why we recommend taking extra steps to be safer online.

If a bad actor accesses more than 51% of the nodes on a network and changes the data, that dataset becomes the agreed version of the record, even if it is not true. An attack of 51%(Opens in a new window) sounds bad, but it is very difficult to achieve on blockchains with higher levels of complexity and large user bases. The blockchain that Bitcoin is built on, for example, is so large now that it will require a huge amount of money and computing power to attempt such an attack.

Other cyber attacks such as Sybil attacks(Opens in a new window) or route attacks can interrupt transactions along the way before they are entered into the blockchain, or crash the system with a flood of fake accounts.

Can Blockchain liberate the world?

Jack Dorsey at the Bitcoin 2021 Conference (Photo: Eva Marie Uzcategui / Bloomberg via Getty Images)

Many in the technology world, including Jack Dorsey and Elon Musk, believe the blockchain can make the world a better place by decentralizing assets such as money and redistributing control to individual users. A big part of this idea is to give those without a bank alternative ways to access money. Countries with violent inflation or remote populations without access to traditional banks can bypass this system entirely with digital currency using blockchain technology and an app on their phones.

But no matter how nice it sounds to bring money to the people, this is easier said than done. These people will still need a place to exchange their digital currency for fiat money or buy goods and services. Developing countries where blockchain technology offers the greatest benefit are also often the most vulnerable to faulty infrastructure and resulting problems such as power outages and internet outages.

It is also worth mentioning the high cost of maintaining and adding a blockchain. When it comes to Bitcoin mining, for example, it requires a huge amount of power(Opens in a new window) just to recover new currency units, let alone maintain the network.

Minto Cryptocurrency Mining Center in Nadvoitsy, Russia (Andrey Rudakov / Bloomberg via Getty Images)

Alternative methods of mining that rely on renewable energy are being explored to reduce this resource consumption, but current methods have not yet been replaced. Before we can find a carbon-neutral solution, it is difficult to see cryptocurrencies, or any blockchain technology, freeing us from the problems of today’s world order.

Finally, the anonymity of blockchain transactions can protect a user’s privacy, but it also facilitates illegal activity. The dark online marketplace Silk Road is probably the best known example of this in action. Some cryptocurrencies such as Monero are designed to be completely anonymous, allowing criminals to further mask their identities.

With all the scams associated with blockchain assets such as cryptocurrencies and NFTs, it will take a lot of hard work before the general public can accept them as anything more than a passing fad.

Blockchain technology is a tool with countless applications in the financial sector and beyond. It is on the fringes for now, but in the coming years we may see more widespread mainstream adoption of the blockchain. From cryptocurrencies to supply chain inventories to medical record keeping, there are real uses for the technology that are useful right now.

We only scratch the surface of blockchain technology, its use and mechanisms. For more, check out our simple explanation in the video above. You can also dive deeper with IBM’s comprehensive blockchain guide(Opens in a new window) and Investopedia’s exhaustive summary(Opens in a new window).