What is the blockchain and what is it used for?

At this point, most people have at least heard of blockchain, but it’s become something of a running joke about how complex the technology can be to understand. Chances are you associate the technology with Bitcoin, but while it was the first real-world 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 blockchain with Bitcoin’s pseudonymous founder Satoshi Nakomota, the concept has been around since 1991, first coined 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 to, that no one can change, and that is not controlled by any person or entity. The core concept is a public ledger with copies spread across multiple locations 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.

In order to change the ledger, those 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 anything stored in the blockchain while building trust in the information being recorded.

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

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

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

The blockchain is sort of like a Google document that is distributed among members of a team. Whoever gets access can add to 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 its 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 applications of 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 themselves.

In theory, any system that requires transactions or data points to be recorded could 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 records(Opens in a new window) and other industries such as healthcare and food safety(Opens in a new window).

Chef Aaron Sanchez talks about using 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. Writing for The Verge(Opens in a new window)Mitchell Clark explains how he created one that stored the entire text of 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 chunks 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 of transactions as well as a trusted record.

It’s especially useful in cases like 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 ledger to weed out inconsistencies, meaning it would be much more difficult to create a false record of ownership. Countries like Georgia already use(Opens in a new window) blockchain-based land title systems.

More security on the blockchain

(Credit: N. Hanacek/NIST)

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

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

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

Using blockchain technology helps prevent duplicate records and makes third-party validation unnecessary, saving both time and effort. Most importantly, this provides a solution to digital currency’s unique problem of double spending.

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Everything that can go wrong

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

Phishing scams may have stolen people’s crypto wallet credentials and used them to wipe out accounts. This is why we recommend taking extra steps to be more secure online.

If a bad actor gains access to more than 51% of the nodes on a network and modifies the data, that dataset becomes the agreed version of the record, even if it is not true. A 51% attack(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 on which Bitcoin is built, for example, is now so large that it would take an enormous amount of money and computing power to attempt such an attack.

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

Can Blockchain Free the World?

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

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

But as nice as 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. The developing countries where blockchain technology offers the greatest benefit are also often the most vulnerable to faulty infrastructure and resulting problems such as power and internet outages.

It is also worth mentioning the high cost of maintaining and adding to a blockchain. In the case of Bitcoin mining, for example, it requires a huge amount of electricity(Opens in a new window) just to mine 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 yet to be replaced. Until we can find a carbon-neutral solution, it is hard to see cryptocurrencies, or any blockchain technology, liberating us from the problems of the current world order.

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

With all the fraud 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 cryptocurrency to supply chain inventories to medical record keeping, there are real-world use cases for the technology that are benefiting right now.

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