What Is the Blockchain and What's it Used For?
At this point, most people have at least heard of blockchain, but it's become something of a running gag about how complex the technology can be to understand. You probably associate the technology with Bitcoin, but while this was the first real-world application of blockchain technology, it's far from the only use case.
What is blockchain?
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 entitled "How to Timestamp a Digital Document “.
Also known as distributed ledger technology (DLT), the blockchain is a record that anyone can add, that nobody can change, and that is not controlled by any one person or entity. The core concept is a public ledger with copies distributed across multiple sites, called nodes, which typically refer 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 contained in the records. Instead, it is distributed across 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 on the blockchain while building trust in the information being recorded.
As journalist Mike Orcutt put it in the MIT Technology Review, “The whole point of using a blockchain is to let people—especially people who don't trust each other—share valuable data in a secure, tamper-proof way.”
The decentralized nature of blockchain also means that there is no single point of failure that could bring down the entire database. A company that stores all of its customers' information on a server farm in a building could lose that data if the building is destroyed. Since there is a copy of the blockchain on every computer in the network at the same time, it can continue to function if one or even more nodes go offline.
As new information is added to the ledger, it is recorded in a group called a block. These blocks are strung 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 something like a Google Doc that is distributed among the members of a team. Anyone with access can add to and edit the document. Anyone can also see changes in real-time, who made those changes, and a history of all changes made for full transparency. The main difference is that no data is 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 like Bitcoin and Dogecoin are the most well-known uses of blockchain technology, they are not one and the same. Digital currencies use blockchains to record transactions and maintain trust, but they are not blockchains themselves.
In theory, any system that requires the recording of transactions or data points can use a blockchain to do so. This includes everything from agricultural supply chains to land title records. IBM, for example, uses blockchain technology for supply chain records and other industries like healthcare and food safety.
Any type of data can be stored on a blockchain, not just financial transactions. Mitchell Clark, writing for The Verge, explains how he created one that saved all of the text from The Great Gatsby in each block.
A blockchain differs from a typical database in that it stores information in blocks of data rather than tables. As each block fills up, it is added to the previous blocks in the chain. Because data is stored in this linear manner and is timestamped, blockchain data can form both a timeline of transactions and a trusted record.
This is particularly useful in cases like land titles, because anyone looking at the blockchain can see when ownership of a piece of land has passed from one person to another over time. And these records would be constantly cross-checked against the other copies of the ledger to weed out inconsistencies, meaning it would be much harder to create false ownership records. Countries like Georgia are already using blockchain-based land title systems.
More security on the blockchain
By its very nature, the blockchain serves as protection against tampering and system failures. If a node on a network is hacked and someone modifies 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 restricting who has access to the data. Private blockchains, like those used by IBM, only give specific people access to the blockchain network.
Because the data written to the blockchain is immutable and time-stamped, it provides a transparent record of all data added to the system. Anyone with a node on the network can see every transaction. Blockchain explorer programs let even people who are not part of the network see real-time transaction data for increased transparency. So even if someone stole your bitcoin, you can track how it was spent and see where it went.
The use of blockchain technology helps eliminate duplicate records and eliminates the need for third-party validation, saving both time and effort. Most importantly, this provides a solution to the unique problem of double issuance of digital currencies.
Everything that can go wrong
Although blockchain technology security is fairly robust, there are ways to circumvent it. Should someone steal the security credentials of someone with access to the network, they could steal data or digital cryptocurrencies like bitcoin.
Phishing scams can and have stolen people's crypto wallet credentials and used them to sanitize accounts. Because of this, we recommend taking extra steps to stay safer online.
If an attacker gains access to more than 51% of the nodes in a network and modifies the data, that record becomes the agreed-upon version of the record, even if it is not true. A 51% attack sounds bad, but it's very difficult to pull off on blockchains with higher levels of complexity and large user bases. The blockchain on which Bitcoin, for example, is based is now so large that such an attempted attack would require an immense amount of money and computing power.
Other cyber attacks such as Sybil attacks or routing attacks can intercept transactions in transit before they are written to the blockchain, or crash the system with a flood of fake accounts.
Can blockchain liberate the world?
Many in the tech world, including Jack Dorsey and Elon Musk, believe that 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 provide alternative ways for the unbanked to access money. Countries with rampant inflation or remote populations without access to traditional banks can completely bypass this system with digital currency using blockchain technology and an app on their phones.
But as nice as it sounds, raising money among the people is easier said than done. These people would still need a place to exchange their digital currency for fiat money or buy goods and services. The developing countries, where blockchain technology brings the greatest benefits, are also often the most vulnerable to faulty infrastructure and resulting problems such as power and internet outages.
Also worth noting is the high cost of maintaining and expanding a blockchain. In the case of bitcoin mining, for example, it takes an enormous amount of energy just to mine new units of currency, let alone maintain the network.
Alternative mining methods that rely on renewable energy are being explored to reduce this resource consumption, but current methods have yet to be replaced. Until we find a carbon neutral solution, it's hard to imagine cryptocurrencies or any blockchain technology freeing 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 activities. The Dark Web marketplace Silk Road is probably the best-known example of this. Some cryptocurrencies like Monero are designed to be completely anonymous, allowing criminals to further disguise their identities.
With all the scams associated with blockchain assets like 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 is a tool
[embed]https://www.youtube.com/watch?v=o3im-TsfQ9I[/embed]
Blockchain technology is a tool with countless applications in the financial sector and beyond. It's on the sidelines for now, but in the coming years we may see broader mainstream adoption of blockchain. From cryptocurrency to supply chain inventory to medical record keeping, there are real-world use cases for the technology that are currently useful.
We are only scratching the surface of blockchain technology, its uses and mechanisms. For more information, see our simple explanation in the video above. You can also dive deeper with IBM's in-depth blockchain guide and Investopedia's comprehensive summary.
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