What is a Blockchain?
A blockchain is a digital database or ledger shared across a computer network's nodes that stores information electronically. Its most recognized use is in cryptocurrency systems such as Bitcoin, where it acts as a secure and decentralized record of transactions.
Unlike traditional databases, blockchain structures data in blocks that hold sets of information. These blocks are linked to the previous block to form a chain of data that is irreversible and exact in chronological order. While databases use tables to structure data, a blockchain creates a tamper-proof timeline of data through its decentralized implementation.
Each block in the chain is assigned a timestamp upon addition to the chain, creating an accurate record of transactions.
A blockchain is a decentralized digital ledger that stores information in blocks that are linked together in a secure and transparent manner. Here is a simplified overview of how a blockchain works:
- 1.A transaction is initiated by a user on the network. This transaction can involve the transfer of cryptocurrency or other digital assets, the execution of a smart contract, or any other operation that the blockchain is designed to support.
- 2.The transaction is broadcasted to the network of nodes, which are computers that maintain copies of the blockchain.
- 3.The nodes validate the transaction using a consensus mechanism, which is a set of rules that governs how transactions are verified and added to the blockchain. This mechanism could be proof-of-work, proof-of-stake, or another system depending on the specific blockchain.
- 4.Once the transaction is validated, it is packaged into a block along with other validated transactions. This block is then added to the existing chain of blocks, creating a new link in the blockchain.
- 5.Each block in the blockchain contains a cryptographic hash of the previous block, forming an unbreakable chain of data that is tamper-proof and secure.
- 6.The blockchain is distributed across the network of nodes, ensuring that every node has a copy of the entire blockchain. This makes the blockchain resistant to attacks and failures because there is no central point of control or failure.
- 7.Users can view the blockchain to see all transactions and the current state of the network. Because the blockchain is transparent, anyone can verify the integrity of the data stored in it.
Due to the decentralized nature of Bitcoin's blockchain, transactions can be openly viewed by either running a personal node or using blockchain explorers, which enable people to view transactions occurring in real-time. Each node has its own copy of the blockchain, which is updated as new blocks are confirmed and added. Consequently, one can track the movement of Bitcoin. For instance, in the past, exchanges have been hacked, and those who kept Bitcoin on the exchange lost everything. Although the hacker might be completely anonymous, the stolen Bitcoins are easily traceable. If they were to be moved or spent, it would be noticeable. Nevertheless, records saved in the Bitcoin blockchain (as well as most others) are encrypted, ensuring that only the record owner can decrypt it to expose their identity (using a public-private key pair). Therefore, blockchain users can remain anonymous while maintaining transparency.
Blockchain technology maintains decentralized security and trust by storing new blocks linearly and chronologically. Once a block is added to the blockchain, altering the contents becomes extremely difficult unless the network reaches a consensus to do so. Each block contains its own hash and the hash of the previous block, along with a timestamp. Hash codes are created by a mathematical function, and any edits to the information result in a change to the hash code.
If a hacker attempts to alter a blockchain, their copy of the chain would no longer match the rest of the network's copies. For such an attack to be successful, the hacker would need to simultaneously control and alter 51% or more of the copies of the blockchain, which would be insurmountably expensive and likely fruitless. Any drastic alterations to the blockchain would be noticed by network members, who would then hard fork off to a new version of the chain that has not been affected.
Ultimately, attacking the network is far less economically incentivized than participating in it.
The blockchain technology is not only used to store data about monetary transactions but also for other types of transactions. Many companies, including Walmart, Pfizer, AIG, Siemens, and Unilever, have incorporated blockchain into their operations. For instance, IBM has developed its Food Trust blockchain to trace the journey of food products from their origin to their final destination. This is because the food industry has seen various outbreaks of diseases, and using blockchain enables companies to track the route of a food product and identify the source of contamination. This way, companies can act faster to prevent the spread of diseases and save lives. There are many other practical applications of blockchain in different industries.
The integration of blockchain technology into banking operations could potentially offer significant benefits. Unlike traditional banking systems, which operate during business hours and can take one to three days to verify transactions, blockchain technology operates 24/7 and can process transactions in as little as 10 minutes.
This means that consumers could see their transactions processed much faster, regardless of holidays or the time of day. Additionally, blockchain could enable faster and more secure exchange of funds between banks. In industries like stock trading, where settlement and clearing can take up to three days, the use of blockchain could significantly reduce costs and risks for banks.
Blockchain is the foundation for cryptocurrencies like Bitcoin, which eliminate the need for a central authority. Under the current central authority system, a user’s currency and data are vulnerable to their bank or government.
A bank hack or collapse, or living in a country with an unstable government, can jeopardize a user’s currency value. These risks inspired the creation of Bitcoin, which operates across a network of computers, reducing risk and fees while providing a more stable currency for those in unstable financial infrastructures.
Cryptocurrency wallets offer savings and payment options, especially for those without state identification, allowing access to wealth storage otherwise unattainable.
Healthcare providers have the potential to utilize blockchain technology to securely store their patients' medical records. Whenever a medical record is created and authenticated, it can be written into the blockchain, giving patients the assurance that the record is immutable. Personal health records can be encrypted and stored on the blockchain using a private key, ensuring that they can only be accessed by authorized individuals, thus maintaining privacy.
Recording property rights is a burdensome and inefficient process that requires physical deeds to be delivered to a government employee at the local recording office, manually entered into the county's central database and public index, and reconciled with claims to the property in case of a dispute. This process is not only time-consuming but also prone to human error, making tracking property ownership less efficient.
However, blockchain technology can potentially eliminate the need for scanning documents and tracking down physical files by storing and verifying property ownership on the blockchain. In war-torn or financially unstable areas where there is little to no government or financial infrastructure, it can be nearly impossible to prove ownership of a property.
By leveraging blockchain, a transparent and clear timeline of property ownership could be established, allowing people in these areas to prove ownership of their property.
A smart contract is a computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions to which users agree. When those conditions are met, the terms of the agreement are automatically carried out.
Say, for example, that a potential tenant would like to lease an apartment using a smart contract. The landlord agrees to give the tenant the door code to the apartment as soon as the tenant pays the security deposit. Both the tenant and the landlord would send their respective portions of the deal to the smart contract, which would hold onto and automatically exchange the door code for the security deposit on the date when the lease begins. If the landlord doesn’t supply the door code by the lease date, then the smart contract refunds the security deposit. This would eliminate the fees and processes typically associated with the use of a notary, a third-party mediator, or attorneys.
As in the IBM Food Trust example, suppliers can use blockchain to record the origins of materials that they have purchased. This would allow companies to verify the authenticity of not only their products but also common labels such as “Organic,” “Local,” and “Fair Trade.”
As reported by Forbes, the food industry is increasingly adopting the use of blockchain to track the path and safety of food throughout the farm-to-user journey.4
As mentioned above, blockchain could be used to facilitate a modern voting system. Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout, as was tested in the November 2018 midterm elections in West Virginia.5 Using blockchain in this way would make votes nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and providing officials with nearly instant results. This would eliminate the need for recounts or any real concern that fraud might threaten the election.
Transactions on the blockchain network are approved by a network of thousands of computers. This removes almost all human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. For that error to spread to the rest of the blockchain, it would need to be made by atleast 51% of the network’s computers - a near impossibility for a large and growing network the size of Bitcoin’s.6
Blockchain technology removes the requirement for third-party verification, which is usually associated with costs for consumers, such as paying a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage. Transactions conducted through credit cards result in a small fee for business owners because banks and payment-processing companies are responsible for processing those transactions. In contrast, Bitcoin and other decentralized cryptocurrencies do not rely on a central authority, thus minimizing transaction fees.
In contrast to traditional databases, blockchain does not rely on a central storage location for its data. Instead, the information is distributed across a network of computers, with each computer maintaining a copy of the blockchain. Whenever a new block is added to the blockchain, every computer on the network updates its version of the blockchain to reflect the change. This decentralized approach makes it extremely difficult to tamper with the blockchain, as a hacker would need to gain control of a majority of the network's computers in order to make any changes to the data. Additionally, even if a hacker were able to compromise a single copy of the blockchain, the rest of the network's copies would remain intact and uncompromised.
Transactions placed through a central authority can take up to a few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. Whereas financial institutions operate during business hours, usually five days a week, blockchain is working 24 hours a day, seven days a week, and 365 days a year. Transactions can be completed in as little as 10 minutes and can be considered secure after just a few hours. This is particularly useful for cross-border trades, which usually take much longer because of time zone issues and the fact that all parties must confirm payment processing.
Many blockchain networks operate as public databases, meaning that anyone with an Internet connection can view a list of the network’s transaction history. Although users can access details about transactions, they cannot access identifying information about the users making those transactions. It is a common misperception that blockchain networks like bitcoin are anonymous, when in fact they are only confidential.
When a user makes a public transaction, their unique code—called a public key, as mentioned earlier—is recorded on the blockchain. Their personal information is not. If a person has made a Bitcoin purchase on an exchange that requires identification, then the person’s identity is still linked to their blockchain address—but a transaction, even when tied to a person’s name, does not reveal any personal information.
Once a transaction is recorded, its authenticity must be verified by the blockchain network. Thousands of computers on the blockchain rush to confirm that the details of the purchase are correct. After a computer has validated the transaction, it is added to the blockchain block. Each block on the blockchain contains its own unique hash, along with the unique hash of the block before it. When the information on a block is edited in any way, that block’s hash code changes—however, the hash code on the block after it would not. This discrepancy makes it extremely difficult for information on the blockchain to be changed without notice.
Most blockchains are entirely open-source software. This means that anyone and everyone can view its code. This gives auditors the ability to review cryptocurrencies like Bitcoin for security. This also means that there is no real authority on who controls Bitcoin’s code or how it is edited. Because of this, anyone can suggest changes or upgrades to the system. If a majority of the network users agree that the new version of the code with the upgrade is sound and worthwhile, then Bitcoin can be updated.
Perhaps the most profound facet of blockchain and Bitcoin is the ability for anyone, regardless of ethnicity, gender, or cultural background, to use it. According to The World Bank, an estimated 1.7 billion adults do not have bank accounts or any means of storing their money or wealth.7 Nearly all of these individuals live in developing countries, where the economy is in its infancy and entirely dependent on cash.
These people often earn a little money that is paid in physical cash. They then need to store this physical cash in hidden locations in their homes or other places of living, leaving them subject to robbery or unnecessary violence. Keys to a bitcoin wallet can be stored on a piece of paper, a cheap cell phone, or even memorized if necessary. For most people, it is likely that these options are more easily hidden than a small pile of cash under a mattress.
Blockchains of the future are also looking for solutions to not only be a unit of account for wealth storage but also to store medical records, property rights, and a variety of other legal contracts.