Blockchain

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What is Blockchain?

A blockchain is a tamper-resistant distributed ledger used to validate and store digital transactional records. In decentralized blockchains, no single authority is responsible for maintaining the blockchain. Instead, computers called nodes in a peer-to-peer (P2P) network each store a copy of the ledger. Specialized nodes verify transactions through a decentralized consensus mechanism to reach an agreement on the state of the network.

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Transactions are stored in permanent, time-stamped units called blocks and each block is connected (chained) to the previous block with a cryptographic hash that is created by using the previous block’s data. The hash links make it impossible to alter data in one block without making changes to each subsequent block. Any attempt to alter or delete transactions in a block will break the cryptographic chain and immediately alert all nodes in the network that there is a problem.

Blockchains can be public or private. In a public blockchain, anyone can view the ledger and participate in the consensus mechanism. In a private blockchain, the consensus mechanism is restricted to certain nodes on the network, and views of the private ledger may also be restricted. Hybrid blockchains have both private and public access, with permission access to private data on the chain.

Originally created for digital currency, blockchain is now being used by many types of industries and organizations. Applications range from smart contracts, which are computer programs that run on the blockchain, to records management for health care and identity and access management (IAM). Decentralized finance (DeFi), gaming, and metaverse projects utilize blockchain technology to provide equal access and ownership of digital assets.

Techopedia Explains the Blockchain Meaning

Techopedia explains the Blockchain Meaning

Blockchain can be thought of as a distributed database technology that’s maintained by multiple computers in a network. Data and transactions are held in blocks, each of which is linked to the preceding block using a cryptographic hash to form a chain that orders transactions and events in an immutable ledger.

The security of this system is based on the idea that the financial cost of conducting a fraudulent transaction will be much higher than any potential reward. Different types of consensus mechanisms are used to provide incentives or disincentives that encourage or discourage the behavior of nodes used for consensus.

For example, one of the most valuable coins to buy today, Bitcoin, uses proof of work (PoW), in which miners must solve a cryptographic puzzle by generating hashes until the correct hash is found to mine a block that will hold new transactions. As an incentive, the miner earns a block reward when a new block is mined. However, the cost of mining a new block and subsequent linked blocks creates a disincentive against fraudulent transactions.

History of Blockchain

The theory of Blockchain has been around for quite some time. David Lee Chaum is credited for proposing the idea in 1982.

Although he presented the theory in his doctoral dissertation Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups, it wouldn’t be until 2008 that Blockchain technology was introduced to the world along with the digital currency Bitcoin.

Several other projects followed Bitcoin’s launch in 2009 in the early days of blockchain, including Litecoin and Peercoin, launched in 2011 and 2012, respectively. The latter introduced a new consensus mechanism called proof of stake (PoS).

Today, Ethereum, the second largest blockchain project by market capitalization, uses PoS to validate transactions using cryptocurrency as collateral to help ensure proper behavior by validator nodes.

How Blockchain Works

How Blockchain Works

Blockchains listen for broadcasts of new transactions from crypto wallet addresses. Nodes within the network then group these transactions into blocks and verify the transactions to prevent double-spending or duplicate transactions.

Various blockchains each use their own protocol to determine which transactions are valid and how the network reaches an agreement (consensus) on the state of the network, including the order of transactions and wallet balances.

As each block of transactions is assembled and added to the chain, each block also includes a link to the previous block, forming a chain. If any of the data in a previous block is changed, this link also changes the hash value of the subsequent blocks, creating a fork in the chain. Other nodes in the network reject the changed block and its subsequent blocks as invalid, negating any financial gain in changing a previously mined block. This aspect of consensus makes blockchains immutable, meaning the data held in confirmed blocks can’t be changed without great expense.

Blockchain networks use one of two primary consensus mechanisms: proof of work (PoW) and Proof of Stake (PoS). The latter of these has become more popular for newer blockchains because it uses much less energy. For example, in 2022, Ethereum switched from PoW to PoS, reducing the carbon footprint for the chain by an estimated 99.992%.

Annual Energy Consumption in TWh/yr

Annual Energy Consumption in TWh/yr
Source: Ethereum.org

Computers on a Blockchain P2P network sync periodically to ensure that all copies of the shared database contain the exact same information, but it is the linkage between blocks that keeps blockchain ledgers secure.

Key Elements of Blockchain

Blockchains differ in the details of how each works, but most share several key elements.

Distributed Ledger
Rather than a centralized database, blockchains use a distributed ledger with copies on multiple computers called nodes. Often, the number of nodes can reach thousands. 
Cryptography
Blockchain networks use cryptography to secure both data and assets held on the blockchain. Cryptography also plays a role in crypto wallet addresses, which use an encrypted hash value as an identity on the blockchain network.
Consensus Mechanism
As a way to validate transactions, blockchains use a method of agreement called a consensus mechanism.

Of note, while we often associate blockchains with cryptocurrency, not all blockchains use cryptocurrencies. Private blockchains may not require a native asset to add new data or transactions to the blockchain.

Types of Blockchain

There are four kinds of blockchain:

Use the code with 1,2,3,4

  1. Public: Anyone with internet access can weigh in on the consensus.
  2. Private: A single, central authority holds the deciding factors.
  3. Consortium (or Federated): Multiple organizations have authority status.
  4. Hybrid: Elements are public access but privately held authority.

Blockchain Protocols

Protocols are sets of rules used by blockchains. Blockchain protocols range from open-source public networks, such as Bitcoin, to tools designed for enterprise use, such as Quorum.

Public Blockchain Protocols:

Blockchain Protocols for Enterprise Use:

  • Hyperledger
  • Quorum
  • Corda

Of note, there is some overlap between the two groups of protocols. For instance, Quorum is based on Ethereum, supporting many of the same features, such as smart contracts.

Blockchain and Bitcoin

The white paper Bitcoin: A Peer-to-Peer Electronic Cash System outlined the implementation of Bitcoin’s blockchain technology. The paper was published by Satoshi Nakamoto, the person or group who created Bitcoin, but that name is widely accepted to be a pseudonym.

Nakamoto claims that the problem with current financial institutions is that they rely on trust. Payees have to trust a bank, and the bank needs to vouch for payments. Blockchains, on the other hand, provide a non-alterable record of all transactions and are available to all parties. This system gives users proof of transactions and removes the necessity for centralized management and trust in a mediator.

The blockchain revolution began with a blueprint for a trustless peer-to-peer payment system, Bitcoin. In the years ahead, blockchain technology will lead to much more advanced applications, some of which we have yet to imagine.

Features of Blockchain Technology

The features of blockchain technology can vary depending on the type of blockchain in use, i.e., public or private. Public blockchains typically bring the following features.

  • Decentralization: Public blockchain keep updated copies of the ledger on multiple computers called nodes. Light nodes hold a truncated version of the blockchain ledger, whereas full nodes hold a complete copy of the ledger.
  • Immutability: Cryptographic links between blocks make blockchains nearly impossible to change.
  • Transparency: Public blockchains make transaction data visible to anyone, linking transactions to wallet addresses.
  • Tokenization: Blockchains can store value in the form of tokens.
  • Trustlessness: Public blockchains allow users to transact with other users or smart contracts without trusting an intermediary to complete transactions.

Blockchain Use Cases

The role of blockchains in securing transactions and data makes blockchains well-suited to a number of use cases. These range from more efficient and fair access to decentralized finance (DeFi) services to government services, including voting.

Expandable list (без двоеточий)

DeFiCapital Markets & FinanceHealthcareGovernmentReal EstateSupply Chain

Blockchain platforms like Aave offer an equal-access money market. Lenders can earn a yield on supplied crypto assets. Borrowers can use their crypto assets as collateral to borrow without loan paperwork in a few clicks.

 Blockchain provides a more efficient way to trade or settle payments worldwide while offering an immutable record for auditability.

Specialized blockchains for the healthcare industry promise more secure medical data storage with controlled access. Other benefits include medical supply tracking and verification of authenticity for equipment and medications.

From blockchain-based identity verification to voting, blockchain technology allows governments to provide transparency where needed while safeguarding private information.

In 2017, Propy sold the first real estate NFT, a digital token representing ownership in the home.

Blockchain can help track supply chain movements, logging status updates, and source data to a decentralized ledger. The IBM Food Trust connects food supply chain participants from growers to retailers and every step in the chain to enhance traceability and transparency.

Blockchain Pros and Cons

Blockchains can replace or complement many current solutions typically served by centralized databases or centralized providers. In comparison to other technologies, blockchain has several advantages but may not be well-suited to other applications.

Pros

  • Equal access on public blockchains
  • Censorship resistance for transactions and interactions
  • Tamper-resistant transactions with settlement finality
  • Decentralized governance for many public blockchain networks
  • Ownership of digital assets with pseudonymous privacy

Cons

  • Slower data processing due to decentralized consensus
  • More cumbersome to use compared to traditional financial rails
  • Less scalable for high-volume transaction application
  • High energy use for proof of work blockchains
  • Costly transaction on some network when block space demand is high

Blockchain Security

Many public blockchains are open-source, meaning the code is openly available for review. This transparency aids in security by making the code accessible to a worldwide community of coders and security experts. Reputable blockchain projects also source third-party audits to help identify potential exploits or unplanned behavior.

Internally, blockchains use one of several types of consensus mechanisms to validate transactions and agree on the state of the blockchain. The most common of these are proof of work and proof of stake, but other options include proof of history (PoH), used by Solana, and proof of capacity (PoC) or PoC+, used by Signum.

Chains are formed by linking each block to the previous block by using a cryptographic hash of the previous block’s header. Any attempt to change an existing block changes every subsequent block. The network protocol causes the nodes to flag these changed blocks as invalid.

Linking combined with consensus makes blockchains immutable, also making them more secure compared to database records that can be easily changed.

Future of Blockchain

Blockchain can make everyday activities much more efficient while also offering more secure forms of ownership through blockchain tokens. Gaming and finance are the most likely ways most consumers will interact with blockchains first.

However, businesses are already using blockchain technology for supply chain to internal asset management. Improved interoperability between blockchains could open a world of possibilities in which assets held on one blockchain can be used elsewhere.

The technologies in the blockchain networks of tomorrow may differ from the blockchains of today, however. Many improvements in how blockchains scale are already being implemented, such as Ethereum’s Dencun upgrade that could boost the network’s speed to 100,000 transactions per second (TPS), compared to Visa, which processes about 1,700 TPS. Projects like Chainlink and blockchains like Avalanche and Polkadot are already working to improve interoperability between networks.

Newer blockchain technology could also change how we think about decentralized ledger architecture, however, and even expand blockchain’s broad definition.

Projects like Avalanche, Hedera, and Kaspa use directed acyclic graphs (DAGs) rather than chains of blocks. This structure allows parallel block validation, ordering the blocks as they are validated while bringing much faster transaction speeds compared to many older chains.

The Bottom Line

Blockchains provide a tamper-resistant and decentralized way to settle transactions and store data. Public blockchains like Bitcoin and Ethereum offer equal access and the ability to transact without intermediaries.

Smart-contract-enabled networks, such as Ethereum or Solana, also bring the ability to host computer programs on the blockchain, opening a new world of functionality from gaming to finance to real estate sales. Private and public sector applications abound as well, with blockchain already in use in many industries and applications ranging from supply chain management to finance.

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Eric Huffman
Editor
Eric Huffman
Editor

Eric Huffman has a diverse background ranging from business management to insurance and personal finance. In recent years, Eric's interest in finance topics and in making personal finance accessible led to a focus on cryptocurrency topics. Eric specializes in crypto, blockchain, and finance guides that make these important topics easier to understand. Publications include Milk Road, Benzinga, CryptoNews.com, Motor Trend, CoverWallet, and others. Always learning, Eric holds several certifications related to crypto and finance, including certificates from the Blockchain Council, Duke University, and SUNY. When he's not writing, you might find Eric teaching karate or exploring the woods.