Blockchain, a type of distributed digital ledger technology (DLT), is a relatively new and exciting way of recording transactions in the digital age. First popularized by Bitcoin creator Satoshi Nakamoto, blockchain has the potential to revolutionize many of our modern-day processes, such as supply chain management and copyright and ownership protection, saving time and money in the process.
Read on to learn what blockchain is, how the technology works and its potential real-world applications.
What is a blockchain?
A blockchain is a digital database that stores records in chronological order. Information on a blockchain is kept in “blocks” linked to one another on a “chain” through shared mathematical algorithms. Blocks contain data, usually transaction records, including the sender and receiver of a transaction, a timestamp and the amount and type of currency sent.
A simple string or chain of three blocks may look like this:
Blockchains differ from other types of digital databases in a couple of ways.
- Distributed databases – Data is stored on multiple servers which are scattered across several physical locations. Generally, this provides greater reliability, performance and transparency than conventional databases.
- Open source software – The entire network community can see the nuts and bolts of the code behind it, working together to discover and fix bugs, glitches or flaws.
- Data can only be added – Once a blockchain network verifies new information, it cannot be altered. New data must be verified by a majority of the network participants, meaning that the responsibility for blockchain security and trustworthiness is shared rather than taken over by a single, central entity.
How does blockchain work?
Blocks in a blockchain contain more than transaction data, they also have what’s known as a hash. Cryptographic hash functions, or hashes, are the mathematical algorithms mentioned above. These fulfill a crucial role within blockchain systems and are the reason blockchain works in the first place.
Hashes appear as a variable series of numbers and letters on a block, such as 4760RFLG07LDD492K8381O82P78C29QWMN02C1051B6624E99. This number-letter combination is generated from the data within a block and functions as its digital signature.
Each block includes the hash of the previous block in its chain. This is how blocks are linked together and how blockchain networks maintain their integrity. Modifying any content within a block would change the hash, which is a red flag for others in the network.
Put it all together, and you get a self-regulated network without intermediaries, where third parties cannot monitor or interfere with transactions.
Proof of work vs proof of stake
Files in a blockchain are distributed across a network of computers called nodes. To add information to a blockchain, a node must first integrate this data into a block along with the hash of the previous block. Then, they must attempt to generate a new hash.
Once a hash for the new block is generated, nodes add the block to their version of the blockchain file and broadcast the update across the network. A majority of the computers on the network must verify this new block and update their copy of the blockchain file for the update to be considered valid. If consensus is reached, the block permanently becomes part of the chain, and the computer or node that created it is rewarded.
The process in which computers compete to create new blocks is called “mining.” Blockchain networks run this competition in one of two ways:
Under a proof of work system, nodes in a blockchain directly compete to see which one can solve a complex mathematical equation first. The first one to do so gets the “proof” of their “work” and is rewarded by earning the right to mine the next block of a transaction. The miner is then rewarded for processing the block.
Under a proof of stake system, nodes are selected via a computer algorithm that employs a certain degree of randomness. Nodes that hold more of the network’s currency are more likely to get chosen, which rewards prolonged participation — their “stake” — in the network over raw computing power. Those selected to process a block are known as validators instead of miners.
Types of blockchain networks
There are four main types of networks in the blockchain ecosystem. All of them can be useful, but each one is better suited for different use cases.
|Public (permissionless)||Private (permissioned)||Hybrid (Semi-private)||Consortium|
|Good for…||› Trust
|Struggles with…||› Scalability issues
› Lower trades per second
› High energy consumption
|› Lack of trust
|› Transparency||> Centralization
Public blockchains are the first type of blockchain network to be developed. This is the type of peer-to-peer network that is associated with bitcoin, which helped popularize the technology behind it. They’re open to everyone, and all transactions on the network can be traced.
Public blockchains are also known as permissionless blockchain networks because anyone who joins can read or write to them anonymously without the need for authorization. Anyone with internet access can sign on to become an authorized node, and participants in the network are responsible for reaching agreements on the state of the chain.
Examples: Bitcoin, Ethereum, Litecoin, NEO
Private blockchains are fundamentally different from public blockchains because they’re run by a central authority — they’re not entirely decentralized networks. The central authority determines who can read, write and participate in the network’s activities, which is why they’re also known as permissioned blockchain networks.
Private blockchains offer greater customizability and can be used to store sensitive data. In exchange, members are often required to pass KYC (Know Your Customer) authentication, which means they must undergo specific identity and background checks. Thus, they cannot remain anonymous.
Examples: MultiChain and Hyperledger projects, Corda
Hybrid or semi-private blockchains were built to offer the best of both worlds by combining elements from both public and private types of blockchain. For example, they’re run by a single entity but may employ both permission-based and permissionless systems to fine-tune access to their data.
Transactions are generally not public but may be verified if necessary. Users join the network as anonymous participants and only reveal their identities to other parties when they engage in transactions.
Examples: Dragonchain, XinFin, Ripple
Consortium blockchains are most similar to private networks but share some characteristics with public blockchains. These are controlled by multiple central authorities and collaborate on a decentralized network.
A predefined group of individuals or nodes are in charge of reaching consensus in consortium blockchains. Like hybrid blockchains, the ability to read or write on the network may be public or restricted to select participants.
Examples: Marco Polo, Quorum, Energy Web Foundation, IBM Food Trust
What is blockchain used for?
Blockchain is most frequently associated with cryptocurrency and NFTs, but its numerous applications go far beyond that. Blockchain has already had a marked impact on several sectors of the economy thanks to its novel use in solving issues of transparency and cost in data processing.
After all, any kind of data can be stored in a blockchain, not just financial records.
Digital currency is the most well-known of all blockchain applications. Cryptocurrency has experienced a pronounced shift into the mainstream during the last couple of years. Popular crypto such as bitcoin, ether, litecoin and dogecoin are no longer niche products: Venmo users can buy Bitcoin and three other coins on the app, firms like Visa and Paypal have incorporated crypto into their payment infrastructures and many financial advisors now consider these digital assets serious, albeit high-risk investments.
Each cryptocurrency has its own, unique blockchain where transactions are combined into blocks and then linked together. For example, the Bitcoin blockchain and Ethereum blockchain do not interact. The cryptographic nature of blockchain networks minimizes the risk of your financial information or identity being compromised, allowing for anonymous and more secure transactions.
If you’re interested in learning more about cryptocurrencies and investing in crypto, take a look at our lists of the best crypto wallets and the best crypto exchanges.
Non-fungible token (NFT)
Non-fungible tokens are likely the second most popular application for blockchain after cryptocurrencies. NFTs are digital items — music, art, trading cards, GIFs, videos — that, unlike crypto, are not interchangeable. Their sole rights to ownership are sold on a blockchain: owning an NFT means you have a digital certificate of authenticity for that specific token.
NFTs are created, or “minted,” on various blockchains, including Ethereum, Cardano, Solana and Flow. Blocks for tokens in these networks store information related to the digital file associated with it and the transaction amount, date, sender and receiver.
Anti-piracy advocates hope that NFTs will help artists fight against illegal reproductions of their work and copyright infringement by tokenizing their work. Because NFTs function as proof of creation and ownership, they can also create additional revenue streams for artists through royalties on all subsequent sales of a token.
If you’re interested in learning how to invest in these digital assets, check out our guide on how to buy NFTs.
Smart contracts are algorithms written into a blockchain that follow simple “if/when… then…” statements. The program triggers when a predetermined condition is met, automatically carrying out the following action written into the code.
Smart contracts can be configured to execute a variety of actions, for example, releasing funds, sending notifications, issuing a support ticket or registering an item. To establish the terms of a contract, participants on the network determine how data will be represented on the blockchain, agree on the conditional and develop a system for resolving disputes.
Businesses use smart contracts to automate pre-established processes, reducing operational costs. Additionally, by limiting human interaction with company data, the possibility of it being lost, sold or stolen is also reduced. Smart contracts are used in several major industries, including healthcare, real estate and finance.
The medical sector has been moving away from paper recordkeeping for years now and adopting blockchain technology is yet another step in that direction. Blockchain helps reduce healthcare costs by improving access to information and streamlining processes.
Securing patient records is perhaps blockchain’s most tangible use in healthcare. Today, most patient data is located in silos, which means that your specialists may not have access to the same data that your primary care physician has, and vice versa.
Blockchain could help alleviate this issue by connecting medical records systems from different providers to a single network. The patient would hold the key to their data — like how traders may hold the private key to their crypto wallet — so they would have to consent for a medical professional or insurance company to access it on the network.
Another use of blockchain technology in the healthcare sector is tracking prescription medicines. Using blockchain would allow pharmaceutical companies to track their products based on serial or batch numbers and combat the problem of counterfeit medications.
Banks and financial institutions
Blockchain technology has arguably had the greatest impact on the financial sector. Its potential applications are numerous and could affect various services, including asset management, insurance, payments, settlements and compliance. One such example is crypto credit cards formed through partnerships with popular card networks such as Visa and Mastercard.
Blockchain’s most straightforward use in finance is expediting the transfer of funds between parties. This is particularly handy for cross-border transactions, which may otherwise need to pass through multiple banks on the way to their final destination.
Blockchain could eventually rival current equity trading platforms because of its ability to validate and settle transactions so quickly. The technology could reduce the wait time when selling stocks and help traders access their funds faster.
Companies are using blockchain technology to monitor supply chains while improving transparency and accountability. For example, companies can pinpoint inefficiencies within chains much quicker by removing paper-based trails. Blockchain can also help track and trace materials and verify the authenticity of consumer goods.
Blockchain has proven itself particularly handy for the food industry. Aggregators, farmers and individual growers can participate in blockchain networks led by food manufacturers and keep a close eye on the food chain to see how perishables travel from farm to table. Walmart has worked with IBM on a food safety blockchain solution to digitalize the food supply chain process and trace over 25 products from 5 different suppliers.
Pros and cons of blockchain
Blockchain offers various advantages that are worth considering for organizations, institutions and businesses. However, the technology suffers from some unique flaws that should be considered before implementing blockchain solutions into a workflow.
- <strong>Transparency.</strong> All participants in a blockchain network share the same documentation instead of individual copies. Because data is shared across a wide network of computers, the blockchain is available for anyone to access, verify and audit data and transactions.
- <strong>Traceability.</strong> Information in a blockchain is organized chronologically and every block of data has an alphanumeric code linked to the preceding block. This makes it easy to track a specific transaction and trace it back to its source.
- <strong>Security.</strong> Data can only be added to a blockchain. Once a block has been created, it cannot be altered, securing the information within it. Moreover, the decentralized nature of most blockchains makes them immune to takeovers or corruption by a central entity.
- <strong>Energy consumption.</strong> The way proof of work networks function is inherently inefficient. Having several network users competing to validate the same operations is a huge waste of energy that has a strikingly negative impact on the environment.
- <strong>Scalability.</strong> As the number of users in a blockchain grows, so does the number of operations. The computational power required for these operations may outpace the workload that hard disks are realistically able to handle.
- <strong>Unavoidable security flaw.</strong> Blockchains are generally more secure than other databases and record-keeping methods but they share one key flaw. If more than half of the nodes participating in the network create invalid transactions or deny legitimate ones, the rest cannot intervene. This is known as a 51% attack.
How to invest in blockchain
As a new technology that represents an exciting area of innovation, blockchain has garnered interest from the worldwide investing community. One factor that has made blockchain appealing to investors is society’s rapid shift to a digital economy, especially after the COVID-19 Pandemic.
This shift has led to advances in blockchain networks and adjacent technologies such as cloud computing and e-commerce. Additionally, blockchain has gotten attention from high-profile tech firms like Amazon and Salesforce, and many sectors of the economy are considering implementing blockchain into their operations.
There are a couple of ways of investing in blockchain technology — some direct, others not so much.
The most straightforward method of investing in blockchain is by purchasing stock in companies that have a financial interest in the future of the technology. For example, you could invest in companies like NVIDIA and AMD, two leading manufacturers of graphics processing units (GPUs).
GPUs are often associated with graphic fidelity in video games and play a significant role in crypto mining. Invest in these companies and you’re also investing in the future of cryptocurrency, which supports the future of blockchain.
Alternatively, you could buy stock from companies that offer crypto services and investing. Interest in cryptocurrencies, which has spread due to mainstream attention, has also helped fuel interest in blockchain tech. Investing in blockchain this way is also an easy way of learning about crypto without gambling on the coins themselves.
Another way to invest in blockchain is through exchange-traded funds (ETFs). ETFs are a group of stocks, bonds or assets that will grant you a stake in its basket of investments when you buy a share. Blockchain ETFs hold a basket of publicly traded companies related to the technology, be it through crypto mining, using or developing blockchain technology or holding significant amounts of crypto.
Investing in blockchain ETFs is seen as a safer alternative to buying individual blockchain stocks. The latter can bear similar risks as investing in cryptocurrency, whereas diversified index funds and ETFs have proven solid long-term value. Nonetheless, these ETFs still carry an inherent amount of risk owing to the nature of the blockchain ecosystem and should be just one part of a diversified portfolio.
A more “hands-on” alternative for investing in blockchain is to mine cryptocurrencies like Bitcoin. Miners are rewarded with coins for validating transactions on a blockchain. Doing so requires expertise and a significant upfront investment due to the current cost of GPUs and the competitive mining environment.
Those who want to “earn” their way to riches instead of speculating in the market, but don’t have the computational power to do so themselves, may also consider investing in a mining pool. These are mining operations where a large group of investors pour their money together to have a greater chance of succeeding against companies with vast server farms that process equations 24/7.
Latest Blockchain News
Universities are starting to experiment with receiving cryptocurrency payments for college expenses. Students will now be able to use crypto to pay tuition at Bentley University, named one of the top 10 best business colleges in the U.S. by Money in 2020. Through a partnership with cryptocurrency exchange Coinbase, the institution will accept bitcoin, ethereum and USD Coin for tuition payments.
According to an analysis from the intelligence company Morning Consult, people continue to invest in crypto despite low trust. Crypto has had a bumpy ride in 2022 due to record-breaking amounts of coins being stolen, federal regulators potentially cracking down on the market and its signature volatility. Despite waning confidence, the number of adults planning to buy crypto has remained steady throughout the year.
What is a node in blockchain?
Nodes are computers linked to a blockchain network and may produce, receive and move data. Nodes keep track of the transactions in the network and are responsible for verifying the validity of new blocks. Each node has a unique identifier that helps distinguish it from other nodes in the network.
What is blockchain mining?
Blockchain mining is the process of using a computer’s processing power to solve complex mathematical equations. Doing so can earn miners new tokens or coins, for example, bitcoin or ether. Basically, miners get paid to function as auditors in blockchain networks.
Is blockchain safe?
Blockchain networks are safer in some ways than traditional methods of record-keeping thanks to cryptography and the nature of distributed ledgers. How hashes work makes it practically impossible for the data in a block to be altered. However, they are not immune to hacking or tampering. Cybercriminals can use 51% attacks and double-spending to manipulate a blockchain.
What is a ledger in blockchain?
Blockchain is often called a ledger because it catalogs all the transactions in a single network. Blockchain is also known as a distributed ledger technology (DLT) because its records are shared and synchronized across a host of independent computers and are accessible by multiple people. This is different from centralized ledgers, which are more prone to cyber attacks and fraud because they have a single point of failure.
Summary of What Is Blockchain
Blockchain technology has the potential to revolutionize the way governments, institutions and corporations work. Companies in various sectors of the economy have already begun to incorporate it into their day-to-day operations. Different types of blockchain will be better suited for different use cases.
Blockchain is no silver bullet: it isn’t foolproof, can negatively impact the environment and doesn’t offer optimal solutions for every industry. Nonetheless, it’s a more transparent and potentially safer way of keeping records than regular databases or ledgers.
© Copyright 2021 Ad Practitioners, LLC. All Rights Reserved.
This article originally appeared on Money.com and may contain affiliate links for which Money receives compensation. Opinions expressed in this article are the author’s alone, not those of a third-party entity, and have not been reviewed, approved, or otherwise endorsed. Offers may be subject to change without notice. For more information, read Money’s full disclaimer.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.