If you haven’t noticed, we’re out here talking about blockchain technology non-stop. We would never dare leave anyone out of a conversation so we want to give you a seat at the table in the form of knowledge. If you’re interested in emerging technology, business, money, or – you know – the world we live in, you will find this interesting (we promise)! So, what is blockchain technology, you ask? We’d love to answer that question for you.
What Is Blockchain technology?
Blockchain technology is a database of digital lists, or ledgers, that hold records referred to as “blocks.” Blocks hold information in a secure, transparent, and permanent way that everyone can access. The original function of blockchain technology was to record cryptocurrency transactions with the world’s first crypto: Bitcoin. Now, blockchain technology has evolved in many ways and has dozens of different use cases. But, before we get into that, let’s talk about what a blockchain is.
A blockchain is a series of transactions known as “blocks.” Each block contains all of the information about a transaction, a hash. It also contains the previous block’s hash. A hash is a code that identifies a block, it changes each time the data of the transaction is altered.
Because each block contains the hash from the previous block, they can build on top of each other, forming a chain. If someone changes one block’s data, the following blocks become invalid since the hashes will no longer match. Therefore, the change will need to go through a validation process. This system is what makes tampering with blockchain information almost impossible.
It’s just a chain of transactions, each referring to the last. If someone wants to do a transaction, they don’t personally edit a block or chain, they submit a request to the peer-to-peer network to be checked, validated, and approved.
How Does Blockchain Technology Work?
Blockchain technology is completely decentralized, meaning that it doesn’t fall under a central authority like a government or a bank.
A blockchain is built up of countless computer systems (known as nodes) from around the world working together to validate transactions and build blocks. This peer-to-peer network ensures that the authority and responsibility are completely shared to eliminate bias and error.
There’s no governing body, no regulation, and no oversight from anyone apart from the community of nodes around the globe. Instead, the nodes act as blockchain ambassadors who have volunteered for their position and the good of the network as a whole. They are incentivized to review and validate transactions with crypto rewards, of course. If a new transaction is made or a block is added, the nodes in a network must come to a consensus before it is validated. The process of validating transactions is done using consensus mechanisms.
We know, that’s a lot to process, but stay with us! Blockchains are databases, a block represents a completed transaction, they are encrypted and assigned identification numbers and linked together to create an unchangeable, public record.
Blockchain Consensus Mechanisms
As we were just discussing, a consensus mechanism is a system that blockchains use to validate and authenticate transactions and keep everything correct, secure, and running smoothly. Consensus mechanisms may also be referred to as consensus protocols or consensus algorithms, among other things. So, what do they look like? Good question.
Another word for the computer systems that make up a blockchain (other than nodes) is miners. And for this specific section of our chat, we’ll refer to them as such. Consensus mechanisms are processes that allow miners the opportunity to come to an agreement on the validity of a new transaction and add it to the blockchain. While this may sound like a long process, it’s extremely speedy because of the sheer amount of miners contributing to a single blockchain.
There are many different consensus mechanisms used by blockchain technology but the most common are Proof-of-Work (PoW) and Proof-of-Stake (PoS) – let’s talk about them!
Proof of Work
Most blockchains use PoW including the blockchains of the two largest cryptocurrencies: Bitcoin and Ethereum. In the PoW process, miners compete against each other to solve an arbitrary equation as fast as possible. The winner gets the opportunity to review and validate the new transaction and, in return, they are awarded cryptocurrency. Miners are incentivized to validate transactions with financial rewards and incentivized to submit only truthful, accurate transactions because they can be reviewed by anyone in the network and are linked transparently to the miner who created the block.
PoW works to ensure a blockchain is correct, secure, and fair. In addition, PoW controls the speed at which miners can create blocks. This controlled speed also protects the blockchain from hackers. It ensures that each transaction connects to the previous one and the next.
The unfortunate thing about this avenue of consensus is that it is extremely inefficient in terms of energy consumption. The carbon footprint of a PoW blockchain is no joke as countless computers all over the world are fighting for a single transaction at the same time. Many miners hung up their hats after a while as networks grew and the computing power’s cost began to outweigh the cryptocurrency earnings. So, to be nice to the earth and the wallets of miners, many new and more energy-efficient protocols have emerged.
Proof of Stake
Proof of stake is a similar concept to proof of work, but it’s far more green. Rather than having miners compete for a transaction, PoS allows miners to put their cryptocurrency at stake for a chance to validate new transactions and earn tokens. It’s rewarding miners who are invested in that blockchain.
Validators are selected based on how much they have staked and how long they have been staking their cryptocurrency on that blockchain. It selects validators who are invested, both financially and time-wise, and offers them a chance to participate in this way. This way, someone “wins” a transaction by expressing and proving interested rather than competing simultaneously with an endless roster of competitors.
Once the winner has validated the new transactions, other parties can assess them and confirm if it’s accurate. Once it has been confirmed a certain number of times, the blockchain will be updated and everyone involved will be rewarded.
Let’s sum all of this up: blockchains are decentralized, so they use P2P protocols to manage the transactions and information. The P2P protocols are carried out by nodes around the world and are done using consensus mechanisms. There are many types of consensus mechanisms, but you’ll likely encounter PoW and PoS most often. Also, unless you plan on mining cryptocurrency yourself, this is just background knowledge for you!
The reason that we call nodes “miners” in this case is that the process of validating transactions is actually how new cryptocurrency is made. The process of adding blocks to a blockchain is also the process of adding currency to the network. Pretty cool, right?
The Benefits of Blockchain Technology
Now that we’re up to speed on what blockchain technology is, you might be wondering what the point of it is? Because this type of technology is incredibly transcendent, the potential use cases and benefits are infinite. But, nobody’s got that kind of time so we’re just going to name a few of the benefits that are present in today’s understanding of blockchain technology.
Decentralization / Autonomy
With decentralization comes autonomy. As we mentioned, blockchain uses P2P governance, therefore it’s controlled by both everybody and nobody simultaneously. This means that everyone who is part of the network has complete autonomy and does not fall under anyone else rule. In a more individual sense, blockchain technology offers autonomy for people to transact exactly as they wish outside of the constraints of regulations and rules that are present in typical institutional settings. Everything that happens within a blockchain is centred
around individual choice.
Because of hashing, every block on a blockchain has a unique fingerprint that cannot be tampered with without altering that fingerprint. Once altered, that block goes back into the validation process, therefore making it almost impossible to be hacked or tampered with. Hashing, also known as cryptographic hashing, as well as the consensus mechanisms, work together to build trust, security, and authenticity on a blockchain.
Transparency & Traceability
Another key benefit of blockchain technology is the fact that everything is recorded and accessible to everyone. Blockchains are incredible save environments because every action can be tracked and is recorded unchangeable forever. If any sinister activity happens, it can be traced to the source. That fact alone may incentivize everyone to conduct themselves lawfully and respectfully.
Some Disadvantages of Blockchain Technology
We’re not fans of one-sided explorations. So, we want to enlighten you on some of the disadvantaged of blockchain technology, too.
As we mentioned, blockchain and cryptocurrency are notorious for having a massive carbon footprint. As networks grow, energy consumption is significant and incredibly problematic. While new solutions are emerging all the time, it has proven to be a pretty big downfall of the space.
Records on a blockchain are there forever, therefore they are immutable. While this works as one of its benefits in the form of transparency and traceability, it can also be a pretty serious downfall. If you’ve ever posted something on the internet and regretted it, you’ve probably appreciated the “delete” button. Imagine if all different types of transactions that you’ve done were public forever. While your name wouldn’t be attached to them exactly, everything can be traced.
Even though we can all gain a basic understanding of blockchain technology, it’s still really complex and difficult to understand in its entirety. If you were looking to build an application on a blockchain or start mining, that type of thing isn’t exactly accessible to the general public. Anyone can buy cryptocurrency and engage with blockchain technology. Though, there are many functions of the technology that are only really available to folks who are experts on the subject.
Now that you know some of the benefits and disadvantages, let’s talk about use cases.
Another downfall of this type of decentralized environment has been a lack of regulation and legal clarity. It’s being worked on by many countries almost daily but the disruptive technology has been hard to classify or fit old standards and laws.
Some Blockchain Use-Cases
It’s impossible to grasp blockchain technology without understanding how it can impact our lives. So, here are some of the many ways that blockchain technology can be utilized.
We’ll start with the obvious: blockchain technology is used to support the buying, selling, trading, and mining of cryptocurrency. Some cryptos such as Bitcoin and Ethereum have their blockchains while others aren’t native to a specific blockchain. You really can’t have cryptocurrency without blockchain technology.
Smart contracts are blockchain applications. These contracts are built with a set of conditions and they are executed instantly once the conditions are met. In this way, people could side-step middlemen like notaries and lawyers to validate agreements when they are executed. For example, if you’ve agreed to pay someone the second they provide a service, once it’s confirmed by both parties that the service has been provided that the funds will be distributed instantly. Smart contracts are a really exciting aspect of blockchain technology.
Banking & Finance
Of course, blockchain technology can be used to carry out the normal functions of banks in a decentralized nature. From transfers and holding to settlements and lending, blockchain holds a ton of potential for banking. In addition, the ledger system itself can be incredibly useful for accounting practice. When it comes to financing, blockchain is endlessly powerful.
Arts & Entertainment
There are now marketplaces where you can buy NFTs (nonfungible tokens) that represent digital assets. Assets like art, music, or photography – for example. This is exciting for artists, consumers, and collectors alike. Beyond NFTs, blockchain has a lot of functions to support the music industry. Musicians can benefit from the tech’s ability to trace streams, provide royalties, sell tickets, and more. The arts community and blockchain technology have far more overlaps than you may expect.
Supply Chain & Logistics Management
Shipping, especially internationally, is costly and complicated. Putting information on a distributed ledger can save a ton on transportation costs. Not only that, but it can store shipment information. Therefore, it can let authorities know that the entire supply chain is following the law. Blockchain can provide all stakeholders along a supply chain with the same information at the same time. This reduces communication and the potential for human error. Overall, blockchain technology can give supply chain, shipping, and logistics professionals more time to carry out their most important tasks. This way, they don’t have to worry about tracking and sharing data.
With the rise of the cloud, we saw data storage like never before. Instead of saving everything to a computer’s hard drive or external storage which could crash or be lost, there is now a location for storage that can be accessed anywhere with the internet. However, cloud storage is a centralized application. Often the more storage you require, the more it costs. A cloud has a central point that an attacker can hack. By comparison, millions of computers worldwide host blockchain information.
The medical industry could benefit from several blockchain features. For example, things like sharing data and medical information, completing complex, multi-party insurance payments, tracking a patient’s journey with many different medical health professionals, and validating information.
Things like smart contracts, file storage, and data tracking could support everything to do with the real estate market. This includes property ownership documents, the sales themselves, inspections, mortgage conditions, etc.
And that’s just to name a few! Exciting stuff.
Getting Involved in the Future of Blockchain Technology
If this has got you excited, there are so many ways to dive in. You could purchase some cryptocurrency, for example, to carry out your first blockchain transaction. You could invest in businesses that leverage blockchain, attend blockchain meetups and talk to passionate folks from all sides of the industry, or just read, research, and keep your finger on the pulse! It all starts with education, and joining us for this exploration was a huge step. Thank you for hopping into our world, you’re always welcome.