What is a Blockchain?
What is a Blockchain?
A blockchain is the technology underpinning cryptocurrencies like Bitcoin and Ethereum. At a basic level you can think of a blockchain as a long list of transactions that anyone in the world can view and verify the truth of. The Bitcoin blockchain, for example, records every transaction or time that a user sent or received bitcoin over time.
Cryptocurrencies and their underlying blockchain technology enable the transfer of value online without requiring intermediaries such as banks or credit card companies. Envision a worldwide, accessible alternative to all the financial services you currently use, available to anyone with just a smartphone and an internet connection.
- Blockchain technology has the potential to be used in many industries outside of strictly banking. Supply chain management, accurate and efficient healthcare offering, medical research, gaming and many more use cases are already being implemented.
- The key concept in blockchain is the ability to transact securely across the world without the need for an independent third party verifier.
How Blockchains Work
While there are thousands of different blockchains, they all fundamentally work the same way. Imagine you have an accounting book of a shipping business that’s been around for many years.
Each chapter or “block” contains a year of transactions of that business which your accountants have agreed to be true. At the beginning of the book is the first transaction, and if you flip to the end of the book, you’ll find the most recent transaction.
Now imagine that this book is kept on thousands of computers spread across the world and that these computers are your accountants, constantly making sure that each record or transaction is correct.
This is called a “shared ledger”, or “shared digital ledger”, an ongoing and neverending record of public facing transactions. Because this ledger is visible to every computer on the network it is impossible for a computer (or accountant) to add in a transaction that is false, since everyone has to agree on it.
The name “blockchain” springs from the process itself. Once each transaction is verified as true it gets added to a bigger “block” or chapter of information. Once a block is full, it is linked to the previous block, creating a long chain of blocks, or “blockchain”.
Advantages of Blockchains
Global: Because of their digital nature, Cryptocurrencies are easy to send quickly and cheaply worldwide.
Decentralized: Unlike traditional ledgers or databases managed by a single entity, blockchains are decentralized and distributed across many computers. This reduces the risk of central points of failure and attacks, as no single party can alter the data without the entire network’s agreement.
Transparent and Secure: Every transaction on a blockchain is visible to all participants and must be collectively agreed upon. This transparency, combined with strong cryptographic security, helps prevent fraud and unauthorized activities.
Immutable: Once data has been recorded on a blockchain, it is extremely difficult to change. This immutability ensures that no one can tamper with the transaction history, providing trust in the system.
Efficient: Blockchain technology can significantly reduce transaction times to near-instantaneous levels and cut out intermediaries, leading to lower costs and faster business processes.
Common Blockchain Questions
Is Bitcoin a blockchain?
Bitcoin was built as a type of digital currency, while blockchain is the underlying technology that makes Bitcoin possible. When you see Bitcoin written uppercase, it’s referring to the blockchain, bitcoin lowercase is referring to the currency, while BTC is the exchange ticker symbol.
How many kinds of blockchains are there?
There are thousands of different blockchains used in applications such as cryptocurrencies (like Ethereum), supply chains, or even traditional banking systems. The two most common types are public and private blockchains.
Public Blockchains
These are open and decentralized networks where anyone can participate without permission. They can read data, make transactions, and participate in the consensus process. Bitcoin and Ethereum are the most well-known examples of public blockchains.
Private Blockchains
Private blockchains are centralized and require permission to access. They are typically used by organizations for internal purposes where the blockchain is only accessible to specific people. This type provides more privacy and faster transaction speeds but at the cost of decentralization.
How do you send and receive money over a blockchain?
First, you’ll need a digital wallet such as Backpack, which acts like your bank account for cryptocurrencies.
This wallet allows you to access your digital currency and keeps your private keys secure. These keys are what you use to access your funds.
To send money, you enter the recipient’s public address (which functions like a bank account number) into your wallet. You then specify the amount of cryptocurrency you want to send, authorize the transaction using your wallet, and send.
Simple!
Disadvantages of Blockchain Technology
Scalability Issues: The blockchain must still be able to efficiently sort, verify and store each transaction, even as the number of transactions grows. This can lead to scalability issues, where the speed and efficiency of the blockchain can be compromised.
Energy Consumption: The consensus mechanisms (the way the network of computers verify transactions are correct) that some blockchains like Bitcoin use, namely “proof of work”, require substantial amounts of computational power and energy, raising environmental concerns.
Regulatory Uncertainty: The novel nature of blockchain technology poses challenges in regulation and legal frameworks, which can hinder its adoption and create an uncertain environment for users and businesses.
Who Invented the Blockchain?
In late 2008, A person or group using the name Satoshi Nakamoto published a whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash System". This whitepaper outlined the first practical implementation of blockchain technology as the underlying framework for Bitcoin, a new kind of digital money.
For the first time, this made secure online transactions possible between two strangers anywhere in the world without the need for an intermediary such as a bank.
Nakamoto's invention was aimed at creating a system for electronic transactions without relying on trust, thus solving the double-spending problem associated with digital currency using a peer-to-peer network.
The ‘double spend’ problem is where a person could use the same digital money more than once. In the physical world, once you hand over your paper currency, it is no longer in your possession. In the digital world, you need a system to prove that your digital currency hasn’t already been spent elsewhere.
For Nakamoto, the solution was a network of computers that was able to constantly verify the transaction or ownership of Bitcoin at any given time. The database that stores all this information is called the Bitcoin network. In exchange for doing the work of double-checking transactions, the computers or “miners” are rewarded with small amounts of bitcoin. This is called “mining” and is also the way new bitcoins are distributed into circulation.
Bitcoin the cryptocurrency cannot exist without the Bitcoin network, since the existence of the network and its record of transactions is what makes bitcoin ownership accurate.
Where Does New Cryptocurrency Come From?
Each blockchain has a different way of deciding how much new cryptocurrency is created and distributed, but here are the most common ways:
Mining: Mining is the most common method for creating new cryptocurrency, particularly for coins like Bitcoin and many others that use a Proof of Work (PoW) system. In PoW, powerful computers solve complex mathematical problems that are difficult to compute but easy to verify.
The first miner to solve the problem gets the right to add new transactions to the blockchain and is also rewarded with a little bit of the same type of cryptocurrency on that network.
Minting: Minting is the process used in Proof of Stake (PoS) cryptocurrencies. It involves computers called “validators” who are chosen to create new blocks and validate transactions based on the number of coins they hold as collateral. It is less energy-intensive compared to mining.
Airdrops: New cryptocurrencies can also be distributed to existing coin holders as a marketing strategy or as a reward for holding the original coin. This is known as an airdrop.
What's the Future of Blockchains?
The potential of blockchain extends far beyond cryptocurrencies by providing solutions to issues such as supply chain transparency, secure electronic voting systems, and efficient record management. Industries from healthcare to finance to public administration are already exploring blockchain's potential to enhance data sharing, improve security, and reduce operational costs.
Blockchains like Ethereum have introduced concepts like “smart contracts”, which automate agreements and transactions based on predefined rules. This flexibility has opened new possibilities for decentralized applications (Dapps) beyond simple currency transactions.
Blockchain technology is a groundbreaking innovation with the potential to disrupt traditional business models and financial systems. While it presents challenges such as scalability and environmental impact, its advantages in terms of security, transparency, and efficiency make it a compelling area of development in the digital age. As technology evolves and more sectors adopt blockchain, it could lead to significant changes in how we conduct transactions and manage data across the globe.
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