What is Blockchain Technology?
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If you’re just getting started with cryptocurrency, you have probably heard the term “blockchain technology” used to describe a wide variety of concepts.
The term is, admittedly, a broad one. You’re just as likely to encounter blockchain in a white paper for a new cryptocurrency as you are in an advertisement from a major company like IBM.
So, what does the term mean and why is it so widely used? Blockchain most often refers to a network of computers that uses a common software to order data in such a way that, after being sequenced, ensures it can’t be adjusted or tampered with by any one dishonest user.
Put another way, a blockchain creates a trusted record using cryptography.
While most commonly associated with the Bitcoin white paper, the concept is an older one, and elements of this design can be traced to the work on which Bitcoin’s creator, Satoshi Nakamoto, referenced in the project’s founding document.
Note: as of 2020, there remains debate over what the definition of blockchain technology should be and if and when it’s being correctly applied.
This is due to the fact that there has been an effort to abstract the architecture of blockchains for uses beyond the ordering of transactions in cryptocurrencies.
Some of these efforts will undoubtedly stretch the technology’s application too far, contributing to a more realistic understanding of its expected impact.
How does blockchain work?
At its most broad, the term blockchain describes a public records system managed by a distributed network of computers called nodes.
These nodes must constantly work to record all updates to the network. What makes a blockchain unique is that all nodes maintain a copy of the ledger.
Before diving deeper into the technology, it is important to understand the characteristics that make a blockchain work.
Generally (and with some exceptions), blockchains aim to be:
Auditable – Updates stored in the blockchain can easily be tracked and verified.
Distributed – Blockchains often aim to remain outside the control of a single entity (or are collectively managed by a broad set of known stakeholders).
Immutable – Once a transaction is recorded on the ledger, it can never be changed (or if it is, it must be to the agreement of its stakeholders).
Pseudonymous - Each user that interacts with the blockchain does so with a generated address that does not reveal their identity.
Components of blockchain technology
In order to fully understand blockchain technology’s potential, one needs to dig deep into the components that power it.
To start off, at the root of the technology lies cryptography, the techniques used for secure private communication, and encryption, the process of encoding that information.
Blockchains today are secured by cryptography, the technique used for securing private communication and the movement of digital data.
Cryptography is the science behind creating codes and cyphers that allows people to transmit information in a private and secure way.
In the early 1900s, cryptography was mainly used by the military and spy agencies, particularly during war, where secret communications were a vital way to send information between posts.
Today, cryptography helps secure transmissions that are held blockchains, making the process of sending and receiving data and information more efficient and cost effective.
On blockchains, digital data is protected through the use of cryptography in a way that creates a reliable record owned and maintained by all participants called a “distributed ledger.”
Envisioned as an alternative to trusted databases, distributed ledgers aim to allow users greater oversight into the maintenance of their data, while reducing liability for companies or entities that might today serve as the central owner of this sensitive information.
Given this impact, there are a variety of industries and organizations using blockchains to set up a trusted network to streamline the sharing of information and the record-keeping process, while improving their performance and security.
Central to the distributed ledgers are webs of “smart contracts,” if-then agreements that, when coded in software, can govern the business transactions.
The idea is that, on the blockchain, a program embedded in a protocol’s code could quickly and digitally enforce the kind of contract that today needs to be implemented by a middleman like an insurance agent or financial intermediary.
Since business transactions are governed by contracts, the execution of smart contracts on the blockchain helps the transactional process run more smoothly.
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What is blockchain used for?
As mentioned, the idea that there are blockchain use cases beyond cryptocurrency is still new.
This means there has been an endless number of proposed use cases for these computing networks, some more realistic and practical than others.
Below is a list of industries that have attempted to incorporate blockchain technology with varying degrees of success.
Blockchain technology’s original, and still most popular, use case is to power cryptocurrencies.
In fact, some would argue blockchains are their central element, allowing users to run software that then enforces the rules around their currencies, making this data scarce and valuable.
Because of their blockchains, cryptocurrencies can be borderless, durable, irreversible, permissionless or pseudonymous.
If you would like more information on how blockchains help power cryptocurrencies, feel free to read our ‘What is Cryptocurrency?’ guide, which offers a more extensive explanation.
Given blockchains can now govern digital money supplies, major companies have sought to extend this technology further to other types of financial services.
As such, it’s believed blockchains could solve inefficiencies in parts of the financial system – inter-bank transactions, clearing and settlements – that have typically been the domain of some of the world’s largest and most opaque financial entities.
The idea is these institutions can use blockchain technology to cut costs, better adhere to regulation and generally upgrade the somewhat antiquated technology that helps them run.
One of the most talked about use-cases for blockchain technology is using it to manage supply chains for businesses.
Global trade is a trillion dollar industry, with goods and services being shipped across the world daily. In order for something to travel from one place to the next, there are multiple supply chain participants, each relying on different systems to approve and process transactions.
Blockchain technology could help reduce the barriers formed from these different systems, removing certain costs and potential points of failures along the way.
Records today, be it health care, real estate or voting, are often maintained by centralized data centers, which brings added costs and risks to the entities entrusted with them.
By nature, this means that information is vulnerable to security breaches and can be difficult and expensive to access.
Many industries need a more efficient and secure system for managing these records while performing and recording other complex transactions.
This is where blockchain technology comes in, and there is some hope it could help solve these long-standing issues, offering a mechanism for recording and maintaining comprehensive records while allowing individuals to have more control over their own data.
Since the 2009, and the inception of Bitcoin, blockchain technology has been the driving force behind a variety of different projects.
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