What is blockchain technology?
The beginner's guide to blockchain
Blockchain technology is a term you’ll often see used in conjunction with Bitcoin and the wider cryptocurrency industry.
And while this new financial frontier has certainly helped popularize blockchains, core elements of the technology actually date back as far as 1979 – long before the arrival of digital assets.
What is a blockchain?
A blockchain is a special type of online database system that distributes the process of storing data across a network of computers connected to the internet.
Each computer stays in constant communication with others in the network, making tampering with information stored within their database or ledger nearly impossible. A ledger is another name for a centralized record of information – usually financial information like transaction data.
However, a blockchain’s ability to maintain consensus among distributed computers means that they do not require the same sort of centralized oversight as traditional ledgers.
This is what makes blockchains decentralized. Developers program blockchain protocols to adhere to a strict set of rules. The protocol automatically issues financial incentives to those who follow the rules, and penalties to those who don’t.
It is this programmatic usage of incentives that allows blockchains to operate without human management.
Characteristics of a blockchain ledger
Before diving deeper into the technology, it is important to understand the main characteristics of a blockchain.
- Auditable – data stored on the blockchain can easily be tracked and verified.
- Distributed – Blockchains often aim to remain outside the control of a single entity. They are often collectively managed by a broad set of volunteers.
- Immutable – Once a transaction is recorded on the ledger, it can never be changed (or if it is, it must be agreed upon by at least 51% of nodes).
- Pseudonymous - Each user that interacts with the blockchain does so with a generated address that does not reveal their identity.
How does a blockchain work?
Each computer that helps to update, manage and verify information on the blockchain is known more specifically as a “node.” Nodes can perform a variety of roles and anyone in the world with a smart device, an internet connection and access to electricity can run a node.
As the name implies, blockchains are virtual blocks filled with data and linked chronologically in a chain.
Each cryptocurrency will use an underlying blockchain to serve as its distributed ledger, and rely on a community of nodes to manage it. This means each time a user sends cryptocurrency to another, every node in the network will assist in verifying the transaction. Each node then updates their own version of the blockchain ledger accordingly to reflect the changes.
Nodes play a crucial role in running and securing blockchain networks and must constantly work to record all updates to the network.
One of the major advantages of using a publicly distributed blockchain versus a private bank ledger is that all nodes maintain their own copy of the financial record.
Each of these nodes works together, without centralized oversight, to verify transactions and information before they add to the blockchain database. Each block of information is digitally chained to the previous block using cryptographic techniques.
Not only does this promote transparency but it also makes blockchains incredibly difficult to tamper with.
Changing just a single transaction on a blockchain ledger would require altering the record of at least 51% of all nodes in that particular network – something that would be incredibly difficult given the globally spread nature of nodes.
What can a blockchain be used for?
The highly secure and immutable nature of blockchains makes them ideal systems for a large number of industries.
While some of these industries have been faster than others in adopting the benefits of blockchain, all of them are exploring its potential. By decentralizing information among users, blockchain has the potential to create greater transparency across each of these industries.
Some use cases are well established and already being used by millions around the world, while others are still in their proof-of-concept phase.
Blockchain technology’s original, and still most popular, use case is to power cryptocurrencies.
The peer-to-peer, censorship-resistant nature of blockchains has allowed developers to create all kinds of cryptocurrency projects that each serve a range of different utilities:
- Crypto assets like Monero (XMR) and Zcash (ZEC) allow individuals to transact in a completely private manner.
- Stablecoins such as USD Coin (USDC) and Tether (USDT) peg their value to real-world assets. This provides users with a way of reducing volatility within their cryptocurrency portfolios. Learn more about these assets with our article What are stablecoins?
- Some crypto assets such as Uniswap (UNI) and Curve (CRV) serve as governance tokens, allowing holders to vote on decisions that affect the future direction of the blockchain protocol.
- Other tokens such as non-fungible tokens (NFTs) allow crypto users to prove and trade the ownership of unique digital items.
If you would like more information on how blockchains help power cryptocurrencies, read our What is Cryptocurrency? guide, which offers a more extensive explanation.
Given that blockchains have proven their usefulness in managing digital money supplies, major companies have sought to extend this technology to other types of financial services.
As such, it’s believed blockchains could solve inefficiencies across many parts of the financial system – including 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.
Examples of traditional institutions exploring blockchain-based solutions for banking services include:
- J.P. Morgan’s Onyx blockchain technology for exchanging value and data
- Santander using Ethereum’s blockchain to issue and manage a $20 million bond
- Regulated Liability Network (RLN) - a conceptual shared blockchain ledger for major global banking institutions like Wells Fargo, HSBC, BNY Mellon, and Mastercard.
Supply chain management
One of the most talked about use-cases for blockchain technology is managing commercial supply chains.
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, multiple participants must rely on different systems to track and process items.
Blockchain technology can help reduce the barriers formed from these different systems, removing costs and potential points of failure along the way. From retailers like WalMart to logistics providers like FedEx, the biggest companies in the industry are exploring how blockchains can create transparency and consistency across their supply chain records.
Some are even providing the blockchain infrastructure enterprises need to start adopting blockchain. Amazon’s Managed Blockchain is a leading example of a service that provides other companies with tools for deploying their own private blockchain networks for supply chain management.
Healthcare records today are often maintained by centralized data centers. This brings added costs and risks to the entities entrusted with them.
The information within these records may be vulnerable to security breaches and difficult to share with other hospitals around the world. By integrating blockchain technology, however, there is some hope it could help solve these long-standing issues. Blockchain technology offers a mechanism for recording and maintaining comprehensive records while giving individuals more control over their own data.
MedRec, Ancile, and OmniPHR are just some examples of solutions that leverage blockchain technology for electronic health record management.
Insurance companies have been exploring the use of blockchain technology for increasing operational efficiency for many years now.
In 2017, AIA launched its own blockchain-based insurance solution in Hong Kong aimed at streamlining the data-sharing process with its banking partners.
In 2023, TradeWaltz launched its marine insurance blockchain solution. Two of Japan’s largest insurance providers, Sompo and Tokio Marine, now provide marine insurance products using TradeWaltz’s platform.
Companies have also seen potential for blockchain-based infrastructure to revolutionize the global energy industry. Siemens, in partnership with several other projects, recently launched Pebbles — a peer-to-peer energy trading market built on a blockchain.
Shell, Accenture and Amex GBT have also collaboratively launched their own blockchain-based sustainable aviation fuel (SAF) solutions called Avelia.
Power Ledger (POWR) is an example of a cryptocurrency project that uses blockchain technology to create peer-to-peer energy trading markets. This allows people to tokenize and trade environmental commodities such as carbon credits and renewable energy certificates.
Handling client personal information requires highly secure, robust systems. Information stored also needs to be accessible and tamper-proof, making blockchains a perfect fit.
IBM’s Digital Credentials service has already tapped into this pioneering technology to create a safe, auditable solution for identity management.
The World Economic Forum has also launched a blockchain-based Known Traveller Digital Identity, or KTD, solution. Leveraging cryptography and blockchain, KTD streamlines passenger travel by facilitating cross-border travel without the need to produce physical documents.
In a democratic society, voting plays a central role in determining the outcomes of local and national elections. To produce accurate results, voting systems need to be reliable, verifiable, and resistant to fraudulent manipulation.
However, legacy voting systems have historically come under scrutiny for being easy to defraud and delivering falsified results. These situations erode trust and can lead to widespread civil unrest.
Some experts have touted the technological innovations of blockchain databases could put an end to controversial elections.
Follow My Vote and Voatz are examples of blockchain-based voting solutions that are seeking to provide US citizens with a more secure, trusted electoral voting mechanism.
The emergence of non-fungible tokens (NFTs) showcased how people can use blockchains to track and verify the authenticity and ownership of digital files such as audio clips and JPEG images — something that wasn’t possible before the advent of blockchain technology.
Since then, other companies have created their own blockchain solutions for tracking and verifying the authenticity of real items.
The Aura Blockchain Consortium, Authena, and Seal are examples of working blockchain-based solutions for guaranteeing the provenance of particular items.
What are the components of blockchain?
Beyond a decentralized network of nodes, there are several other important parts that make up a blockchain ledger.
Blockchains today are secured by cryptography — a system used for enciphering and deciphering information for private communication over a public network.
In the early 1900s, military and spy agencies mainly used cryptography, particularly during war time, where secret communication systems were vital for sharing information between posts.
Today, cryptography plays a foundational role in the digital asset industry. Projects leverage cryptographic techniques to secure transactions sent over blockchain networks and allow users to prove who owns what funds.
You can learn more about the cryptography behind blockchains and cryptocurrencies in our Kraken Learn Center article How do cryptocurrencies use cryptography?
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 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 trusted networks to streamline the sharing of information and the record-keeping process, while improving their performance and security.
A consensus mechanism is the part of the blockchain protocol that establishes agreement among nodes on the state of the ledger and the validity of transactions.
It ensures that all nodes in the network follow the rules, reach a common understanding of the blockchain's current state, and agree on which transactions should be added to the ledger. In essence, it is the mechanism that enables decentralized trust and prevents double-spending and other forms of fraud in a distributed ledger system.
Over the years, many different types of consensus mechanisms have emerged; each with their own system for incentivizing good behavior among nodes and dissuading malicious activities. The most prominent mechanisms used by a majority of cryptocurrency-focused blockchain networks are proof-of-work and proof-of-stake.
Get started with blockchain technology
In summary, blockchain technology has emerged as a transformative force across various real-world industries.
Its unique characteristics of decentralization, transparency, security, and immutability have opened up new avenues for innovation and efficiency.
As these industries continue to adapt and integrate blockchain technology into their operations, we can expect to witness even more groundbreaking developments. The decentralized nature of blockchain holds the potential to democratize access to services, reduce intermediaries, and empower individuals in ways previously unimaginable.
Get started in the exciting world of blockchain technology by signing up for a Kraken account today.
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