What is blockchain technology?

• A blockchain is a decentralized database system that securely stores data across multiple locations and is tamper-proof.
• Instead of a single entity controlling the database, blockchain uses a decentralized network of computers (also known as “nodes”) to help validate and record transactions.
• Blockchain technology isn't only about cryptocurrencies. It's revolutionizing industries like finance, supply chains, healthcare and more.
• The top benefits of blockchain technology include enhanced security and transparency, improved efficiency and cost-effectiveness across various industries, the potential for future innovations, and its global accessibility.

Blockchain technology is a decentralized, secure system that stores tamper-proof data and is verified by a network of computers. 

Each block in the blockchain has its own unique identifier and is cryptographically linked to the next, making tampering with committed blocks nearly impossible.

These unique identifiers help ensure the integrity of information stored within a database or ledger. The combined mining or staking resources powering each network make cryptocurrencies more resilient against attacks — offering a higher level of data security.

Enhanced security is a crucial factor in how blockchain technology fosters trust among its users. This is particularly evident in the crypto industry and its related sectors like decentralized finance (DeFi), smart contracts, and non-fungible tokens (NFTs), where blockchain acts as a core infrastructure.

Before diving deeper into the technology, it is important to understand the main characteristics of a blockchain.

At its core, blockchain technology is… 

• 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).

While each type of blockchain operates using a network of computers, there are multiple types of blockchains for different industries and applications. Below are four key types of blockchain technology with unique uses depending on their build and permissions. 

• Public blockchain: A public blockchain is the most accessible type of blockchain, offering a decentralized digital ledger where anyone can make transactions. This is also sometimes referred to as a permissionless blockchain. 
• Private blockchain: A private blockchain is controlled by a single entity or organization. This type of blockchain is often used for enterprise applications and could be referred to as a permissioned blockchain.
• Hybrid blockchain: As the name suggests, hybrid blockchains combine elements of public and private blockchains. That means certain parts of the network may be public while others are private.
• Consortium blockchain: Consortium blockchains are a type of private blockchain shared by a group of organizations. These organizations collaborate to validate transactions and maintain the network.

Think of blockchains as virtual blocks filled with data that are cryptographically linked together forming a traceable, digital chain. The computers that help update, manage and verify information on the blockchain are known as “nodes.” 

When someone initiates a blockchain transaction, it's broadcast to the entire blockchain network. Each node then verifies the transaction to make sure the sender has sufficient funds and isn’t attempting to fraudulently spend the same transaction twice.

Once verified, the transaction is added to a new block, which is then committed to the blockchain ledger, creating a chronological record of transactions.

Beyond a decentralized network of nodes, there are several other important parts that make up a blockchain ledger.

Today, blockchains are secured by cryptography — a system that enciphers and deciphers information for private communication over a public network.

In the early 1900s, military and spy agencies mainly used cryptography, particularly during wartime, 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 public blockchain networks and allow users to prove who owns what funds.

To learn more about cryptography, check out our 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.

Blockchain in crypto refers to the underlying technology that powers cryptocurrencies like Bitcoin, Ethereum and many types of cryptocurrencies. 

In the context of cryptocurrencies, blockchain serves as the foundation that makes these digital currencies possible. 

Every cryptocurrency transaction is recorded on a blockchain, where it is verified by a globally distributed network of independent nodes.

This process helps ensure that all transactions are transparent, traceable and secure, which limits issues like double-spending or fraud.

The combination of cryptography and distributed consensus mechanisms enables blockchains to function autonomously, creating a system where users can transact directly with one another in a trustless manner. 

As a result, blockchain technology has become the backbone of the cryptocurrency industry, enabling everything from simple peer-to-peer payments to complex decentralized finance applications.

The highly secure and immutable nature of blockchains make 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 examples of what you can do with blockchain are well-established and already being used by millions around the world, while other blockchain examples 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 purposes. 

Real-life example: Crypto assets like Bitcoin (BTC) and Tether (USDT) allow individuals to transact directly between each other at near instant speeds, without needing to involve an intermediary in the process.

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 by these different systems, removing costs and potential points of failure along the way. 

Real-life example: 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 or difficult to share with other hospitals around the world. Some experts believe blockchain technology could help secure and verify records, giving individuals the ability to manage their data more autonomously.

Real-life example: 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. Many believe that blockchain’s decentralized nature and ability to create an immutable record of transactions could help address issues like fraud, claim disputes and slow processing times. 

Real-life example: In 2023, TradeWaltz launched its 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 the potential for blockchain-based infrastructure to revolutionize the global energy industry. By enabling peer-to-peer energy trading and supporting the integration of renewable energy sources, blockchain could transform the way energy is produced, distributed and consumed.

Real-life example: 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 that are accessible and tamper-proof. Blockchain could help support this need by automating identity verification and providing individuals with greater control over their personal information. 

Real-life example: The World Economic Forum uses a blockchain-based solution called Known Traveller Digital Identity (also called KTD) to help streamline cross-border travel by limiting the need for physical documents.

In a democratic society, voting plays a central role in determining the outcomes of local and national elections. Some experts have touted the technological innovations of blockchain databases could put an end to controversial elections.

Real-life example: Follow My Vote and Voatz are blockchain-based voting solutions seeking to provide U.S. citizens with a more secure, trusted electoral voting mechanism.

Non-fungible tokens (NFTs) showed how people can use blockchains to track and verify the authenticity and ownership of digital files — something that wasn’t possible before blockchain technology. Since then, other companies have created their own blockchain solutions for tracking and verifying the authenticity of real items.

Real-life example: The Aura Blockchain Consortium, Authena and Seal are working blockchain-based solutions for guaranteeing the origin of particular items.

With the right application, blockchain technology can be a game-changer for industries worldwide.

For example, 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. This eliminates any single point of failure, enabling the entire ledger to be restored from a single node even if 99% of the network were to fail.

Additionally, blockchains are tamper-resistant by design. To change just a single pending transaction would require gaining at least 51% control of all nodes in that particular network. This would be incredibly difficult considering the globally spread nature of nodes and the cost of resources needed to attack established blockchain networks.

Once a transaction is confirmed by the network, it becomes permanent and can never be altered. This promotes data integrity and is one reason blockchains are incredibly secure. 

Here's a closer look at the key benefits of blockchain technology and how it can serve as a cornerstone of the modern digital infrastructure. 

• Enhanced security and transparency: Transactions on the blockchain are immutable, meaning they can’t be changed or deleted, which ensures data integrity. Its decentralized and cryptographic design makes it highly resistant to fraud and hacking. Additionally, the open ledger system lets all participants view and verify transactions, fostering trust and making auditing and verification easy and reliable.
• Increased efficiency and cost-effectiveness: Blockchain cuts costs and speeds up transactions by allowing direct peer-to-peer interactions. Smart contracts — self-executing agreements coded into the system — automate tasks and help reduce errors. This eliminates the need for central data storage and traditional financial intermediaries, leading to lower expenses and more efficient business processes.
• Potential for innovation: Blockchain is not just a static technology; it’s a platform for innovation. Smart contracts enable automated agreements without a middleman, leading to decentralized applications (dApps). It also allows the creation of digital tokens that can represent real-world assets, unlocking new business models and financial products.
• Global accessibility and scalability: Blockchain's global reach and expanding scalability are key to its growing impact. Anyone with internet access can join a blockchain network, enabling fast and low-cost international transactions. Advances like Layer 2 blockchains and the Lightning Network boost the capacity of certain blockchains to process more transactions, while improved connectivity between blockchains allows for smooth cross-chain transactions and data sharing.

Investing in blockchain can take several forms, depending on your risk tolerance, financial goals and knowledge of the market.

 A few options for those looking to to invest in blockchain: 

• Consider purchasing cryptocurrencies directly using a trusted crypto trading platform like Kraken. As with any investment strategy, it’s crucial to research thoroughly and only invest what you can afford to lose.
• Invest in blockchain-focused companies or ETFs (like a Bitcoin ETF) that provides broader exposure to the industry, including firms developing blockchain technology or using it in innovative ways.

As with any investment, due diligence is key. Understanding the technology and the market may help you make better-informed decisions.

Check out our article on how to do your own research for more tips as you get started in crypto.

Kraken makes it easy to connect to different parts of the blockchain ecosystem that are changing the world. Get started in the exciting world of blockchain technology by signing up for a Kraken account today.