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What is blockchain? A simple concept wrapped in needless tech talk
A blockchain is a digital ledger that allows people to store and exchange information in a secure, transparent, and decentralized way. Okay, what does this mean?
It’s basically a database – that’s it. The key difference with a regular database (a server, for example) is that the information stored on blockchains is shared across multiple computers on a public or private network. This is why the blockchain is also called a “distributed ledger technology” (DLT), distributed referring to this structure, and ledger to the fact that a blockchain serves as a public record of transactions.
Basically, like a store’s paper ledger stored information of every item sold, so does the blockchain store information of every transaction ever. On the most basic level, there is no difference.
And yet, the difference is huge. In a traditional system, information is usually stored on a central server or database that is owned and controlled by a single entity. This means that if the server or database is hacked, the information could be lost or stolen. In contrast, a blockchain contains its information on different computers, also called nodes. Each node on the network has a copy of the entire ledger, so if one node fails or is attacked, the other nodes can still maintain the integrity of the ledger.
The nodes maintain, update, and keep the network secure by providing their own resources – an all-for-one concept put into practice. All computers on the network have access to the ledger, and the information is always up to date in real time.
There is no master computer, there is no CEO, no board of directors, and no government that controls the system. Blockchain is a self-regulating system.
The network can store various types of data, but has so far most widely been used as a ledger for transactions of a financial nature. The technology became popular around the world due to its application in cryptocurrencies, most notably Bitcoin (BTC) – the first and to this day probably most important digital currency in existence.
Core concept: a blockchain is simply a database that is distributed among multiple computers (nodes) around the world. It is also called distributed ledger technology (DLT) because it serves as a permanent and unchangeable record of transactions.
Because of this distribution of resources, the blockchain is pretty much impossible to tamper with – for this to happen, much like in a real functioning democracy, a majority of computers would need to agree to do it – this is what is referred to as “consensus”.
Read more: What does Proof-of-Stake mean for a blockchain? And what is Proof-of-Work?
Okay, got it. But why is it called blockchain?
A blockchain stores and organizes its data in a digital format in chunks called, you guessed it, blocks. Each of these blocks has a certain capacity for information. Once it fills up, a new block is created and connected to the previous one. Once the new one is filled up, a new one will be created and connected to it, and so forth. This creates a chain of information blocks – a blockchain.
Once the block is created, it is set in stone, and cannot be changed. This chain of blocks provides a visual history of everything that has ever happened on the blockchain, and because the data is encrypted, it cannot be altered. Doing so would take an enormous amount of energy and money (in Bitcoin’s case, just about ~$10 billion dollars needed only for the hardware), so someone would need a very good reason to do it.
Core concept: the quality of unalterable data makes the blockchain immutable and a highly reliable store of information.
Dive deep: how do blockchains work? Read here.
Types of blockchains
There are three main types of blockchain: public, private, and permissioned. Each type of blockchain has its unique features and use cases.
Public Blockchain (permissionless)
Public blockchains are open to anyone who wants to participate, and they are decentralized – no central authority is in control. Transactions on public blockchains are transparent, and anyone can revisit their history. Public blockchains are typically used for cryptocurrency transactions, a prime example of this being Bitcoin. The security of the network is maintained by a consensus mechanism, typically Proof-of-work (PoW) or Proof-of-Stake (PoS), but that’s another topic;
Private Blockchain (permissioned)
Private blockchains are closed, meaning that only a select group of participants can access the network. The participants are often within the same organization or consortium of organizations, and the blockchain is used for specific business purposes. Private blockchains are more centralized than public blockchains, and access to the network is controlled by an administrator. Transactions on private blockchains are typically kept private, and the consensus mechanism is often a form of Proof-of-Authority (PoA) or Proof-of-Stake (PoS).
Hybrid blockchain – the best of both worlds?
A hybrid blockchain is a type of blockchain that combines elements of both public and private blockchains. In a hybrid blockchain, some parts of the network are publicly accessible and transparent, while others are private and permissioned.
Typically, the public part of a hybrid blockchain is used for tasks such as maintaining a public ledger, while the private part of the blockchain is used for more sensitive operations such as executing smart contracts, conducting transactions, and storing sensitive data. This provides the benefits of a public blockchain such as transparency, decentralization, and immutability while also offering the security and privacy features of a private blockchain.
Consortium blockchain
A consortium blockchain is a type of blockchain where a group of organizations or entities come together to form a shared blockchain network. Unlike a public blockchain where anyone can participate and view the data, a consortium blockchain is more private and permissioned, with only approved participants having access to the network.
In a consortium blockchain, the participating organizations typically share the responsibility of maintaining the network and verifying transactions. This makes it more decentralized than a private blockchain but less decentralized than a public blockchain.
Consortium blockchains are often used in industries such as finance, supply chain, and healthcare where multiple parties need to collaborate on a shared system while still maintaining privacy and security. Examples of consortium blockchains include R3’s Corda, which was designed specifically for the financial industry, and the Linux Foundation’s Hyperledger Sawtooth, which is a modular platform designed for enterprise use cases.
What can blockchains be used for?
Blockchain technology has a wide range of potential use cases across different industries and sectors. Here are just a few examples:
Cryptocurrencies
The most well-known use case of blockchain technology is the creation of cryptocurrencies like Bitcoin, which use blockchain to enable secure, decentralized, and transparent transactions.
Supply chain management
Tracking the movement of goods and products through supply chains is another area where blockchain could shine, increasing transparency and traceability and reducing the risk of fraud or counterfeiting.
Identity management
Decentralized identity management systems can enable individuals to control their own digital data and reduce the risk of identity theft.
Voting systems
Governments can potentially use blockchain technology to design transparent voting systems, enabling individuals to cast their votes anonymously while ensuring the integrity and accuracy of the voting process.
Smart contracts
Users and businesses alike can use blockchain to create self-executing contracts, which automatically enforce the terms of a contract when certain conditions are met.
Healthcare
Institutions can use blockchain technology to securely store and share medical records and other health-related information, enabling patients to have greater control over their health data while ensuring the privacy and security of sensitive information.
Real estate
Companies and individuals can use blockchain technology to facilitate secure and transparent property transactions, providing a safe method for buying and selling property without intermediaries and significantly reducing the risk of fraud.
These are just a few examples of the many potential use cases of blockchain technology. As the technology continues to evolve and mature, it is likely that new and innovative use cases will continue to emerge across a wide range of industries and sectors.
Read more: Blockchain applications and use cases detailed.
What lies ahead: the challenges blockchain faces
While blockchain has many potential benefits, there are also several challenges and limitations that must be considered in order for us to have an objective look into its future. Blindly diving into the argument that “blockchain solves all problems” is not useful to anyone, nor true.
The limitations are various.
Scalability
One of them is scalability. Blockchain networks have a limited capacity for processing transactions, which means that as more users join the network, the transaction speed can slow down significantly.
This can be a problem for applications that require high transaction throughput, such as payment processing or supply chain management. However, recent years have seen that scalability can be tackled, and many projects in the blockchain space have successfully scaled beyond what was originally thought possible. With new advancements in technology, we can safely say that this will be resolved in time.
Governance
Another challenge is the issue of governance. Blockchain networks are decentralized and rely on consensus mechanisms to reach agreement on the state of the ledger. However, this can lead to conflicts between different stakeholders in the network, particularly if there is a lack of clear rules and processes for decision-making. Additionally, blockchain governance can be vulnerable to attacks from bad actors seeking to manipulate the network for their own gain.
Blockchain security
Security can also be a concern with blockchains, albeit rare. While blockchain networks are generally considered to be secure due to their use of cryptographic algorithms and distributed ledger technology, they are not immune to attacks. In particular, there is a risk of so-called 51% attacks, where a single entity gains control of a majority of the network’s computing power and can manipulate the ledger, but carrying out such an attack successfully requires enormous resources and the one doing it needs a very good reason for it.
Additionally, smart contracts on blockchain networks can contain bugs or vulnerabilities that can be exploited by hackers. The rule stands – Do Your Own Research (DYOR) always, and you will be safe. Another possible weak point for blockchains are network bridges, which establish a connection between two blockchains. Historically, inadequate bridge security has caused some of the worst hacks in crypto.
User-friendliness
It’s also worth mentioning challenges related to the usability of blockchain technology. While blockchain networks are designed to be accessible to anyone, the complexity of the technology and the lack of user-friendly interfaces can make it difficult for non-technical users to interact with the network. This can limit the adoption of blockchain technology, particularly in applications where user adoption is critical, such as digital identity or voting systems. However, there are multiple projects that aim to simplify DeFi and make it more accessible to the general user, even the one who is not tech-savvy or has no knowledge of blockchain’s intricacies.
Opposition
And, finally, there is government regulation – a major challenge to the growth and adoption of blockchains and cryptocurrencies. The decentralized and autonomous nature of these technologies makes them difficult to regulate, as there is no central authority controlling their operations. As such, many countries have introduced regulatory frameworks, which can also stifle innovation and limit the potential of blockchains and cryptocurrencies to transform various industries. Striking a balance between regulation and innovation will be key to the long-term success of these technologies.
Conclusion
While this article is anything but exhaustive on the benefits and multi-faceted of blockchain, we hope it has provided you with a solid foundation to continue your research into crypto. We continue to dive deep in subsequent articles, so follow us for the journey and open your horizons.
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