The blockchain is a relatively new technology that was first put to proper use in 2009, initially to support Bitcoin — the world’s first cryptocurrency — and similar projects. More than a decade later, blockchain technology has a wide range of applications across industries like decentralized finance (DeFi), healthcare and medicine, logistics and lots more.
Blockchain is a type of decentralized Distributed Ledger Technology (DLT) that is distributed between a large network of computers or “nodes.” Since it is so fundamental to cryptocurrency, non-fungible tokens (NFTs), and the wider web3 world, a basic understanding of blockchain technology can be incredibly useful for any newcomer.
What is blockchain technology?
A blockchain is essentially a distributed database that is shared among all the computers or “nodes” of a network. It is used to permanently store information, such as cryptocurrency transactions, electronically. The data is stored in blocks, each of which is linked together in a chain and secured by cryptography. The data cannot be edited or deleted once it is written.
One key element of a blockchain is that it is decentralized. By sharing the database among a large number of computers, no single entity has control. This not only ensures the trustworthiness and validity of all the data it contains, but it makes the network more secure. Unlike a centralized network, such as those used by conventional banks and other financial institutions, there is no single system that can be targeted by cybercriminals.
Blockchains use a consensus mechanism — such as proof-of-work (PoW) or proof-of-stake (PoS) — for agreement, and they are maintained by the community.
Blockchain is a compound word formed by the words “block” and “chain.” Blocks are used to store certain information, such as a series of cryptocurrency transactions after it has been validated by the network. Once a block is full, it is closed and then added to the chain to create a complete and permanent database — or ledger of transactions.
What is a blockchain’s primary goal?
Blockchains have multiple goals, and these can differ depending on how the blockchain is being used. However, some of the most common goals for almost all blockchains are:
Decentralization The data stored in a blockchain is not controlled or maintained by a single entity. Everyone in the network plays a part in updating the database, and once a block is closed, it cannot be altered or deleted in any way. This helps ensure another blockchain goal, which is…
Permanency Because blockchain data cannot be altered or destroyed, and the blockchain itself cannot be disrupted or shut down, the data recorded is permanent. The chain is secured by cryptography, and since a potential change to any block would affect the entire chain, it is virtually impossible for the information to be tampered with in any way.
Transparency Many think of cryptocurrency trading as a completely anonymous activity, but that’s only partly true. While there are ways to conceal your identity as much as possible, you cannot hide a cryptocurrency transaction. Blockchains are completely transparent, which means it’s possible for anyone to see a transaction. This helps prevent manipulation.
How does blockchain work?
The simplest way to understand how a blockchain works is to imagine it as a large database, except instead of being stored on a single computer or a single server, the database is distributed among a large number of computers or “nodes.” A node is another name for a processing device, such as a computer, that is part of the blockchain.
The distributed database is made of up individual blocks, each of which contains a chuck of the blockchain data, a digital timestamp, its own cryptographic hash, and a hash of the previous block. A hash is essentially a long string of unique digits that identifies the block and its contents — kind of like a digital fingerprint.
It is these unique hashes that chain each block together to make up the entire blockchain. If the data inside a single block changes, so does its hash, which means subsequent blocks will no longer be recognized by the rest of the chain. So, if an attacker wanted to change a single block, they would also have to change all of the blocks that follow it.
That’s near impossible given that those blocks are distributed across the entire network, and the entire network has to agree that those blocks are valid. What’s more, thanks to mechanisms like proof-of-work (PoW), it takes a substantial amount of time and computing power to process one block, let alone hundreds or thousands of them.
The type of information each block contains depends on what the blockchain is used for. The most common use for blockchains today is still cryptocurrency, and in this case, blocks are used to store transaction data, such as sender and receive information, the amount of coins transferred, and the time and date the transaction took place.
The process of filling, validating, and adding a block to the chain is referred to as “mining.” In many cases, miners are rewarded for their efforts with cryptocurrency tokens, which helps ensure that there are always participants willing to contribute to the blockchain.
Although cryptocurrency trading is still the biggest use for blockchain technology, other industries have discovered other uses for it. Some of the biggest include:
Smart contracts Blockchain technology enables smart contracts, which are essentially automated applications that run when certain conditions are met. They are typically used to execute an agreement between two parties automatically, and because no middleman is required, they are instantaneous and inexpensive.
Smart contracts are also completely transparent, so anyone can examine their code on the blockchain to find out exactly how they work.
Sharing economies Blockchains are now being used to allow buyers and sellers, or lenders and borrowers, to interact directly when making deals. OpenBazaar is one such application that allows users to buy and sell goods — much like Amazon or eBay — without an intermediary.
Fundraisers and charities Total transparency makes blockchains ideal for fundraisers and charities since all parties can see exactly where their funds are going. And again, there is no intermediary taking a cut.
Government databases Some governments are now using blockchain databases for transparency, making it easier for government agencies to access critical information without compromising its security.
Data storage Blockchain technology enables secure and decentralized data storage systems in other areas, too.
Identity management Blockchain ledgers offer a more comprehensive method of verifying someone’s identity, and the technology is being increasingly used to digitize and secure documents for online interactions.
A blockchain ledger is essentially a database of cryptocurrency transactions that is distributed among a network of computers or nodes. Thanks to cryptography and decentralization, it is more secure than conventional, centralized databases.
A smart contract is an application that runs on the blockchain, usually to facilitate transactions between multiple parties. Smart contracts are automated and execute automatically when certain conditions are met, which means they require no intermediary or third-party.
Decentralization means there is no central or single entity in control of the blockchain. Blockchains by their very nature are distributed among a large number of computers or nodes, each of which contributes to keeping the blockchain up to date. They are not governed by anyone.
Believe it or not, blockchain technology was first introduced in 1991 when Stuart Haber and W. Scott Stometta revealed a decentralized system for notarizing digital documents. However, the technology never really took off back then. It wasn’t until Bitcoin creator “Satoshi Nakamoto” created the concept of Bitcoin in 2008 that a blockchain was put to proper use.
Nakamoto built upon concepts first devised by Hal Finney (Harold Thomas Finney II), a crypto activist, who introduced the RPoW (Reusable Proof-of-Work) system in 2004.
Blockchain technology has almost unlimited possibilities, and while the most common use for it is still cryptocurrency, blockchains have steadily been cropping up elsewhere over the years. Today, blockchain technology can be found in healthcare and medicine, logistics, research, the financial sector, and in many more fields.
Was this article helpful?
Have a Question? Join our active Discord
Share this article:
About the author
Senior content writer
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.