What is blockchain technology?
A Beginner's Guide to Blockchain
If you're just getting started with cryptocurrencies, you've probably heard the
term "blockchain technology" used to describe various concepts.
Admittedly, the term is a broad term. You are just as likely to encounter
blockchain in a new cryptocurrency white paper as you are in an advertisement
for a big company like IBM.
So, what does this term mean and why is it used so widely? A blockchain
generally refers to a network of computers that uses general-purpose software to
sequence data, which, after sorting, ensures that the data cannot be adjusted or
tampered with by any dishonest user.
In other words, blockchain uses cryptography to create trusted records.
Although most commonly associated with the Bitcoin white paper, the concept is
an older one, and elements of this design can be traced back to work cited by
Bitcoin's creator, Satoshi Nakamoto, in the project's founding documents.
Note: As of 2020, there is still debate about what the definition of blockchain
technology should be and if and when it should be applied correctly.
This is because there have been efforts to abstract the architecture of
blockchains for uses other than ordering cryptocurrency transactions.
Some of these efforts will undoubtedly extend the application of the technology
too far, contributing to a more realistic understanding of its intended impact.
What is Blockchain Technology
How does blockchain work?
Broadly speaking, the term blockchain describes a public system of record
managed by a distributed network of computers called nodes.
These nodes must constantly work to record all updates to the network.
Blockchain is unique in that all nodes maintain a copy of the ledger.
Before diving into the technology, it is important to understand the
characteristics that make blockchain work.
In general (with some exceptions), the goals of a blockchain are:
Auditable - Updates stored in the blockchain can be easily tracked and verified.
Distributed - Blockchains are generally designed to be not controlled by a
single entity (or jointly governed by a wide range of known stakeholders).
Immutable - Once a transaction is recorded on the ledger, it can never be
changed (or if it is, it must have the consent of its stakeholders).
Pseudonyms - Every user interacting with the blockchain interacts using a
generated address that does not reveal their identity.
Components of Blockchain Technology
To fully understand the potential of blockchain technology, one needs to dig
deeper into the components that power it.
First, the roots of technology lie in cryptography, the technology used to
secure private communications, and encryption, the process of encoding
Blockchains today are protected by cryptography, the technology used to secure
private communications and the movement of digital data.
Cryptography is the science behind creating codes and passwords that allow
people to transmit information in a private and secure manner.
In the early 1900s, cryptography was primarily used by military and spy
agencies, especially during wartime, when covert communications were an
important way to send information between posts.
Today, cryptography helps secure transfers held on blockchains, making the
process of sending and receiving data and information more efficient and
On a blockchain, digital data is secured through the use of cryptography, which
creates a reliable record owned and maintained by all participants, called a
As an alternative to trusted databases, distributed ledgers are designed to
allow users to better oversee the maintenance of their data, while reducing the
liability of companies or entities that today may act as the central owner of
this sensitive information.
Given this impact, there are various industries and organizations using
blockchain to build trusted networks to simplify the process of information
sharing and record keeping, while improving their performance and security.
At the heart of distributed ledgers is a network of "smart contracts", i.e.
if-then protocols that can govern business transactions if coded in software.
The idea is that, on the blockchain, programs embedded in protocol code can
quickly and digitally execute contracts that today need to be enforced by
middlemen such as insurance agents or financial intermediaries.
Since business transactions are managed by contracts, executing smart contracts
on the blockchain helps the transaction process go more smoothly.
What is blockchain used for?
As mentioned, the idea that there are use cases for blockchain beyond
cryptocurrencies is still new.
This means that there are countless proposed use cases for these computing
networks, some more realistic and practical than others.
Below is a list of industries that have attempted to adopt blockchain technology
with varying degrees of success.
The original and most popular use case for blockchain technology is to power
In fact, some would argue that blockchain is their core element, allowing users
to run software that then enforces rules around their currency, making this data
scarce and valuable.
Thanks to their blockchain, cryptocurrencies can be borderless, durable,
irreversible, permissionless or anonymous.
If you want to learn more about how blockchain can help drive cryptocurrencies,
feel free to read our "What are cryptocurrencies?" guide, which provides a
Given that blockchain can now manage the supply of digital money, large
companies have sought to further extend the technology to other types of
As such, it is believed that blockchain can solve inefficiencies in parts of the
financial system - interbank transactions, clearing and settlements - which are
often the domain of some of the largest and most opaque financial entities in
The idea is that these institutions can use blockchain technology to reduce
costs, better comply with regulations, and generally upgrade the somewhat
outdated technology that helps them operate.
One of the most talked about use cases for blockchain technology is using it to
manage the supply chain of an enterprise.
Global trade is a trillion-dollar industry, with goods and services moving
around the world every day. In order for something to travel from one place to
another, there are multiple supply chain actors, each relying on different
systems to approve and process transactions.
Blockchain technology can help reduce the barriers posed by these disparate
systems, eliminating certain costs and potential points of failure.
Today’s records, whether in healthcare, real estate or voting, are often
maintained in centralized data centers, which creates additional costs and risks
for fiduciary entities.
Essentially, this means that information is vulnerable to security breaches and
is difficult and expensive to access.
Many industries need a more efficient and secure system to manage these records
while executing and recording other complex transactions.
This is where blockchain technology comes in, and hopefully it can help solve
these long-standing problems, providing a mechanism for recording and
maintaining a comprehensive record, while allowing individuals to have more
control over their own data.