At this point, most people have at least heard of blockchain, but it’s become something of a running joke how complex the technology can be to understand. Chances are you associate the technology with Bitcoin, but while that was the first real-world application of blockchain technology, it’s far from the only use case.
What Is Blockchain?(Illustration: Jonathan Kitchen/Getty Images)
While some people equate the invention of blockchain with Bitcoin’s pseudonymous founder Satoshi Nakomota, the concept has been around since 1991, first coined in a paper by researchers Stuart Haber and W. Scott Stornetta called "How to Timestamp a Digital Document(Opens in a new window)."
Also known as distributed ledger technology(Opens in a new window) (DLT), the blockchain is a record that anyone can add to, that nobody can change, and that isn't controlled by any one person or entity. The core concept is a public ledger with copies spread out among multiple locations called nodes, which usually refer to individual computers with copies of the ledger.
This is what people mean when they refer to the blockchain as decentralized. No one person or entity has control of the information kept in the record. Instead, it’s distributed among the many nodes that make up the network.
In order to change the ledger, those changes must first be verified by everyone on the network. As long as all copies of the record match, the system knows it can update the information. This increases the difficulty of changing anything stored within the blockchain while building trust in the information that’s recorded.
As journalist Mike Orcutt put it in the MIT Technology Review(Opens in a new window), "The whole point of using a blockchain is to let people—in particular, people who don’t trust one another—share valuable data in a secure, tamperproof way.”
Blockchain’s decentralized nature also means there’s no single point of failure that could take down the entire database. A company that stores all its clients’ information on a server farm in one building could lose that data if the building were destroyed. Because a copy of the blockchain exists on every computer on the network at the same time, it can keep working if one or even multiple nodes go offline.
When new information gets added to the ledger, it’s recorded in a group called a block. Those blocks are strung together to make up a chain of records, hence the name blockchain. Once the data is recorded, it can’t be changed—you just have to keep adding new blocks.
The blockchain is sort of like a Google Doc that is distributed among members of a team. Whoever is granted access can add to and edit the document. Everyone can also see changes made in real time, who made those changes, and a history of all the changes made for full transparency. The major difference is that data is not stored on Google's servers. Each contributor has their own local copy that can communicate directly with the other copies.
Not Just Cryptocurrency
While cryptocurrencies like Bitcoin and Dogecoin are the best-known uses of blockchain technology, they aren’t one and the same. Digital currencies use blockchains as a means of recording transactions and maintaining trust, but they aren’t blockchains themselves.
In theory, any system that requires transactions or data points to be recorded can use a blockchain to do it. That includes everything from agricultural supply chains to land title records. IBM, for example, is using blockchain technology for supply chain records(Opens in a new window) and other industries like healthcare and food safety(Opens in a new window).Chef Aaron Sanchez talks about using blockchain tech for food tracking.(Photo: David McNew/AFP via Getty Images)
Any kind of data can be stored in a blockchain, not just financial transactions. Writing for The Verge(Opens in a new window), Mitchell Clark explains how he created one that stored the entire text of The Great Gatsby in every block.
A blockchain differs from a typical database in that, instead of storing information in tables, it stores it in chunks of data. As each block fills up, it gets added to the previous blocks in the chain. Because data gets stored in this linear way and comes timestamped, blockchain data can form a timeline of transactions as well as a trusted record.
That’s particularly useful in cases like land titles, because anyone looking at the blockchain could see when ownership of a piece of land was transferred from one person to another over time. And those records would be constantly checked against the other copies of the ledger to weed out inconsistencies, meaning it would be much harder to create a false record of ownership. Countries like Georgia are already using(Opens in a new window) blockchain-based land titling systems.
More Security on the Blockchain(Credit: N. Hanacek/NIST)
By its very nature, blockchain acts as a safeguard(Opens in a new window) against tampering and system failure. If one node on a network gets hacked and someone changes or deletes transaction data on that computer, the other nodes on the network will reject the corrupted record because it doesn't match their copies of the ledger.
Security can even be increased by limiting who has access to the data. Private blockchains, like the ones IBM uses, only give certain people access to the blockchain network.
Since data written to the blockchain is immutable and timestamped, it provides a transparent record of everything added to the system. Anyone with a node on the network can see every transaction. Blockchain explorer(Opens in a new window) programs let even people who aren’t part of the network see transaction data in real time to increase transparency. So, even if someone stole your Bitcoin, you could trace how it was spent and see where it went.
Using blockchain technology helps prevent duplicate records and renders third-party validation unnecessary, saving both time and effort. Most importantly, this provides a solution to digital currency's unique issue of double-spending.
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Everything That Can Go Wrong
While the security of blockchain technology is pretty robust, there are ways it can be circumvented. Should someone steal the security credentials of a person with access to the network, they could steal data or digital cryptocurrency like Bitcoin.
Phishing scams can and have stolen people’s crypto wallet credentials and used them to clean out accounts. This is why we recommend taking extra steps to be more secure online.
If a bad actor gains access to more than 51% of the nodes on a network and changes the data, that data set becomes the agreed-upon version of the record, even if it isn’t true. A 51% attack(Opens in a new window) sounds bad, but it is very difficult to accomplish on blockchains with higher levels of complexity and large user bases. The blockchain that Bitcoin is built on, for example, is so large now that it would take an immense amount of money and computing power to attempt such an attack.
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Other cyberattacks like Sybil attacks(Opens in a new window) or routing attacks can intercept transactions en route before they’re written into the blockchain, or crash the system with a flood of false accounts.
Can Blockchain Free the World?Jack Dorsey at the Bitcoin 2021 conference(Photo: Eva Marie Uzcategui/Bloomberg via Getty Images)
Many in the tech world, including Jack Dorsey and Elon Musk, believe the blockchain can make the world a better place by decentralizing assets like money and redistributing control to individual users. A huge part of this idea is providing the unbanked with alternative ways of accessing money. Countries with rampant inflation or remote populations with no access to traditional banks can bypass that system entirely with digital currency that uses blockchain tech and an app on their phones.
However, as nice as it sounds to bring money to the people, this is easier said than done. Those people would still need somewhere to exchange their digital currency for fiat money or buy goods and services. The developing countries where blockchain tech provides the greatest benefit are also often the most vulnerable to faulty infrastructure and resulting problems like power and internet outages.
It's also worth mentioning the high cost of maintaining and adding to a blockchain. In the case of Bitcoin mining, for example, it takes a tremendous amount of power(Opens in a new window) just to mine new units of currency, let alone maintain the network.Minto cryptocurrency mining center in Nadvoitsy, Russia(Andrey Rudakov/Bloomberg via Getty Images)
Alternative methods of mining that rely on renewable power are being explored to mitigate that resource consumption, but current methods have yet to be replaced. Until we can find a carbon neutral solution, it's hard to see cryptocurrencies, or any blockchain technology, freeing us from the problems of the current world order.
Finally, the anonymity of transactions on the blockchain can protect a user’s privacy, but it also facilitates illegal activity. The dark web marketplace Silk Road is probably the most well-known example of this in action. Some cryptocurrencies like Monero are designed to be completely anonymous, making it possible for criminals to further mask their identities.
With all the fraud that is associated with blockchain assets like cryptocurrencies and NFTs, it's going to take a lot of hard work before the general public can accept them as anything more than a passing fad.
Blockchain Is a Tool
Blockchain technology is a tool with myriad applications in the financial sector and beyond. It’s on the fringes for now, but in the coming years we may see more widespread mainstream adoption of the blockchain. From cryptocurrency to supply chain inventories to medical recordkeeping, there are real-world use cases for the tech that have utility right now.
We're just scratching the surface of blockchain technology, its uses, and its mechanisms. For more, check out our simple explanation in the video above. You can also dive deeper with IBM's extensive guide to blockchain(Opens in a new window) and Investopedia’s exhaustive summary(Opens in a new window).
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