What is Blockchain?
The word cryptocurrency has become well known among most households. However, due to the allure of life-changing returns, many investors can often forget about the underlying technology that allows these digital assets to exist: the blockchain, a technology that has arguably provided one of the biggest advancements of the 21st century.
Blockchain technology has expanded far beyond the now-effortless process of transferring wealth between individuals. Thanks to the blockchain, anything can be tokenized and stored within a secure and immutable system. With the advancement of digital smart contracts, the blockchain has allowed for a vast range of decentralized applications to be realized. Non-fungible tokens (NFTs), decentralized finance (DeFi), and the metaverse are all reliant on operational blockchains.
But what exactly is a blockchain? This is exactly what we plan to solve in this article. We will look at how a blockchain works, uncover where the idea first came from, what blockchains are used for, and discuss what the future may hold.
What Is a Blockchain?
A blockchain is commonly described as a decentralized public ledger. But that description can sometimes be as unclear as the word — blockchain. So, let’s break down exactly what a decentralized public ledger is.
A ledger is simply a record of data. Most ledgers are related to transactional data — your bank will utilize a transactional ledger — however, ledgers can record all sorts of information.
In a blockchain, that ledger is then made public and is hosted on thousands of computers all over the world; this creates a peer-to-peer network. To update the ledger, all participants in the peer-to-peer network must validate and come to agree on what new data to record. As no one party can add or change data independently, the ledger remains decentralized and secure.
Therefore, a blockchain can be thought of as a network. A network that allows for data to be processed and recorded digitally without the need to rely on an intermediary third party.
How Does a Blockchain Work?
When thinking about how a blockchain works, it can be useful to consider what a blockchain is trying to achieve. Two parties typically want to exchange value between each other, whether that is a digital currency or another digital representation of an asset, such as a land title, image, or piece of music. Once executed, it is the blockchain that must verify and record the transaction, and subsequently transfer the asset.
In a blockchain, all data is organized into blocks. In the Bitcoin blockchain, these blocks contain transactional data. However, thanks to advancements in blockchain technology, blocks can now contain all sorts of information, including the outcome of smart contracts. Importantly, each block in the blockchain can only hold a set amount of data. Once that block is filled, data begins accumulating in the next block.
A blockchain begins with the first block — referred to as the aptly named Genesis block. The first block is provided with a number — called a hash — which is related to the time that the block was created. Subsequent blocks are then provided with a new hash that links the new block with the previous one. As successive blocks are added, a chain is formed.
A record of all blocks is then stored on all computers within the peer-to-peer network. This means that there is no single point of failure. If one computer goes down, a record of the blockchain remains intact on all others.
In addition to keeping a record of the blockchain, each node in the blockchain network has two other important roles to play: (1) Nodes must help to validate transactions, and (2) nodes must help to reach consensus — in other words, nodes must agree in what order those transactions should be recorded.
Validate transactions. As each transaction is executed it is broadcast to all network participants. Transactions are then bunched together as a block and validated for legitimacy. However, as miners hear about transactions at different times, the network needs a way to order transactions correctly. This is where consensus comes in.
Find consensus. It is important not to include the same transaction twice. You can’t spend the same BTC or ETH twice after all. So, to ensure that the correct block is added, a consensus mechanism is used. In the example of Bitcoin, this is called Proof-of-Work.
Miners in the network must compete by sacrificing computing power. And not just a little bit of computing power — a lot of computing power. Whichever miner solves a cryptographic formula first gets the right to add their block to the blockchain. However, before the block is added, it is checked one more time by other participants in the network. If more than 51% of network participants agree that the transactions are valid, the block can be added.
Other blockchains employ a range of other consensus mechanisms to achieve the same purpose. Cardano employs Proof-of-Stake, and while Solana employs a combination of Proof-of-Stake and Proof-of-History, however, each mechanism tries to achieve the same thing. Before a new block of data can be added, the peer-to-peer network must reach a consensus regarding what block of transactions to add.
In addition to making sure transactions are not added twice, consensus mechanisms also help to ensure that it is near impossible to change the blockchain after a new block has been added.
What Is the History of Blockchain?
It may come as a surprise to hear that the idea of a blockchain came long before the idea of Bitcoin. Although the world’s leading cryptocurrency thrust blockchain technology into the spotlight, the idea of ordering data into blocks is not a new one.
So, let’s take a walk down blockchain’s surprisingly long history.
Before the Blockchain
1979–1982. If you had to pinpoint the start of blockchain’s history, it would likely begin with two individuals — Ralph Merkle and David Chaum — and would start some 27 years before Bitcoin came into existence.
In 1979, Merkle first described the idea of authenticating digital signatures, which eventually developed into the idea of Merkle trees. Although we won’t go through the technical details of these now, Merkle trees are a type of data structure that allows data to be grouped into blocks.
A few years later, in 1982, Chaum wrote a university thesis titled “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups” — sound familiar? He later went on to develop a company called DigiCash, which introduced types of digital currencies. Unfortunately, Chaum’s idea never took off, but Merkle and Chaum arguably set the bedrock for what we know a blockchain to be today.
1991: Almost a decade after Chaum, two researchers, Stuart Haber and W. Scott Stornetta, released another thesis outlining a way to timestamp digital documents. These timestamps could not be altered, and it was proposed that each document could be stored within a chain of blocks. Perhaps not quite a blockchain, but they were getting close.
1992: A year later, Haber and Stornetta added the technology of Merkle trees to the design of their digital chain, which allowed multiple documents to be stored within one block. The first useable blockchain began to emerge.
1993–2008: Although there was no specific blockchain technology released between the period of 1993 and 2008, there were certainly two advancements that helped to bring the modern-day blockchain to life.
Firstly, peer-to-peer (P2P) networks became popular in the 90s, which showed that a network could survive on the computing power of thousands of individuals.
Secondly, the consensus mechanism Proof-of-Work (PoW) was introduced in 1997 by Adam Back. Back designed the system to prevent email spamming but, importantly, it proved that there was a useable method to reach consensus between individuals.
Blockchain 1.0: Transactions
2008–2009: It wasn’t until 2008 that a pseudonymous individual or group of individuals called Satoshi Nakamoto amalgamated all previous technologies in the hope of creating a peer-to-peer payment network that could be operated without the need for a trusted third party.
Nakamoto’s idea was published in a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” According to Nakamoto, the transfer of each digital coin (bitcoin) could be confirmed by the signing of digital signatures. Each coin consisted of a chain of digital signatures, with the last signature highlighting the current owner of the coin.
With the help of a few developers, the idea of Bitcoin was then put into practice in early 2009. On January 3, 2009, the first block of the Bitcoin blockchain — the Genesis block — was mined by Nakamoto. It brought together the concepts of Merkle trees, digital signatures, and a Proof-of-Work consensus mechanism.
2010–2012: The Bitcoin blockchain was the first of the modern-day blockchains to garner true attention. During this period the first digital coin began being used for the purchase of real-world items. Remember Laszlo Hanyecz, who bought two pizzas with 10,000 BTC? At the same time, exchanges such as Mt. Gox and Coinbase were established so that users could begin exchanging BTC for fiat currency efficiently.
Throughout the same period, developers were coming up with new ways to improve Bitcoin’s foundation. Several blockchain spinoffs, such as Litecoin, were developed to improve the speed with which transactions could occur.
Blockchain 2.0: Contracts
2014–2015: Up until 2013, blockchains had remained focused on one thing — the transfer of wealth. However, in 2014, blockchain technology took a gigantic leap forward into the age of digital smart contracts.
While Bitcoin continued to amass a following, the co-founder of Bitcoin Magazine, Vitalik Buterin, created a foundation focused on the development of a blockchain capable of hosting decentralized applications.
This later became known as Ethereum. In one year, the Ethereum blockchain was launched and differentiated itself from all others by allowing developers to program smart contracts. These digital versions of contracts were immutable and could be executed and recorded on the blockchain.
2016–2019: Smart contracts can be executed autonomously, which removes the need for centralized third-party interactions, and, just like transactions, the outcome of these contracts can be stored immutably. Thanks to this flexibility, the Ethereum blockchain began to unleash a wave of decentralized applications (dApps).
Between 2016 and 2019 sectors such as decentralized finance (DeFi), non-fungible tokens (NFTs), and eventually the metaverse began to develop. However, with increasing use cases, blockchain technology ran into another stumbling block — scalability.
Blockchain 3.0: Global Adoption
2020–2022: Although the use case for blockchain technology consistently improved between 2016 and 2019, it became clear that many blockchains, including Ethereum, could not handle the throughput required from new decentralized applications. As the complexity of applications increased and user numbers expanded, the need for quicker and faster blockchains became clear.
However, this also generated other problems, such as sustainability, cost-effectiveness, and security. It was accepted that the above concerns needed to be addressed before blockchain technology could be accepted by corporations and businesses the world over. Unfortunately, as developers soon discovered, answers were hard to come by, as adjusting scalability and security often meant sacrificing decentralization.
Nevertheless, new blockchains sought to improve upon the scalability, sustainability, and security weaknesses of both Bitcoin and Ethereum. Between 2020 and 2022, hundreds of alternative Layer-1 blockchains entered the cryptocurrency market and helped to encourage the ever-expanding sectors of DeFi, NFTs, and the metaverse.
However, moving beyond crypto-based applications, blockchain technology now has the capacity to alter a range of industries including healthcare, transport, supply chains, and manufacturing. As a result, developers continue to experiment with consensus mechanisms, Layer-2 scaling solutions, and privacy aspects to ensure that blockchains remain fit for purpose.
Over the last few years of blockchain’s continuing history, better known as Blockchain 3.0, the focus has shifted to ensure that the technology can be adopted on a mass scale long into the future.
What Is a Blockchain Used For?
Although the technology has only enjoyed a short history, the application of blockchain tech has now expanded far beyond Nakamoto’s dreams. Let’s take a look at the plethora of industries that now benefit from the technology — a list that will likely only expand in the future.
Before Bitcoin, blockchains were not used practically. They were purely researched rather than applied to anything. However, Satoshi Nakamoto provided the first use case in 2009.
After the 2008 financial crisis, Satoshi Nakamoto wanted to create a decentralized way to transfer wealth. Out of that vision sparked bitcoin, or BTC, — a digital coin that could be transferred across the Bitcoin blockchain. It could be used as a method to transfer wealth and it could be used to purchase goods and services.
From there, other blockchains and blockchain solutions have been created to allow for efficient international and cross-border payments. The company Ripple created the XRP Ledger and has partnered with several banks globally. The Stellar Lumens blockchain is aiming to help the unbanked across the world, and there are now a host of digital stablecoins that form the backbone of the crypto industry.
Supply Chain Logistics
The blockchain’s immutable ledger means that the technology is extremely good for keeping track of goods and services. With digital tags and tracking software, all movements can be recorded on the blockchain, which ensures that manufacturers can work efficiently with demand and authenticity is guaranteed for customers.
VeChainThor is a blockchain network dedicated to the application of blockchain technology for supply chain logistics. Meanwhile, companies such as OriginTrail and SyncFab are leveraging existing blockchain solutions to solve weaknesses in logistics.
Health data is one of the most personal and important forms of data available. Blockchains allow this data to be stored securely and in a manner that cannot be altered by malicious third parties. It also prevents medical records from falling into the hands of those that could seek to monetize it.
Companies such as Akiri provide networks-as-a-service so that individuals can protect patient health data, and companies such as Guardtime help healthcare companies integrate blockchain into backend security. Guardtime was instrumental in helping much of Estonia’s healthcare industry become integrated with blockchain tech.
Thanks to the open-source nature of smart contracts and decentralized applications developed on a blockchain, contracts between customers and insurers can be executed in a secure and transparent way. Insurance terms can be recorded and then automatically executed in the event of an insurance claim. All claims can be verified and then recalled if required.
Blockchain-based games have exploded in popularity since 2020. Composing the capabilities of smart contracts, DeFi, and NFTs, blockchain games now allow players to earn cryptocurrency tokens, collect in-game accessories, and trade all tokenized assets among other players. The blockchain has allowed for new internal economies to be developed in games that would otherwise have been controlled by centralized game developers.
One of the most popular games in the blockchain space over the last two years has been Axie Infinity. Some of the earliest players in the game were able to generate a stable salary just from playing. Meanwhile, metaverse worlds such as Sandbox and Decentraland allow players to purchase their own digital parcel of land within a virtual world.
Social Media and Content Creation
Data has become one of the biggest commodities in the modern world and is something most of us give up for the freedom of using our favorite social media platforms. Blockchains hand this power back to the individual.
Blockchains have also been used to protect the Intellectual Property (IP) rights of content creators. Binded is a blockchain-solutions company where photographers can secure copyright using a fingerprint identifier. Meanwhile, Sapien is a social news platform where users are able to vote and dictate which news is true or not.
While we can’t list all of the use cases for blockchain technology (there are simply too many) there are numerous other industries that are also benefiting from this groundbreaking technology. Industries including:
- Retail & ecommerce
- Property & real estate
- Automotive vehicles
- NFT marketplaces
- Personal identity security
According to a 2019 Global Blockchain Survey completed by Deloitte, 45 percent of emerging disruptors were choosing to incorporate blockchain tech in startups. According to the report, it is easier to integrate a new technology when starting from the ground up rather than swapping an old system for a new one.
From this data, it is clear to see that blockchain will likely become widely integrated into the next wave of global businesses.
What Is the Future of Blockchain?
Predicting the future of any technology is difficult, especially one as fast-paced as blockchain. Even though modern blockchain technology has only been around for 13 years, it has made its way into a vast range of industries and is developing its capacity so that it can compete with traditional systems that have been in place for decades.
However, while the technology’s reach has grown, it is not yet the go-to solution for all businesses. Many are still hesitant to its true potential and there are still questions regarding reliability and function. With this in mind, conquering scalability and security, while ensuring decentralization, will continue to be high on the priority list for many blockchain developers.
In parallel, designers will likely need to continuously work on improving the user interfaces associated with blockchain tech. With convenience comes adoption. Many leading experts believe that true blockchain adoption will only occur when the average person does not know that a blockchain is being used behind the scenes.
Interestingly, the future of blockchain may not even lie specifically with blockchain technology. There are now several blockchain alternatives that might steal the limelight as we move forward.
Although blockchain was the first type of distributed-ledger technology, there are now several alternatives that have spawned from its success. And who knows…perhaps one of these alternatives will go on to have even more success than blockchain technology has already enjoyed.
Sidechains. Although not a true alternative, sidechains (like Liquid) have become a useful solution for tackling the issue of scalability. As a result, there are now several sidechains that have been developed to work alongside existing blockchains. Sidechains help to increase throughput by taking away smart contract execution from the mainchain. Blockchains can then scale while maintaining security and decentralization.
Direct Acyclic Graph. One true alternative to blockchain technology is known as a Direct Acyclic Graph, or DAG for short. Just like blockchain, once a transaction is completed, that transaction is immutable and cannot be tampered with. However, instead of transactions being grouped into blocks and ordered in a chain, all DAG transactions follow one after the other, which makes the system more scalable. Transactions can be confirmed instantaneously, there is no requirement for miners, and transaction fees can be far lower.
While offering stronger scalability, DAGs have come under fire in the past for a lack of decentralization and an incapability to directly process smart contracts. Nonetheless, IOTA, Hedera Hashgraph, and Nano are all projects that choose to leverage DAG technology instead of blockchains.
Distributed Hash Table. Another alternative distributed-ledger technology is known as a Distributed Hash Table (DHT). Instead of each node within the network storing a complete copy of the blockchain, in a DHT, each node only stores a small percentage of the data. Each piece of data is associated with a key, which can be then used to retrieve and piece back together information when it is required.
This type of structure allows for increased decentralization and also increased transfer speeds. Unfortunately, increases in decentralization and scalability come at the cost of security. Holochain remains one of the very few blockchain projects that currently employ DHT technology.
What Are the Pros and Cons of Blockchain?
For all of the advancements that blockchain has brought, there are still disadvantages that it cannot quite answer. As such, let’s take a look at both the pros and cons of using this technology.
- Decentralized and transparent. One of the biggest advantages of blockchain technology is that data can be transferred and recorded without needing to trust a dedicated third party. No single party can manipulate data, which means that business conducted on blockchains is much more transparent in comparison to the Internet.
- Cost-effective for large-volume transactions. As there are no centralized servers controlling a blockchain, the cost of those centralized servers is removed. Likewise, as there is no human interaction and no costs to record information, the processing of transactions is far cheaper than it would otherwise be through a centralized service provider, such as a bank.
- No single point of failure. As a blockchain relies on a peer-to-peer network of nodes, it means that there is no single point of failure within the system. Unlike centralized servers, if one node goes offline, the remainder of the nodes can keep the blockchain operational.
- Accessibility. Anyone with an Internet connection can begin contributing and supporting a blockchain. Everyone has equal access. A non-tech person could wake up one day and decide to set up a node within the network and begin processing transactions. There are no limits to the number of supporters. The platforms built on a blockchain are also far more accessible.
- Transaction-fee volatility. Although the cost of transactions can be far less than a bank or third-party service provider, they are extremely volatile. Otherwise known as gas fees, these costs are usually dependent on the congestion of the blockchain, which fluctuates consistently. At times of high congestion, fees can rise. At times of low congestion, fees become cheaper.
- Can require large amounts of power. Some blockchains that rely on Proof-of-Work mechanisms can consume large amounts of electricity. Each miner within a PoW blockchain must sacrifice computing power to mine new blocks. Cumulatively, this can result in a significant amount of power being expensed. As only one miner gets to add the next block to the chain, the majority of that power is also wasted.
- Scalability. Blockchain is a fantastic technology. Unfortunately, its success has led to one of its greatest downfalls, its inability to scale. Due to the internal architecture of some blockchains, transactions cannot be processed quickly — far less than traditional payment providers such as Visa and Mastercard. Although some blockchains have addressed this issue, often scalability comes at the cost of decentralization.
- Uncertain regulations. As blockchain is decentralized in nature, the uptake of regulations has been slow. In some cases, blockchains such as Bitcoin have been banned in some countries. The lack of universal regulation and acceptance is one of the key reasons why more businesses globally have not implemented blockchain technology into internal systems.
Blockchain is not a new technology, but it is one that has only found fame after Bitcoin was launched in 2009. Since then, it has led to one of the greatest advancements of the 21st century and the establishment of a brand-new industry.
Thanks to relying on a decentralized peer-to-peer network, blockchains are universally accessible, transactions are stored immutably, and there is no single point of failure. It is for these reasons that blockchain technology is being adopted at such an astonishing rate.
However, there are still a few obstacles that blockchains need to overcome. Blockchain developers need to work on improving scalability, user-friendliness, and future regulations need to be navigated. If this can be achieved, this technology certainly has the potential to become the infrastructure layer for the third era of the Internet.