Blockchain
What is blockchain?
Blockchain is a digital database where transactions are cryptographically stored on linked sequential data groups (also known as blocks). Unlike conventional databases that store information on one server in one location, this decentralized and distributed ledger stores identical copies of data across a global peer-to-peer network.
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Types of blockchains
There are two types of blockchains:
Public blockchains allow everyone to participate in reading, writing, and auditing the data. No one authority oversees the blockchain.
Private blockchains are controlled by a single group that decides who can read, write, and audit the data.
Researchers Stuart Haber and Scott Stornetta originally introduced the concept of blockchains in 1991 as a technique to protect digital records from manipulation. The two also wrote a series of papers and filed patents related to this new technology.
In 2008, the technology entered the mainstream, when someone (or multiple people) operating under the pseudonym of Satoshi Nakamoto made improvements to the blockchain method of timestamping. With the technique refined, Nakamoto launched the cryptocurrency known as Bitcoin.
How does blockchain work?
Here’s the basic process of how this distributed digital ledger works:
Step 1: A user initiates a transaction.
Step 2: A network of peer-to-peer computers transmit the transaction. Each computer is referred to as a node.
Step 3: The network uses algorithms to verify that the transaction is both real and valid. In other words, it must be a genuine request and the parties involved must be able to satisfy the transaction.
For instance, if User X is trying to send 100 bitcoins to User Y, the nodes have to verify that User X has the funds to make such a payment. If the user doesn’t, then the transaction gets canceled.
Step 4: If the nodes agree that the transaction is legitimate, it gets added to a block. Validated transactional data continues getting added to the block until it is filled.
Step 5: The block receives:
A unique hash (a string of data)
A record of the hash of the previous block
A timestamp
It then joins the other blocks in the blockchain, which are stacked one on top of another in chronological order. This permanent, unalterable chain presents a clear timeline of all transactions.
Step 6: The transaction is complete.
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What is blockchain technology used for?
While blockchain technology is commonly associated with cryptocurrencies, there are many other uses for an immutable ledger that cannot be manipulated or destroyed.
For example:
Decentralized finance
Similar to cryptocurrencies, DeFi systems like Ethereum replace traditional banking systems, enabling consumers to cut out the middlemen and manage their finances over the blockchain.
Non-fungible tokens
An NFT is a unique digital unit of data whose location is stored on a blockchain. NFTs are branded with code that authenticates the stored location and enables the secure sale and transfer of assets. NFTs are most commonly associated with image, audio and video files. Tip: Learn how to create an NFT here.
Smart contracts
Blockchain technology removes the need for an intermediary to execute a legal agreement. These self-executing agreements are automatically generated and certified.
Healthcare
The blockchain enables healthcare companies to encrypt patient records and ensure that they remain private and confidential.
Supply chain
Product inventories and the supply chain can be monitored through the blockchain. This can help companies increase accuracy and accountability in their operations.
The metaverse
The metaverse is a network of interoperable 3D virtual worlds that manifest as an immersive internet. While pockets of these virtual worlds exist today, they are not interoperable—many hope that blockchain technology is the key to connecting these artificial environments. Currently, many virtual worlds mint NFTs for items within the games.
Web3
The blockchain plays a prominent role in web3, a proposed new, decentralized version of the internet ecosystem
Tip: Learn the difference between web2 vs web3 to understand the proposed future of the internet.
Pros and cons of blockchain
Why has blockchain technology grown over the last decade? Many see the potential in blockchain for the future of the internet—and invest in web3 technologies and NFT websites. While the technology is still relatively young, many are optimistic that the kinks will work themselves out along the way.
Overall, these are the main pros and cons of blockchain:
The pros
No intermediaries mean fewer roadblocks for transactions.
Decentralization reduces the chances of manipulated or tampered data.
Blockchain infrastructure replicates data across the network, preventing data from being lost due to a power outage or server failure.
Transactions are more accurate as the network verifies authenticity.
The blockchain encrypts all transactions, making them private and secure.
The permanent digital ledger offers greater transparency into important transactions.
The cons
Blockchain technology is complex, which can lead to challenges in implementing and improving upon it.
The energy needed to verify transactions comes at a high cost, which can mean high “gas” fees for consumers.
As the blockchain becomes more popular, processing speeds will slow as the network funnels data. Scalability is an anticipated issue.
Blockchain technologies are not hack-proof.
Transactions don’t take place over a single server in a specific location, which can make jurisdictional agreements and regulation difficult.
Human error can lead to asset loss. To access data from the blockchain, users need to have a cryptographic key. If they lose it, it’s gone forever.