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Home»Finance»What is blockchain technology? Blockchain explained
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What is blockchain technology? Blockchain explained

Eliott BertholdBy Eliott BertholdNovember 28, 202211 Mins Read
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Blockchain is the technology that powers cryptocurrencies like Bitcoin. Learn what it is, how it works, and why you should care about blockchain.
Introduction to blockchain technology: What is it?
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You’ve probably heard of the term blockchain before, and know it has something to do with Bitcoin, but what exactly is it?

Blockchain technology is a chain of blocks that are connected using cryptography. Satoshi Nakamoto initially created it in 2008 as part of Bitcoin, but now there are many uses for this technology.

Individuals and companies can use it in almost anything from financial transactions to social media networks like Facebook or Instagram. Blockchain needs no central authority because it automatically records all changes on an open ledger.

Blockchain technology is a revolutionary step in the evolution of society, as it provides transparency and accountability for transactions, creates new ways of exchanging value like cryptocurrencies or tokens, and decentralizes power away from governments or other institutions that can control what people do with their money.

What is blockchain technology?

Blockchain is a secure, distributed and decentralized way of storing data. We can use it to save and trace information in a verifiable way by a network of computers.

It is a digital ledger that stores sets of records known as blocks, and these blocks are connected through peer-to-peer nodes and cannot be corrupted or altered in any way because they are stored on multiple computers. Blockchain can keep transaction records, which makes them highly secure and tamper-proof.

This means that transactions cannot be edited or deleted once confirmed. The only way to reverse a transaction is if it contains an error, making both the initial and amended transactions visible on the blockchain.

The network of computers that share the blockchain is known as nodes or block explorers; they can see the data but cannot change it.

Critical elements of a blockchain

The critical elements of a blockchain are the following:

  • A distributed ledger that is decentralized and shared among all participants
  • Network nodes verify transactions through consensus algorithms
  • Participants are known as miners, who provide the computing power to solve blocks
  • Bitcoin is an example of a digital currency operated on blockchain technology with no central authority or single administrator

How does it work?

To understand blockchain technology, it is important to know what it is and how it works. Blockchain technology predates its first widespread application in use: Bitcoin, in 2009.

The goal of a blockchain is to allow digital information to be recorded and distributed but not edited.

Blockchains are becoming increasingly popular due to the creation of various cryptocurrencies, decentralized finance (Defi) applications and non-fungible tokens.

Every blockchain has three critical parts:

  1. Blocks
  2. Miners
  3. Nodes

Every node in the network can see what other nodes are doing because they have unique alphanumeric identification numbers.

Each participant is given an identification number that tracks their transactions, and blockchain systems use the system of checks and balances to maintain integrity among users on a network.

Blockchain technology helps with scalability by creating trust in information via technology rather than relying on individual human beings for verification or validation.

Blocks

Blocks are the basic unit of information in a blockchain. Verifiable data is included after the chain is complete, making it more difficult for malicious actors to alter old rules and produce invalid outputs. For example, Bitcoin’s proof-of-work system uses a rule change such that the network considers the chain with the most cumulative proof-of-work valid instead of relying on an arbitrary global difficulty adjustment (i.e., hash rate).

Blocks consist of three elements: data, nonce, and hash. The 256-bit number must be extremely small when used as a hash in a block header so that it is impossible to change without compromising the integrity of the blockchain itself.

The iterative process confirms the integrity of the previous block, all the way back to a “genesis block.” This makes it difficult for any single party to make changes without being detected. The probability of blocks becoming superseded decreases exponentially as more blocks are built on top.

Miners

A blockchain contains blocks chained together and containing data that can only be changed when most of the network agrees to it. To add new entries to the chain, one must solve a complex mathematical problem called “mining.” Miners use special software and hardware to solve these problems, and they receive a reward when they successfully mine a block and therefore have an incentive for mining.

Miners use software to find a nonce that generates the accepted hash to create new blocks on the blockchain. This process of finding the “golden nonces” is very difficult because they only have 32-bit length and 256 bits of range.

The golden nonce is a term used to describe the algorithm, making it nearly impossible for miners to manipulate transactions on the blockchain. When you find this number, it’s added into what is called “the block.”

Nodes

Nodes are devices that maintain copies of the blockchain and keep the network functioning by verifying and approving any newly mined blocks.

Nodes are essential in blockchain technology because they verify new blocks and update the chain. Blockchains maintain the integrity and create trust among users while being transparent to ensure that every action is easily checked.

Uses of blockchain

A blockchain is a technology that enables cryptocurrency to exist. One example of a use for such technology would be Bitcoin, which was created as an alternative currency to reduce transaction costs involved in buying and selling things online.

The primary benefit of blockchain technology is that it’s almost impossible to corrupt, which gives rise to many potential uses in the future.

It can be more efficient than other non-DLT systems because it has no single point of failure, whereas traditional databases have multiple points that are vulnerable to hacking or corruption.

Redundancy is another advantage because if one node goes down, the others have a copy of the ledger, which allows for redundancy so there are always at least two copies available for verification purposes.

The technology can revolutionize many industries for both consumers and businesses alike by eliminating middlemen and third parties such as banks.

Smart contracts

Smart contracts are computer codes that facilitate, verify, or negotiate a contract agreement. They operate under specific conditions and automatically carry out the terms of an agreement when those conditions are met.

Smart contracts are contractual agreements that do not require a trusted third party, like the court or government. These benefits may include reducing friction and opening up to more transaction automation.

The term “smart contracts” was first coined by Nick Szabo in 1994, long before the cryptocurrency Bitcoin existed. In his proposal, he wanted to extend transaction methods traditionally done with paper-based forms like a POS (point of sale) and bonds into digital transactions.

He also proposed the execution of complex terms structures digitally through computerized analysis, which would lower costs because they are standardized contracts that can be traded easily due to their low transaction fees.

The paper predicted that derivatives trading would be conducted mostly through computer networks. He was right. Today, derivatives trade is made through computer networks with complex term structures.

Supply chains

Blockchain is the technology that powers cryptocurrencies like Bitcoin. Learn what it is, how it works, and why you should care about blockchain.
Blockchain and supply chains

Supply chains are a chain of people, organizations, and assets moving from one point to another. Blockchain is an open ledger that records transactions in chronological order, making it easier for supply chain partners to verify authenticity with blockchain technology.

Blockchain technology can be used in supply chain management to monitor the movement of goods. Companies like IBM’s Food Trust are using blockchain for their food-related efforts, and it has also been employed by Walmart to track specific items within its supply chains.

With supply chains, a massive amount of information needs to be stored. With traditional data storage methods, it can be difficult to trace the source for problems. Blockchain technology offers an innovative solution through decentralized ledgers and smart contracts.

Voting

A blockchain can also be used to facilitate voting systems, as it’s nearly impossible to tamper with and has the potential to increase voter turnout. Furthermore, the blockchain protocol would provide transparency in the election process by reducing personnel needed to conduct an election and giving instant results.

Although blockchain voting is still in the development stages, experts are already looking into ways to apply blockchain technology to be used for future elections. Blockchain voting would allow people to submit votes that cannot be tampered with and remove the need for manual paper ballots.

Advantages of blockchain

Blockchain helps to avoid the single point of failure and provides security. Blockchain is secure because confirmed blocks are difficult to reverse or change.

The large-scale advantage of blockchain technology is that anyone can use it to provide transaction security. The transactions are more efficient in public blockchains, but they can sometimes be slow and inefficient because the data needs to grow exponentially while maintaining a high level of redundancy.

Blockchain technology can disrupt many industries and make them more cost-effective. It’s often used in cases where there is a need for third-party verification or intermediaries, but blockchain can eliminate these costs by making transactions between parties faster and easier.

Blockchain also provides increased efficiency and reliability of transactions by eliminating third-party involvement.

Blockchains can be public or private, depending on the organization’s needs. A consortium blockchain comprises pre-selected individuals who determine which members may submit transactions and access data. There are two types of consortium blockchains: permissioned and permissionless.

A permissioned consortium blockchain is ideal for businesses when all participants need to be authorized by an individual or company who controls access to the chain and shares responsibility for maintaining it with one another.

What are the disadvantages of blockchain technology?

While the advantages are many, there are also some disadvantages. One issue with blockchain technology is its complexity which may have limited application opportunities due to its high level of technical detail.

Besides, blockchain technology is still in its infancy, and it has limitations that prevent it from being widely adopted. This new technology may be more efficient than other technologies, but there are concerns about the accuracy of information shared on the blockchain.

This can cause problems for companies when they try to use this type of system because there might not be enough data available through reliable sources or if individuals don’t have access to specific markets due to regulations related to illegal activity.

High energy costs

Blockchain is the technology that powers cryptocurrencies like Bitcoin. Learn what it is, how it works, and why you should care about blockchain.
Blockchain uses a lot of energy

Bitcoin mining uses more electricity than any other method known to mankind. It is not without flaws, as it requires a lot of energy compared to other technologies.

There has been a massive debate about whether or not Bitcoin is energy efficient. Although its proof of work model is inefficient, the growth in population means that high energy costs are becoming an issue that needs to be addressed across the world.

The carbon burden results from high energy costs, and the cost to mine cryptocurrencies on the blockchain can be significant.

As a result, there are some industry leaders that have decided not to use blockchain technology because of the high energy costs.

Immutable data

Data immutability is one of the most significant disadvantages, as it means that once data is recorded on a blockchain network, it cannot be changed or deleted.

For a system to be genuinely immutable, the nodes that form a blockchain network must be distributed fairly. If an entity owns 50% or more of these nodes, he can control and manipulate the blockchain in any way desired.

Keep an eye on your ‘keys’

The private key is the only way to access your digital assets in a blockchain. The reliance on users can be considered one of this technology’s disadvantages. One thing that makes blockchain different from centralized systems is that there is no central authority that can take care of user mistakes, and also, it’s decentralized.

The private key is a string of numbers and letters that unlocks a digital wallet. Keys must be kept secret because if they are shared with anyone, they could gain access to your cryptocurrency without needing to pay you back.

Costs

Blockchain technology is all the rage these days, but some find it too expensive to implement. Businesses that want to use the new tech will have to wait for more time before doing so because of budget constraints or lack of funds.

The costs associated with hiring developers, managing a team that excels at different aspects of blockchain technology, licensing costs if you opt for a paid blockchain solution, and so on are all quite significant. The maintenance cost can be pretty expensive as well.

Final thoughts

Blockchain technology is a digital ledger in which transactions made in Bitcoin or another cryptocurrency are recorded chronologically and publicly.

While the underlying principle of blockchain is to create decentralized, immutable ledgers, there are many possible applications for this new form of data storage.

What does it mean? It means that you don’t need your bank anymore! You can transfer money from one country to another without having any middlemen involved. And if there was ever a hack, like the famous 2017 Equifax data breach, the people who lost their personal information will be able to get it back and have a say in what happens next.

In short: Blockchain is not just exciting because of its potential but also because we’re finally moving past having our data held hostage by large corporations with only one goal in mind: profit.

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Eliott Berthold

Eliott is a Nexym Finance writer. He runs several high yielding portfolios for American and international clients. He teaches first and second year Finance at various universities and enjoys golf and competitive running.

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