What is blockchain technology?
A blockchain is a type of distributed ledger technology (DLT) that consists of growing lists of records, called blocks, that are securely linked together using cryptography.
The concept of blockchain technology first emerged in 1991, with a paper explaining the use of a continuous chain of timestamps to record information securely, and now forms the bedrock of cryptocurrencies such as Bitcoin and Ethereum.
Bitcoin was largely created to facilitate the exchange of bitcoin cryptocurrency (BTC), but its potential was quickly discovered. The Bitcoin blockchain was designed to store a lot more than just data on the crypto token's movement.
Blockchain is a distributed ledger technology that facilitates the process of recording transactions and tracking assets in a network. The distributed database is managed by multiple participants.
An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.
All network participants can access the digital ledger and its immutable record of transactions. With this shared and public ledger, transactions are recorded only once.
How blockchain works
Transactions are recorded using an immutable cryptographic signature (a fixed-length string known as a hash). They show the movement of an asset and can record the information of your choice called metadata.
The transactions are then organized into blocks, and each block contains a number of transactions, every one of which are recorded on the participants' ledgers.
Each block is connected to the ones before and after it: blocks are "stacked" on top of each other and each new block includes a hash of the previous block, effectively chaining them together, thus the term "blockchain". Every time a new block is added, the previous one becomes unmodifiable, making each block more and more secure over time.
To sum this up, the blockchain's critical parts include records (block records and transaction records), blocks, hashes and chain. Transaction records include the digital asset, price and ownership data that are recorded, approved and settled across all nodes.
Blockchain use cases
Blockchains are becoming an increasingly important part of daily life and work, with the growing popularity of Bitcoin, Ethereum, Litecoin and other cryptocurrencies as well as NFTs.
A blockchain platform allows users and developers to create novel uses on top of an existing blockchain infrastructure. One example is Ethereum, which has its own native cryptocurrency (ETH). The Ethereum blockchain also allows the creation of smart contracts and programmable tokens, and NFTs. These are all built up around the Ethereum infrastructure and secured by nodes on the Ethereum network.
NFTs, unique digital assets secured by blockchains, are one of the most widely known blockchain applications. Smart contracts allow collectors and artists to sell, trade and authenticate original artwork on the blockchain, removing the need for intermediaries such as galleries. Creators can sell their digital art and get royalties for every sale on the secondary market thus creating another revenue stream, put their work up for auction, and connect with their communities.
However, while NFTs and cryptocurrencies such as Bitcoin or Ethereum are the first to come to mind when blockchain is mentioned, the ecosystem is growing beyond financial services and has many other use cases and real-world applications.
Healthcare providers can use blockchain technology to securely store, track and share electronic medical records, improving the efficiency and accuracy of healthcare delivery. Blockchain can also be leveraged to manage clinical trials data while maintaining regulatory compliance, amongst other things.
Blockchain and NFTs can also be used for supply chain management purposes. Koinearth is a startup that creates enterprise NFTs that enable the tracking of physical goods and documents across the supply chain. As another example, IBM has created its Food Trust blockchain to trace the journey that food products take to get to their locations. Metadata of products can be stored on the blockchain, preventing data elimination or unauthorized manipulation, while enabling tracking of the goods from their origin to their destination.
When it comes to finance and record-keeping, blockchain removes the need for financial institutions such as banks, and central authorities. The peer-to-peer network cuts out the middle man and allows for a highly secure way of recording transactions. Blockchain can also be used to facilitate cross-border payments or create tamper-proof records for voting systems. DeFi, decentralized identity, copyright and royalties protection and dApps are other examples of possible blockchain use cases. Blockchain could also become a regulator of IOT (Internet of Things) networks to identify devices connected to a wireless network, monitor their activity, and determine how trustworthy they are. Blockchain could also help automatically asses how trustworthy new devices are.
The two main types of blockchain, public and private, offer different levels of security and use cases.
Public blockchains use computers connected to the public internet to validate transactions and bundle them into blocks to add to the ledger. This means that with a public blockchain such as the Bitcoin blockchain, anyone can join the network freely and establish a node. Public blockchains are known as permissionless, because they are open, and are typically designed around the principle of anonymity.
To validate new entries or records to a block, a majority of the decentralized network's computing power must agree to it. To prevent bad actors or hackers from validating bad transactions or double spends, blockchains must be secured with cryptography and a consensus algorithm such as Proof of Work (PoW) (where miners mine blocks) on Bitcoin or Proof of Stake (PoS) (where validators validate blocks) on Ethereum. These mechanisms allow for agreement even when no single node is in charge.
Private blockchains, on the other hand, typically only permit known organizations to join. These permissioned blockchains require each node to be approved before joining. Because nodes are considered to be trusted, the layers of security do not need to be as robust. Private blockchains are mainly used by businesses. Consensus can be achieved through a process called 'selective endorsement,' where known users verify the transactions, so only participants with the appropriate access and permissions can maintain the ledger.
As of 2022, there are more than 10,000 active cryptocurrencies based on blockchain, with several hundred more non-cryptocurrency blockchains.
Cryptocurrencies vs blockchain
It is important to understand the difference between cryptocurrencies and blockchain technology. Blockchain is the bedrock for crypto, which is built on a blockchain protocol. Cryptocurrency uses blockchain as a means to transparently record a ledger of payments, but blockchain can be used to immutably record any number of data points, whether related to currencies or not.
Bitcoin is both a cryptocurrency and a blockchain protocol. It is the first and largest cryptocurrency in the world, with the highest market cap. The Bitcoin blockchain is an amalgamation of Bitcoin (BTC) and blockchain. The original 2008 Bitcoin white paper that first described the blockchain system and its set of computational rules --- that would serve as the backbone of the entire crypto market --- was written by a person or group of people known as Satoshi Nakamoto. The Bitcoin protocol was officially released in 2009 as open-source software.
The Bitcoin blockchain aims to decentralize financial services and allows users to be in full control of their digital currency, with no third party needed. Users no longer need to go through any financial institution to make or receive online payments. The Bitcoin blockchain is a public ledger that contains the history of every bitcoin transaction. In other words, Bitcoin is a trustless form of money that removes the need for a trusted third party to keep a ledger, because everyone part of the Bitcoin network has a copy of this ledger. A copy of the blockchain can be downloaded, and any user can inspect the path of bitcoins from one transaction to another with public data being accessible through an API. Bitcoin transactions are pseudonymous, meaning users are not required to provide proof of their identity.
Of course, the records stored in the Bitcoin blockchain are encrypted. This means that only the owner of a record can decrypt it to reveal their identity (using a public key and private key pair). This allows users to remain anonymous while preserving transparency.
Despite Bitcoin (BTC) being the most well-known blockchain and biggest cryptocurrency, its smart contract use cases have been limited due to its scalability, speed and syntax limitations. The Stacks blockchain aims to change this, and unlock Bitcoin's potential. The Stacks blockchain provides a blockchain technology that uses Bitcoin's high security while allowing the creation of smart contracts.
The future of Blockchain
Many in the crypto ecosystem have expressed concerns about government regulation over cryptocurrencies. While it is getting near impossible to end a crypto like Bitcoin, considering its large decentralized network, governments could theoretically make it illegal to own cryptocurrencies or participate in their networks. However, this concern has grown smaller over time, as countries have made Bitcoin payments possible and large companies such as PayPal have started allowing the ownership and use of crypto on their platforms.
As we prepare to head into the third decade of blockchain, the only remaining question is when legacy companies will catch on. Today, we see a proliferation of NFTs and the tokenization of assets as well as companies purchasing BNS names, ensuring the future of their Web3 identity. Important growth is predictable for blockchain over the next decade.