What Is Blockchain Technology?
Written by
Vance Cariaga
Edited by
Nupur Gambhir
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Blockchain is a decentralized, shared digital ledger system that uses cryptography to verify and record transactions in a transparent but unalterable database. A type of distributed ledger technology (DLT), blockchain has become a vital part of modern finance and computing technology.
How Does Blockchain Technology Work?
Blockchain networks are comprised of individual chunks of data that are unique and compartmentalized but permanently linked together with all those that came before and after.
The Concept of Blocks and Chains
Blockchain technology gets its name from its structure — verified data is stored in blocks that are linked together in a chronologically consistent chain. Blockchains are secured with public key cryptography, which issues unique identifiers for each of the network’s participants.
Decentralization
Unlike traditional databases or servers that warehouse data in a central location, blockchain ledgers exist across a network of connected computers. This encrypted, transparent and decentralized framework grants all users access without any participant needing to trust another.
Consensus Mechanisms
Blockchain systems have strict rules about how, when and by whom the network can be altered. The network’s participants must give consent for recording new transactions only after they reach a consensus that a transaction is valid.
There are two kinds of consensus mechanisms.
- Proof of work (PoW): “Miners” use powerful, specialized and energy-inefficient computers to solve complex computational problems to submit new transactions to the network. This was the original blockchain consensus mechanism, which Bitcoin — the first cryptocurrency — still uses.
- Proof of stake (PoS): Developed to address the energy inefficiency of mining, PoS is a faster, less labor-intensive process that rewards users for holding a small amount of cryptocurrency in the network — called “staking” — to validate transactions. Most altcoins (non-Bitcoin cryptocurrencies) use PoS.
Key Features of Blockchain Technology
A blockchain can’t function unless the data it holds is visible to the network, inalterable and secure.
Transparency
Network visibility is essential to blockchain functionality. The network’s users can see all the transactions without having their privacy compromised. The technology achieves this transparency — which negates the need for a trusted third party like a bank or government — by distributing blockchain data across the network’s many computers instead of securing it in a single database.
Immutability
Permanence is also crucial. The fact that data can’t be deleted or altered once recorded on the blockchain ensures security, further negates the need for trust and safeguards the data’s integrity.
Security
A process called hashing is essential to blockchain security and integrity. Hashing generates cryptographic signatures, which are the digital equivalent of fingerprints. Assigning unique markers to each transaction ensures their authenticity and validates their source of origin.
Blockchain and Cryptocurrency
Blockchain technology is most closely associated with cryptocurrency, but it has many other applications.
The Connection Between Blockchain and Bitcoin
Blockchain networks are the foundation for cryptocurrencies like Bitcoin. Network users perform vital maintenance, and in exchange for their efforts and computing power, the network rewards them with a nominal amount of Bitcoin. Therefore, the blockchain’s miners both ensure the network’s integrity and generate new digital currency simultaneously.
Use Cases Beyond Cryptocurrency
Blockchain technology is synonymous with cryptocurrency, but it has many other real-world applications.
- Blockchains like Ethereum use the technology to facilitate smart contracts, which are programs that automatically execute predetermined agreements between multiple parties.
- Online casinos use blockchains to ensure fair play and safeguard player privacy.
- Data storage providers use blockchains to enhance security.
- Logistical firms use blockchain technology to facilitate communication and data-sharing among far-flung stakeholders.
Is Blockchain Secured by the Government?
Decentralization is the foundation of blockchain technology — the whole point is to achieve security and integrity without third-party custodians like governments.
Although blockchain networks have independence from government control, some governments use them to streamline services, secure data and ensure accountability through applications like:
- Creating immutable voting systems.
- Preventing fraud in real estate and land transactions.
- Maintaining public records.
- Collecting taxes.
- Managing supply chains.
The Future of Blockchain Technology
Blockchain technology emerged with cryptocurrency and then went on to support new functions like NFTs and decentralized finance (DeFi). It continues to evolve and is now bringing new emerging trends into reality, including:
- Investment and asset tokenization
- Interoperability and communication between blockchains
- AI-infused blockchain technology
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