What Is Blockchain Technology?
Even the most traditional investor is, by now, aware of the huge boom in cryptocurrency that we’ve seen over the past five years.
A decade ago, cryptocurrencies were regarded as exotic, volatile, and even dangerous. Now, they are fast becoming part of the investment landscape.
That doesn’t mean, of course, that they are easy to understand. The technology that underpins cryptocurrency is still not well understood by investors, and particularly those new to the world or investing.
One ongoing point of confusion concerns the difference between blockchains and cryptocurrencies. While the two terms are often used interchangeably, they refer to distinct technologies.
Blockchain refers to a broad technology which has many applications – and one of these is cryptocurrency.
Accordingly, references to a particular cryptocurrency – such as Bitcoin or Ethereum – shouldn’t be confused with blockchain.
In this article, we’ll look at the definition of blockchain, and explore some of the possible applications of the technology.
Blockchain: The Basics
The basic idea of a blockchain can be explained simply. A blockchain is, essentially, a database. However, unlike a traditional database, the data that a blockchain holds is not stored in one place on a server.
Instead, these data are distributed across all of the “nodes” of a network. In most cases, these nodes are individual computers running the software that is used for a particular blockchain.
The name “blockchain” comes from the way in which these data are structured. In a “traditional” database, data is structured in tables.
In a blockchain, as the name suggests, data is organized in “blocks”. Blocks have a certain storage capacity, and when they are filled they are closed and linked to the previously filled block.
In this way, all the blocks in a blockchain are linked together. And because a block can only be filled once, and then is timestamped, it forms a permanent record of the transactions on the blockchain.
Lots of different types of information can be stored on a blockchain. The most familiar of these is data relating to the ownership and transactions of a cryptocurrency.
However, almost anything can be stored in this way, and in some cases there are significant advantages to doing so.
Security and Transparency
At this point, it’s worth reflecting on why we would use a blockchain instead of a standard database.
Blockchains have two main advantages over standard databases – they are arguably more secure, but yet they are also more transparent.
The original goal of blockchain technology, in fact, was to create a way of storing data that is secure, but not controlled by any one individual.
There are several reasons why we would not want to have one person, server, or organization in control of a database.
If only one definitive version of a database exists, it is very vulnerable. If the power goes out, or if the server is hacked, all the data might be lost. By distributing data across a network, we can reduce the likelihood of this.
For many cryptocurrency pioneers, there was another reason why blockchain is so attractive. Because the data on the blockchain is distributed across a network, it cannot be controlled by any one individual or organization.
This means that currencies based on blockchains do not have a central controller (such as a state bank or government).
Not only does this distribution of data make blockchain networks more transparent – it also makes them more secure. In fact, and perhaps counter-intuitively, it is the transparency of a blockchain that makes it secure.
Here’s how it works. In order for a transaction to be added to a blockchain, it must be witnessed and recorded by a majority of nodes.
If one user tampers with Bitcoin’s record of transactions, for instance, all other nodes would cross-reference each other and easily pinpoint the node with the incorrect information.
This system helps to establish an exact and transparent order of events. This way, no single node within the network can alter information held within it.
The Uses of Blockchain
Blockchain was first discussed as a research project way back in 1991. However, it wasn’t until 2009 that the technology was implemented outside the lab.
In January 2009, Bitcoin was released as the first real-world, widespread use of blockchain.
The reason why blockchain was chosen as the basis for Bitcoin (and, since then, other cryptocurrencies) is because of the inherent properties of blockchain databases.
The “ledger” for Bitcoin – the record of who owns which Bitcoins – is distributed across all the computers running some form of Bitcoin software.
This ensures that the record can never be hacked, and allows the currency to run without central control.
Since then, blockchain technology has been used for a wide variety of other purposes. The advantage of the technology is that it allows transactions to be recorded in a way that is both secure and open to scrutiny.
This makes blockchain a good choice in circumstances where security is important – for example, as a way to vote securely in democratic elections.
The nature of blockchain’s immutability means that fraudulent voting would become far more difficult to occur.
For investors, the more impactful applications of blockchain are likely to be those in the financial sector.
It is thought that banks could use the same technology to record and manage the transactions of their customers, and that this could make transactions much quicker.
Consumers can see their transactions processed in as little as 10 minutes—basically the time it takes to add a block to the blockchain, regardless of holidays or the time of day or week.
With blockchain, banks also have the opportunity to exchange funds between institutions more quickly and securely.
Since blockchain technology made its first public appearance in 2009, it’s been applied to a wide variety of applications. But there is good reason to think that this is just the start.
We are still just at the beginning of exploring what technology can do. So expect to see blockchain appearing in many more places over the next decade.