What is blockchain technology?
A blockchain in simple terms is an immutable (unchangeable) digital ledger which is managed by a decentralised network.
The blockchain is a type of database in which transactions are not governed by a single party and the entire transaction history is recorded. The first blockchain usage example is bitcoin (BTC), which was created in 2009.
How the blockchain works
A simple blockchain explanation is to imagine a long series of connected data, organised into blocks that form a chain. Each block is capable of holding a predetermined amount of data; as it is filled, it is forged into the chain and a new block is formed.
As the chain progresses all previous blocks are impossible to change. All data entering the new block must be verified by a majority of the computational power from a decentralised network. This decentralised network consists of nodes – devices connected to maintain the network’s integrity, which base their decision on the accuracy of the current transaction and on all the data previously confirmed to be accurate in the closed blocks.
In this way the blockchain is nearly impossible to be corrupted by any single user. Nodes, validating new blocks that are being added to the blockchain, are rewarded for their efforts, typically in the form of the digital asset they are verifying.
Blockchain usage example:
Someone wants to transfer a certain number of bitcoins from one address to another.
A transaction is requested in the network.
The transaction is sent to a peer-to-peer network consisting of computers known as nodes.
Bitcoin’s validation process is performed by miners who are rewarded for their participation in securing the network.
The Bitcoin network of nodes validates the transaction using cryptographic algorithms.
After the transaction is verified it is added to other transactions to build a new block of data for the ledger.
The new block is then recorded to the end of the existing blockchain.
The transaction is complete.
What is blockchain used for?
While bitcoin and other cryptocurrencies are by far the most prevalent users of blockchain technology, it does have other application areas.
A fast-growing area for blockchain is non-fungible tokens (NFTs), which give the purchaser digital asset ownership of things such as music and video. It is also being used to secure ownership rights in physical assets, such as precious metals and land. Even the traditional fiat banking system started utilising blockchain to allow for more secure and efficient transfers of money and credit products.
Businesses are using blockchain to enter into smart contracts whereby the execution of the contract is only possible when all parties have fulfilled their obligations, reducing the risk of fraud. Large companies are also using the technology to solve complex production, inventory and supply chain issues across the globe.
Governments are even looking at using blockchain to prevent voter fraud in future elections.
Pros and cons of blockchain
As blockchain must be verified through a series of nodes it is very difficult to corrupt. In a system such as Bitcoin, even if one node was successful in corrupting the file, the consensus requirement would soon render such efforts pointless.
This is because the blockchain in its entirety is stored on each node and as soon as the error was detected the rest of the network would eject the offending node and continue along with the correct version.
The disadvantages of blockchain technology are largely caused by the functions which make it secure. Bottlenecks in transaction speed can be detrimental to its usage in many applications. As you can imagine, the chain is constantly increasing in size and requires increasing amounts of computational power to confirm each additional block.
Energy consumption is another major disadvantage of blockchains using proof-of-work consensus mechanisms, such as bitcoin. However, this issue was addressed in a proof-of-stake protocol, which requires less power to keep the blockchain running.