What is a blockchain?

What is a blockchain?

A blockchain is a type of database invented in 2008 that stores and secures information in sequential blocks. Unlike the case with traditional databases, the content of a blockchain is not held on a single server. Instead, a copy of the entire database is recorded and stored in each computer or node operating the network. Anyone in the world can operate a node if they want to. Also, blockchains are completely transparent for anyone to monitor and verify.

Data blocks are linked together by a network of miners or validators. Miners are most often associated with BitcoinBTC, where participants enlist powerful computers in a race to solve a complex mathematical problem to earn bitcoin. Validators typically refer to participants on blockchains where operators post digital assets as collateral in exchange for the right to add transactions to the blockchain and earn in-kind benefits. You can think of both processes as updating a database. These decentralized setups are meant to make blockchains more secure than traditional databases, which are often plagued by what is known as a single point of failure. For example, one compromised login can give an attacker access to the entire kingdom.

Blockchains come with trade-offs. The validation process can make some chains slow. For example, the Bitcoin network can process 4.6 transactions per second while Visa’s V-rate is 1700. Right now, EthereumETH can only handle a dozen or so. Many developers are working on ways to achieve faster processing times, and some newer platforms such as SolanaSOL, CardanoADA, and AlgorandALGO claim to be able to handle thousands of transactions per second. Nevertheless, centralized solutions are generally faster.

Why use a blockchain?

That brings us to the next question. Why would anyone need a decentralized database? It depends on the problem you want to solve and how it fits with a blockchain’s properties. A common trade-off is that blockchains sacrifice speed and efficiency for security, transparency and decentralization. Putting your company’s transaction information on a blockchain won’t be the best option when you can update an Excel file or collaborate with colleagues on a Google Drive.

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Blockchain’s biggest advantage is replacing middlemen. Government administrators, bankers and lawyers may one day find themselves out of a job because of blockchains.

Let’s look at bitcoin, for example. People with reliable banking infrastructure often don’t see the need for decentralized money. However, in countries with currency hyperinflation and inaccessible or corrupt banking systems, bitcoin can preserve savings simply by being money that does not rely on governments or banks for minting, transfer and access. Add smart-contract-based infrastructure, and blockchains can replicate the traditional banking system in a decentralized and permissionless way.

Another example, one with growing popularity today, is non-fungible tokens (NFTs) that displace intermediaries in digital art. Unlike working through resellers, artists can register their work directly on a blockchain and post it on an NFT marketplace. Ownership is verified on the blockchain and transferred to the highest bidder through a smart contract. Not only does going direct to consumer increase artists’ profit margins, but they can program a royalty to be paid into their digital wallets every time a work is resold. Many different types of content creators can benefit from the ability to transfer digital ownership of intellectual property via blockchains.

What about private blockchains?

Most people think of digital assets like bitcoin and ethereum when they hear the word blockchain. That’s because public blockchains are supported by network participants who are compensated with each network’s token. What if users want the security and transparency of a blockchain, but don’t need decentralization or tokens to incentivize behavior?

Private blockchains are used to upgrade conventional enterprise systems. Shipping and logistics giant Maersk uses blockchain technology to track supply chains and process marine insurance claims. BoeingBA uses a blockchain-enabled air traffic control system to communicate with and track drones. Honeywell maintains transparency with blockchain flight records. New York-based Signature Bank offers a blockchain-based 24/7/365 instant payment system based on a privatized version of Ethereum to help customers move funds around the world in an instant.

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The Future of Blockchain

No one knows what the future holds, but there are several developments that give us insight into what blockchains will look like years from now. First, they will get better and faster over time. The public blockchain industry is also working hard on interoperability, or the ability of different blockchains to talk to each other, and friendlier user interfaces for decentralized applications.

Second, there are historical parallels between blockchain and the early Internet. Private blockchains are a bit like the “intranet” idea, compared to public blockchains. Time will tell if one or both survive. Blockchain tokens are also subject to speculative bubbles as investors try to find the next AmazonAMZN and avoid the next Pets.com.

Blockchain is here to stay. We can know who is who and who owns what without relying on a single party to clear transactions or update the database. Blockchains may become part of our everyday life in the near future.

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