What is a blockchain and how does it work? Definition and Applications
Blockchains are public and immutable, so they are a way to facilitate and store digital transactions.
Shubham Dhage via Unsplash; Canva
What is a blockchain in simple terms?
A blockchain, at its most basic level, is a digital ledger of transactions stored on many different computers (called nodes) connected by a network. It is composed of a series of “blocks”, which are essentially digital baskets that can be filled with records of transactions. Once the transactions in a block are verified via a consensus between nodes in the network, that block is “closed” and added to the existing, immutable, chronological chain of previous blocks.
Most often, blockchains are used to buy, sell, trade and record the ownership of cryptocurrencies (such as Bitcoin, Ethereum and Solana) or other digital assets such as NFTs. They can also be used for other purposes, but we will come to them later.
You can think of a blockchain sort of like a chain-of-custody record for evidence in an investigation. Every time the proof (or in the case of a blockchain, a digital asset like a Bitcoin or an NFT) changes hands, that transaction is recorded in an unaltered ledger.
While a chain of proof log can be altered or falsified, a blockchain cannot because there are many copies of it on many different networked computers that must verify the legitimacy of a transaction in order for it to be permanently inscribed on the blockchain in the first place.
The appeal of a blockchain is that it is a secure, immutable record of transactions that does not rely on any central authority, such as a bank. In other words, no person, entity or institution must be trusted or relied upon for the blockchain to remain safe and secure.
Anyone running a node for a blockchain (or using a blockchain explorer application) can see all the transactions ever recorded on that blockchain, so the history and chain of ownership of any digital asset traded on it is a matter of public record.
How do blockchains work?
Blockchains do two main things – facilitate transactions and keep track of those transactions.
Each blockchain user has their own cryptographic keys – one public and one private. When a transaction occurs, one party sends an asset to another party using the latter’s public key as a kind of address. The recipient’s private key is then used to prove their identity, allowing them to “unlock” and accept the asset.
The nodes of the peer-to-peer network then work to check the validity of this transaction according to a protocol agreed upon by the users of the network. Once all the transactions in a block have been verified and there is agreement on the order in which they occurred, the block is closed and linked to the previous block in the chain, and each node’s copy of the blockchain is updated.
How are blockchains used?
Blockchains are most commonly used to conduct and record transactions involving cryptocurrencies such as Ethereum and Bitcoin, but blockchain technology can also be useful in many other contexts.
In cryptocurrency
When individuals make purchases using cryptocurrency, their transactions are facilitated via a blockchain. A buyer uses a seller’s public key to send them crypto, and the seller’s private key unlocks the funds. This transaction is verified by nodes in the network which are then embedded permanently in the blockchain.
In NFT Trading
An NFT, or non-fungible token, is sort of like a certificate of ownership and authenticity for a digital or physical collectible – often a piece of art. Once an NFT is created, it is “stamped” on a blockchain and can then be sold by its creator.
When purchased, the ownership becomes associated with the buyer’s identity on the blockchain, and this ownership remains intact, publicly visible and irrevocable until the NFT is sold again, whereupon the sale and the new owner are recorded on the blockchain, and so on.
Beyond Decentralized Finance (DeFi)
Currently, blockchains are primarily used for the transfer of cryptocurrencies and NFTs, but they have many other potential applications and may become popular in a variety of industries in the near future.
One possible use of blockchain technology is inventory and shipping management. Because blockchains are good at tracking assets over time and between parties, they will undoubtedly be useful for large companies that do a lot of manufacturing and shipping work, especially when products or product components have to change hands many times between manufacturer and consumer.
Another area many DeFi enthusiasts believe could benefit from blockchain is voting. Voter fraud is very uncommon, but that doesn’t stop pundits from worrying about it and even making accusations, and this situation isn’t helped by buying the fact that today’s voting technology is somewhat vulnerable. Whether used in state or federal elections, internally within organizations or across shareholders in public companies, blockchains can allow votes to be easily recorded, chronicled and verified via public and private keys.
Medical records present yet another application – Most people move multiple times, and occasionally records slip through the cracks between different cities, states, facilities, doctors and insurance providers. If each individual’s medical record was embedded in a blockchain, everyone’s information could be recorded chronologically, permanently protected, and accessed by any doctor or provider with access to a patient’s account via their private key.
There are many other potential applications for blockchain, and we are likely to see the technology rise in prominence in a variety of industries in the coming years.
Are blockchains infallible? Can they be hacked?
Blockchain technology is new enough that vulnerabilities are still being explored, but it is clear that money can be stolen in certain cases. According to an MIT Technology Review article, more than $2 billion worth of cryptocurrency was stolen between early 2017 and February 2019, but most of these attacks have targeted crypto exchanges, where users can trade crypto without directly interacting with a blockchain.
When it comes to exploiting a blockchain itself, the main threat is a so-called 51% attack. This occurs when more than half of the nodes on a blockchain work in concert to split or “fork” a blockchain and fraudulently rewrite history, which can allow for the dual use of cryptocurrency.
51% attacks are possible because, in most cases, only a simple majority of a network’s nodes need to be consensus in order to make changes. For larger, more popular blockchains, this is highly unlikely to happen, as so many different users operate so many different nodes that it is extremely unlikely that one party could gain control of more than half of them. However, for smaller blockchains with fewer users, 51% attacks represent a real threat.
When was the first blockchain created and by whom?
The first popular, decentralized and well-known blockchain was created as a transaction ledger for the cryptocurrency Bitcoin by an anonymous person or group using the name “Satoshi Nakamoto” in 2009.
