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What is blockchain?

by | Dec 14, 2017

Without the blockchain, no cryptocurrency would exist. No Bitcoin, no Ethereum, no Dogecoin. So while crypto is a flashy headline and exciting to read and write about, this article is going to focus on the superstar of the digital world: the blockchain. And we’ll try to make it fun to read, too.

A blockchain is a decentralized, distributed, immutable, and open ledger that lives in a network of computers. Bitcoin, Ethereum, Litecoin, and many other digital assets each have their own underlying blockchain.

The blockchain is what makes transactions secure, unhackable, and accessible anywhere on the planet. For example, when you buy or sell Bitcoin, you broadcast your transaction to the Bitcoin network where miners and “nodes” (computers) work hard to solve complex mathematical equations that serve to validate and confirm your transaction. Miners and nodes are rewarded with coins, Bitcoin, in this case, if they happen to successfully solve the mathematical guessing puzzle – this is their incentive to participate in the system. Once your transaction has been verified and confirmed, it is grouped with other transactions to create a new block, which is then linked to the previous Bitcoin block of transactions via cryptography, aka math used for encryption. This creates, you guessed it, a chain! Remember that the chain is unchangeable, and every node in the Bitcoin network can see every block, which is what makes the blockchain a secure public ledger of transactions. Even if one, or several, or many, nodes shut down for some reason, every other node has a complete copy of the blockchain and can continue its maintenance.

The graphic below provides an example of how a blockchain is formed:

bitcoin block chain diagram that explains transactions are processed with Bitcoin using the blockchain technology

Every block that is created contains a bundle of transactions (Tx), a timestamp, and a cryptographic code (known as a hash). The has is calculated by an algorithm and is based on all the information that was included in the previous block. Similarly, a new hash is calculated from all the information in this current block and will be included in the next one. The carry-over of hashes is what creates the chain, because the hash of each new block depends on the code of the previous. If anyone tries to change any tiny bit of information in any prior block, the hash of that block would change completely, which would change the hash included in the next block, and so on. The network can easily recognize that this version of the blockchain has been tampered with, and reject it. This cryptography ensures that the blockchain is immutable requiring trust in a third party.

It is effectively impossible for any computer, entity, or person to take over control of the blockchain. Not only is it spread across a distributed network that stays alive through millions of unique users, but decision making doesn’t take place via a central authority. Rather, the network makes decisions as a whole via a consensus algorithm.

Let’s use the internet a simple analogy for how the blockchain works. There is no entity that can “turn off” the internet. Nation states and governments can regulate and restrict access to it, but it is still there and there are still ways to get to it. Plus, the internet is the sum of those who use it: those who create content, those who consume the content, and those who maintain it with new protocols and updates.

Here are a few other ways that the internet and blockchain are similar:

  1. No single person controls either network.
  2. They are both globally distributed. Without the intervention of regulators, everyone on earth would have the same access to and copies of web pages.
  3. When a website or blockchain is updated, it is updated for everyone.

Other applications of blockchain technology

Blockchain is making the news these days because it supports monetary transactions and digital currencies like Bitcoin, but there are many other ways the revolutionary technology can be put to use. Here are five of them.

Land titles and other important documents

It is estimated that 70% of the people in the world who own land have only a loose title to it. For example, Honduran farmers face an ongoing problem of government officials showing up at their front door claiming that their records show the government in fact owns the land they have built your home on. Even if you have a paper title to the land, it’s your piece of paper against their government records. If the title were tracked on the blockchain, every transaction of the title would be uneditable and transparent — so everyone could see who really owns the land.

This application of the technology has promising implications for anti-corruption efforts around the globe.

A true sharing economy

When you think of the sharing economy, you probably think of Ubers, Airbnbs, Lyfts, and TaskRabbits. The fundamental principle of a sharing economy is that people can come together to create and share their resources directly with one another. These companies have great marketing teams that have convinced us the sharing economy can only exist if facilitated through their platform but try this. Imagine a room rental blockchain, owned by every single person with a room to rent instead of just one company. When you go searching for a room to rent, you enter your criteria, get connected to the owner, and send them a payment without any surcharge added! Now, you’re self-sufficient and both parties are accountable since ratings on the blockchain are public and unchangeable.

Rethinking remittances

This is not as common of an issue for those from economically developed countries, but the remittance industry moves more than $600 billion each year for people who leave their homeland and send money back to their families. Every transaction is accompanied by a hefty fee to wire the money, and the transactions can take days to complete. On the blockchain, transaction fees are minimal and it takes only a few minutes to send money across the world.

Data, privacy, and identity

Data is unlike other assets in that we each create it. As we move through the digital world, we leave a trail of data breadcrumbs: Facebook statuses, Tumblr pages to which you forgot your password, Youtube comments, all of these are pieces of data you created but do not own. The blockchain can provide privacy for those who want it. There are companies right now that are creating what are essentially black boxes for your digital identity as you move through the blockchain, giving out only what information is needed at the moment. For example, when making transactions, the seller only needs to know that they have received payment and nothing else about your identity. The blockchain can provide this kind of privacy.

Incentivizing content creators

Digital content creators include musicians, bloggers, videographers, and countless other mediums. Most of them receive no compensation for their work because the way that the internet and intellectual property laws have developed necessitate offering work practically for free in order to attract an audience. A musician with a hit song might only make a small profit for huge numbers of listens on a streaming platform. By putting content on a blockchain ecosystem, however, artists can grant access to their work for digital accounts, choosing whether or not to charge a nominal amount (small, small fractions of a penny, for example) to listen to a song, for example. And if a song was added to a movie or made into a ringtone, IP rights could be specified and regulated by the blockchain through smart contracts. This would bring control and fair compensation back to the artists and creators themselves, rather than intermediaries.

An added bonus: if an artist, video-maker, or blogger charged those micro-cents to access the content, they would not need to take money to post advertisements! Can you imagine a world without ads?

Conclusion

These are just a few of many, many possible applications of blockchain technology. Bitcoin provides a robust model for digital payments, Ethereum’s blockchain supports smart contracts, opening the door for other applications, and that same technology can be used to track intellectual property, physical property, and supply chains. Blockchain technology is here to stay, and we hope this helped you to understand it a little bit better!

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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