Beginner Series

Blockchain for Beginners: What Is Blockchain?

You may have heard of the word ‘blockchain’ before but not really understood what it is.

Often when you hear blockchain mentioned it’s when people are discussing cryptocurrency, particularly Bitcoin. That’s because while bitcoin is a cryptocurrency, Bitcoin is also a technology that supports it, and more importantly is one of the first blockchains.

Blockchains have been getting attention for many reasons as we’ll discuss in this post, but one of those core themes is decentralisation.

We don't often stop to think about it, but we place a great deal of trust in third parties - be that banks or other services - to authenticate, approve and keep records of our transactions. We ask and pay them to manage our accounts and protect our interests.

However, decentralisation is a hallmark of cryptocurrencies. Much of their appeal (lower fees, faster transaction times, use all around the world) lies in the fact that they are not subject to the management of governments or institutions.

But just how does this work in practice?

How are transactions in cryptocurrency authenticated and approved?

How are they processed and recorded?

That’s where blockchain technology comes in.

What is blockchain technology?

A blockchain is an online, distributed peer-to-peer ledger. Much like a database which keeps records, a blockchain keeps track of information. However unlike a database that stores it on a computer system, blockchains store the information online throughout the distributed network.

This may sound complicated but the concept of it is quite simple.

A blockchain collects information in blocks, which holds sets of information. These blocks only have so much storage capacity and when they are filled, another block is added to the chain. This chaining of data is what gives the technology its name, ‘blockchain’. Each block is also timestamped when it is added to the chain.

Advantages of blockchain technology

Distributed Ledger

A bank ledger is maintained by a central authority, whereas a blockchain is a decentralised ledger distributed among the computers (known as nodes) in its peer-to-peer network. Anyone is allowed to join and when a person enters the network, they will get the full copy of the blockchain. Responsibility for maintaining entries in the ledger is shared by these nodes.

When a transaction takes place in the network, it’s up to the network to validate it. This can either be done by the nodes participating in a vote with 51% or more agreeing, or based on a proof-of-work model, which requires individuals called ‘miners’ to validate the transaction. At which point the transaction is added to a block on the blockchain.

The nodes then need to create a consensus, so they agree what blocks are valid or not. Blocks that are deemed invalid will be rejected.

Updated in real time

Nodes in a blockchain network constantly update each other on the most recent version of the ledger as new blocks are created. This means that the network is always up-to-date and accessible via any node wherever they are in the world.

Transparency

While the identity of a person is secure, their public address is listed on the blockchain, and the contents of a ledger are publicly viewable. This level of transparency has never been seen before in a financial system, which creates a new level of accountability. So if you knew the cryptocurrency address of a company, you can simply look it up and see all the transactions that they have made.

Secure

Blockchain technology uses cryptography to process and confirm entries to the ledger. The science and maths behind these functions ensures that records are essentially immutable.

For example, let’s say a hacker wanted to change the blockchain and steal cryptocurrency from people. They would not only have to alter their own copy of the blockchain, but they would also have to control and alter over 50% of the blockchain copies so that their copy became the majority and the version agreed upon by all the nodes in the network.

This would require an enormous amount of money and resources to pull off. The Bitcoin network is growing quickly, so this would be an almost impossible task. Seeing drastic alterations to the blockchain would raise enormous suspicion and once everyone cross-referenced their blockchain version it would be cast aside as illegitimate.

Who invented blockchain?

In 1991, cryptographers Dr Stornetta and Dr Harber published a white paper introducing a decentralised, cryptic database where digital transactions are secured known as a ‘blockchain’. Together they pioneered a system that was transparent and verifiable.

Then in 2008, a person under the pseudonym Satoshi Nakamoto published a white paper about a digital currency where transactions could be made through a decentralised system known as Bitcoin.

While blockchain is transforming the financial world, there are many applications for it in other industries including government, agriculture, health and much more.

What is blockchain technology used for?

There are so many different ways that blockchain can be used outside of finance. You may not be aware, but some companies are already using blockchain technology including Pfizer, Walmart, Siemens, and others who are using it for various purposes.

Smart contracts

A smart contract is a computer code to verify, negotiate or facilitate a contract. When conditions are met, the terms of the agreement can be automatically carried out.

For example, it could be used for a sublease agreement, where a new tenant has to pay a bond before they can move into the property. Once the bond has been paid, they are automatically given a door code to enter the property. If the bond is paid but the tenant is not given access to the property, the smart contract would refund the bond. This eliminates the stress and processes that typically come with these types of contracts.

Protecting intellectual property

It’s difficult to protect digital information, thanks to the internet. Intellectual property theft can result in enormous financial losses, which is why blockchain technology is being used to protect copyright and eliminate the risk of people copying files and redistributing them.

Grammy Award-winning artist Imogen Heap, is using blockchain technology to create a peer-to-peer music distribution system. This is to ensure that everyone involved in the music creation process is paid and acknowledged, as well as leveraging blockchain technology to create new ethical standards in the music industry.

Identity management

Think of how many times you’ve been required to supply personal details in order to sign up for a service or log into an account. Every time personal information is disclosed, it gets stored in different online databases. This can create security issues.

Blockchain technology can be used to protect people from identity theft and reduce fraudulent activities. It can also allow individuals to create encrypted digital identities, so they don’t have to remember multiple passwords and usernames that is also a lot safer and saves valuable time.

Healthcare

Security is a big issue in the healthcare industry because every time patient records are exposed in a data breach, hackers have access to important information such as credit card details, health data and genomic testing records.

Blockchain can be used to securely store patient medical records because it’s incorruptible and a decentralised system. When records are made and signed, it can be stored in the blockchain with confidence that they cannot be tampered with. While blockchain is transparent, it’s also private which means all identities are concealed through complex codes that can protect sensitive information.

Using blockchain technology means all parties involved can spend less time validating data and more time delivering goods and services. It also means either better quality products, reducing costs or both.

A distributed ledger means it can greatly reduce the time it takes to audit supply chain data, which currently can take weeks.

Supply chain management

People often want to know whether the businesses they are dealing with who claim their products are ethically made and sourced are telling the truth. Blockchain technology can create a more transparent and accurate way of tracking the supply chain.

Organisations can create a decentralised immutable record of all transactions, which can create more visibility to consumers and businesses.

Cryptocurrency and blockchain technology

So, what does blockchain mean for cryptocurrency?

Blockchain technology solves the problem of centralisation of financial assets. It enables parties to perform transactions online using digital money without the need for a 'middle man' to protect their assets and keep transaction records.

How is blockchain used for cryptocurrency transactions?

  • A person requests a transaction
  • The relevant blockchain network is notified when a transaction is requested
  • Nodes (computers) in the network verify that a transaction is authentic and valid using the maths of cryptography
  • When a transaction is approved, it is grouped in a batch of transactions commonly termed a 'block'
  • Each transaction block is securely anchored in the chain by a reference to the previous block (hence 'blockchain')

This reference to the preceding block makes the information stored by a blockchain very secure. This is because altering any transaction or block of transactions would mean altering all the blocks from that point forward.

This may sound feasible in theory; however there simply isn't enough computing power in the entire world to enable it to succeed. Blockchain technology is considered impenetrable.

Why is blockchain technology considered so safe?

Blockchain technology works via consensus. This means that a network automatically accepts the longest chain of blocks as the correct one on which to continue building.

In this way, transactions could only be tampered with if 51 percent of an entire blockchain network colluded to build an alternative version of the chain; a new version accepted by the majority of the network.

Therein lies the brilliance of blockchain technology. It masterfully authenticates, approves and records transactions with unparalleled security. All without a third party in sight.

Is blockchain technology the future?

A 'secure public ledger' may at first appear a contradiction of terms. However, blockchain technology is just that; a decentralised public ledger providing confidence for cryptocurrency transactions.

Not only for cryptocurrency, but as we outlined above there are so many different industries that can benefit from using blockchain technology because it:

  • Provides greater transparency
  • Removes third parties or middlemen because it’s a decentralised system
  • Secures records and transactions
  • Can save time
  • Can reduce cost

Want to start trading in over 240+ cryptocurrencies? Create an account with Cointree today.

\ Read next topic Back to learning hub

Ready to invest?

Get $10 worth of BTC free, when you make your first trade. T&Cs apply.