What is Blockchain?

Cryptocurrencies run on blockchain technology. Thanks to blockchain, cryptos can run without a central authority and are protected by encrypted algorithms that guards them against hacks. In this guide, we go through what is blockchain and how it is used to store and trade cryptocurrencies.

So, what is Blockchain?

In its simplest form ‘blockchain’ is a distributed record-keeping technology. As a distributed ledger, it differs from a traditional ledger because it has to be verified by a multitude of connected yet independent parties from all around the world. When people refer to blockchain as a distributed and decentralized ledger, this is what they are referring to, as there is no single point of control or failure in the system. The system relies solely on its transaction verifiers and participants to keep it alive. The decentralized and distributed nature of blockchain is what makes it such a revolutionary technology because when you boil down the complexities all you have is a record-keeping system.

The ability to fully function as a transactional service without needing permission from a company, institution, government or any other central organization takes powers out of their hands and returns it back to you, the user. By functioning as a decentralized and distributed database, blockchain technology can provide the same services as a traditional system while mitigating the needs and costs propped up by intermediaries.

Blockchain Technology Explained

As we already established, blockchain technology is a distributed and decentralized record-keeping system designed to weed out middlemen, but how does it work?

In crypto mining, each transaction needs to be verified by every verifier in the ecosystem, or ‘miner’, and therefore, each transaction in the ledger is bundled into a “block” of other transactions. These blocks can contain up to 3,500 transactions each in the case of Bitcoin’s blockchain, to speed up the process. Once a miner has verified the legitimacy of the block of transactions, the block is then verified by every other miner in the ecosystem. Assuming all the other miners verify its legitimacy successfully, the original miner gets a reward, and these block records are permanently sealed off in its history as accurate.

This verified block is now a part of a permanent record of transactions, added to the ‘chain’ of previous transaction blocks that were verified beforehand. This chain of blocks can trace every single transaction since the inception of the network and is accessible to everyone since the Blockchain Explorer is essentially an internet browser for Blockchain. This process continues and repeats itself as long as there are new transactions and miners willing to validate their correctness.

Although blockchain refers to the technology that makes it possible for these distributed and decentralized transactions to take place, there are different types of blockchains that cater specifically to each system’s needs. These different blockchains have varying degrees of privacy, anonymity, and usability.

Types of Blockchain Networks

There are three types of blockchain networks:

• Public blockchains;
• Private blockchains;
• Hybrid blockchains.

For most users and most people interested in the cryptocurrency space, you only need to worry about public blockchains, but it is still important to understand them all.

Public Blockchains

The most prominent in the space and most available to users are public blockchains, as there are zero access restrictions. As long as you have an internet connection, you can fully partake in the network and send transactions or become a network validator (miner). The bitcoin blockchain and almost all mainstream cryptocurrencies are examples of using public blockchains.

Private Blockchains

Next, there are private blockchains, meaning they are permissioned networks that cannot be used or viewed unless network administrators grant access. Both participating and validating in these networks is restricted to whom the administrators deem necessary. An example of this is JP Morgan’s Quorum.

Hybrid Blockchains

The final option is a hybrid blockchain, which combines aspects of the previous two. The administrators will decide the rules of the chain, with some aspects being centralized and some decentralized. An example could be a blockchain network where anyone can participate but validators are pre-selected and centralized.

Features of Blockchain Technology

Blockchain is such a revolutionary technology because there are so many additional features that make it much more advanced than a traditional ledger database. Some of blockchain’s most important and prominent features are its permissionless and decentralized aspects, meaning anyone anywhere can access these features without restriction. Many other features make blockchain technology so important for the future of transactions and interactions, such as their:

• high level of security;
• the ability to send transactions directly peer-to-peer without a middleman;
• transparency;
• pseudonymity;
• immutability.

High Level of Security

As a decentralized and distributed system, if is there any fraud or malfunction in the blockchain network, every participant will have their assets at risk; because of this, security is of the utmost importance. Blockchain security is based around the “Byzantine Generals Problem” or source congruency; how can you trust a potentially unreliable source if you need them to be 100% accurate? This problem has been attacked with various technological and economic incentives, making it impossible to solely control the validation of transactions without 51% or more control of the network.

In the case of Bitcoin, this would mean attackers would have to invest 10s of billions to take control of the network in order to use it to their advantage, which would then crash the network and Bitcoin price once users see there’s a malicious source. This level of security makes it financially unfeasible, although not impossible, to “hack” a blockchain.

Permissionlessness 

Unlike conventional systems, blockchain technology is permissionless and accessible by anyone. This means that no sanctions, government, corporation, organization, or any other financial entity can physically stop the transaction from taking place (although they can certainly threaten you). To some, this may seem like not enough restriction, but you have to put yourself in the shoes of the millions of people around the world who have to live under mass surveillance or can be systematically punished by their government. Although you may live in a ‘just’ system where you have freedoms, not everyone does, and blockchain technology takes the power away from these authorities and returns it to the user.

Peer-to-Peer Transactions

This is one of the most important and revolutionary aspects of blockchain technology. Through the internet, you can now interact directly with anyone around the world and exchange value without having to go through a middleman, similar to how you would with traditional fiat currency. This ability to directly transact with another user decreases unnecessary costs and friction, bypassing how long it takes and how much it costs to transact. Traditionally, you would have to use a payment processor to transfer value, they would take their cut and it could take hours or days; this peer-to-peer operability changes that forever.

Decentralization  

Decentralization means there is no single point of authority in the network, rather, the authority lies within the participants of the network. Of course, entities can have higher shares in a system, giving them more proportional influence, but it is a 1:1 democratic system – 1 validator, 1 vote. This system means no single authority has full decision-making power; the network decisions are determined democratically by everyone; the users have a financial stake in the maintenance of the network. This system is why “forks” can happen and why additional chains can be created depending on network decisions, such as the birth of BitcoinCash out of Bitcoin. 

Transparency

As a distributed and decentralized system where validation takes place by every participant in the network, blockchain tech is fully transparent as a record keeping system. Every validator verifies every single transaction, and every block is based on the previous block of transactions, so the entire network must have access to the full history of the ledger. 

Pseudonymity

As an unrestricted system, the ability to remain private is important to many users. There were even blockchains created specifically for anonymity, so no single transaction can be traced to a user. Pseudonymity in blockchain usage means there is nothing directly connecting you to any particular address, and you can create as many addresses as you like to protect your transactions. Based on their transaction records, a user could be connected to their account, but that would take detective work.

Immutability 

Once the block is validated and verified by the ecosystem, it is “sealed off”, where it cannot be changed or edited in any capacity. In terms of auditing and trust in the network, this immutable characteristic means permanent, uneditable transactions viewable by anyone. Basically, once the transaction is verified, it can never be lied about or changed.

Common Blockchain Myths Debunked

As a new and complex technology, there are many myths and conspiracy theories about what blockchain technology can do, who/what it was created for, and the actualities of its security, immutability, and features. Below we’re going to dive headfirst into some blockchain myths to dissect them.

Myths #1: Blockchain is Completely Tamper-Proof

Anyone who tells you anything is 100% guaranteed either wants your money, is lying to you, or both. That being said, hacking the Bitcoin blockchain has been the biggest ‘bug bounty’ in computer history for years now. Although there are innumerable attempts every day, no one has been able to successfully tamper with Bitcoin’s blockchain. If someone or a group was able to control over 50% of the network’s hash rate, they would be able to prevent all future transactions and reverse complete transactions, allowing them to falsely double-spend the network’s cryptocurrency. Although they wouldn’t be able to alter previous blocks, they would have the ability to reverse transactions while they maintained 51% control.

Myths #2: Blockchain is 100% Secure

Similarly to not being completely tamper-proof, blockchain is not 100% secure. The possibility of a 51% or double-spend attack is extremely small, as the economic incentives for validating transactions are specifically aligned to make sure this does not happen. As discussed above, a group of miners would need at least 51% control of a network to be able to manipulate the validation of transactions and have the ability to double-spend coins. In this situation, the coin will either crash in value (as the system is now compromised), or fork to a new chain where the hashing power can be concentrated without manipulation. This has happened with the Ethereum blockchain and led to the creation and distinguishment between Ethereum Classic and Ethereum.

Myths #3: Blockchain is Bitcoin

BLOCKCHAIN IS NOT BITCOIN, always remember that. Blockchain is the decentralized and permissionless ledger technology that allows transactional services like Bitcoin to exist. Bitcoin is the first example of blockchain technology in use. Bitcoin was created using blockchain infrastructure, but blockchain itself is not Bitcoin. There are many other popular blockchains that provide similar yet differing services, a couple of examples being Ethereum, Tether, and even DogeCoin. Like Bitcoin, these blockchains all have their own cryptocurrency to incentive validators and network users. They have different rules, services, and capabilities depending on what you would like to do on the network.

Myths #4: Blockchain is Designed Solely for Business Interactions

As a permissionless and decentralized database, this myth couldn’t be further from the truth. The ability to send pseudonymous or fully anonymous transactions in a peer-to-peer manner was specifically designed and created so businesses wouldn’t have to be involved as intermediaries. The first blockchain created was Bitcoin, and it was made so users would not have trust ANY organization with their money. There are many business applications that blockchain is useful for, but at the heart of blockchain technology is the ability to transact and interact between users without ever having to involve a business that could potentially take advantage or corrupt the interaction.

Blockchain and Cryptocurrency

We do not live in a perfect world, and as the saying goes, “there’s no such thing as a free lunch”. You must understand that it requires time and economic resources to validate a transaction. Depending on the blockchain, there are different methods to validate the transaction, but validation either requires computing power or asset staking to incentive validators to be truthful. To reward successful and truthful validators for validation of the transaction, they are rewarded with the base cryptocurrency of the network. This economic incentive is then owned by the miner, with the ability to store, trade, sell, transact with, or do whatever their heart desires with their new cryptocurrency. This cryptocurrency can then be sent to any other user with a network address. Since obtaining the initial cryptocurrency required the time and economic resources of the validator, they should not give their reward away, as it costs them to obtain these rewards.

Like any other asset, the market value is determined by the supply and demand of that asset. Depending on what you can do with the asset, how many people are using it, and how many people want it, the demand for the asset can change, but the underlying supply is limited and predetermined. These and many other market factors determine the rate and price of which this network incentive will trade for. For example, Ether is the cryptocurrency and economic incentive of the Ethereum network. Miners that validate a transaction are rewarded with Ether they can use in Ethereum network smart contracts, or transfer/sell/spend it with other users. This is why cryptocurrency is necessary to run a blockchain network and how the elemental value is determined.

Using a Blockchain Wallet to Store Cryptocurrency 

When using a blockchain system, every user must create at least one digital address to store that blockchain’s cryptocurrency. With blockchains like Ethereum, blockchain applications with their own economic incentives (cryptocurrencies) can be created, meaning multiple cryptocurrencies will be able to be stored on a single blockchain address. This digital address that holds your cryptocurrency is known as your digital wallet, or blockchain wallet, and is of the utmost importance when storing and protecting your cryptocurrency. 

There are two types of blockchain wallets, hot wallets, like the Coinbase and Trustology wallets, and cold wallets, like the Ledger Nano S and Trezor. Hot wallets are less secure and more vulnerable than cold wallets, as hot wallets are connected to the internet while cold wallets are not. Each blockchain address or wallet is randomly generated and does not require internet use to create; if you create an address using a cold wallet, your private keys, or wallet “password”, will be much more secure, as it was never accessible online. Don’t let that scare you though, hot wallets are very secure and can be useful for transactions, but I would not recommend them as a permanent storage method. The good news is cold wallets don’t need to be complex; they can be simple as a handful of words written on a piece of paper.

Blockchain vs. Bitcoin

As I stated earlier, blockchain is not Bitcoin. Bitcoin is an example of a usable blockchain database; blockchain is a technological infrastructure. Many aspects compromise a blockchain ledger, such as being decentralized and permissionless, but no single creation of a blockchain compromises the entirety of blockchain infrastructure. We will continue below on the daily uses of blockchain, but there are many other interactions blockchain technology is useful for besides storing and transferring value. In the case of Bitcoin, this is what it was designed for and this is what Bitcoin utilizes blockchain technology to achieve, but that does not make Bitcoin the entirety of blockchain.

In a basic comparison between blockchain and the Internet, Bitcoin is the biggest and most used website, but it does not make up the entirety of the internet and therefore does not represent the entirety of blockchain. The internet has many websites that supply users with different functions, but its top sites (and the top blockchains/cryptocurrencies) are the ones used most. Although there are over 1 billion websites, there are now over 5,000 unique cryptocurrencies and hundreds if not thousands of individual blockchains. That all started with the very first blockchain, Bitcoin.

Uses of Blockchain in Everyday Life 

Blockchain technology has many uses, the primary function being able to store and transfer value without any central control or authority, but it also has a multitude of other applications. We are still in the infancy of understanding and using blockchain technology, and just like the early days of the internet, it is hard for us to imagine or understand what the future capabilities of blockchain technology will entail. As an open-sourced and democratically changeable ecosystem, we could see the same blockchains and cryptocurrencies we use now evolve into something we currently cannot even comprehend. Below are some current uses of blockchain technology.

Smart Contracts

A smart contract is an online, digitally verifiable, self-enforcing contract. These contracts allow the administration of tasks without the need for an intermediary or third party. For example, you want to buy something from overseas, but the manufacturer has a bad reputation. To protect yourself, you create a smart contract that only releases the funds for your purchase once it arrives at your house. This creates a traceable and auto-fulfilling commitment once pre-determined requirements are met.

Banking

Although many banks are trying to figure out how to successfully integrate blockchain into their companies, Bitcoin and blockchain have the opportunity to replace or drastically decrease the importance of the banking industry. Blockchain transactions can be used for lower fees, faster transactions, greater transparency and more accessibility, which can benefit how banks interact in the immediate future, but threaten them in the long run.

Cryptocurrency

Whether buying a drink at the corner store or engaging in international remittance, cryptocurrency is already changing how people are storing and transferring their value. Today many places accept Bitcoin as a payment method. With the features explained in the banking section, cryptocurrency is drastically changing the fees, transaction time, and accessibility of spending and sending your value worldwide.

Healthcare

Healthcare in blockchain is where hybrid blockchains come in. If users would like to utilize blockchain to optimize their healthcare, they will be able to grant access to parts of their data for certain periods of time to relevant parties. Patients would be able to automatically collect and verify their data with full control and without having to worry about confidentially issues.

Advantages of Blockchain Technology

We have been discussing the many advantages of blockchain technology over traditional databases, but recapping on what makes blockchain superior can only strengthen the support of the technology. As a distributed and restrictionless database, blockchain technology gives users unequivocal control over their value and transactions, without the possibility of compromise, manipulation, or deception by a third party. Blockchain creates a borderless, classless, democratic monetary system that cannot discriminate on any basis. 

In terms of owning, storing, and transferring value, blockchain technology allows users to have unmanipulatable and predetermined control in their fiscal policy for the first time since the destruction of the gold standard. No government entity, corporation, or third party of any sort can control your value or tell you what you need to do with it unless you permit them. This is why blockchain technology and cryptocurrency is such a game-changer to so many industries as a whole, and why it continues to adapt and grow throughout the unheard-of volatility never seen in other emerging or financial markets. Blockchain is a new technology, but its benefits are already starting to have a measurable impact on the world around us.

Some Disadvantages of Blockchain Technology

When compared to a traditional database, blockchain databases are significantly slower. If you think about it on a basic level, with blockchain transactions, every single transaction needs to be validated by every single validator, and there is only a limited number of transactions per block. When compared to a centralized database, where only one party needs to validate the transaction, the process is currently much slower. This is a major issue for Bitcoin and blockchain as a whole. Although there are more efficient verifying methods than the one Bitcoin uses, currently Bitcoin processes around 5 transactions per second compared to Visa who processes 1,700 per second. The potential usability is more than feasible, but current technological and speed restrictions limit Bitcoin and other blockchain’s usability.

Another major disadvantage in the current iterations of blockchain technology is the complex technical skills needed to interact with this technology. Even when using basic or introductory services, you will need to transfer your cryptocurrency between at least a few cryptocurrency exchanges to get it safely stored in a hardware wallet. 

There are also a lot of scams and people looking to take advantage of new or unknowing users. Since the blockchain ecosystem is still very new, many people do not fully understand it before getting involved and end up being taken advantage of. This is why we aim to help you fully educate yourself on all things crypto and blockchain.

Concluding Thoughts on What is Blockchain

Blockchain may be a relatively new technology, but it is already starting to have massive global impacts. Blockchain can be complex and limiting in some contexts when it comes to everyday usability, but every day we are seeing continued advancements in the industry. Blockchain technology can be as revolutionary as the internet itself, and as it continues to survive the fear, uncertainty, and doubt cast upon it, it grows stronger, more reliable, and overall more useful. We are still at the very beginning of understanding blockchain technology and its uses, but as the ecosystem matures, we will see the amazing abilities this technology is capable of. Either way, we hope you have a clearer picture of what is blockchain and how to use it!