If you’ve arrived at this page trying to understand blockchain technology, the first step is this: forget the crypto part. Forget even Bitcoin. One tiny word lies at the heart of what blockchain is all about–data.
What is blockchain?
There are three elements that make something a “blockchain”:
- It is a digital database containing data–this can be any kind of data, like monetary transactions (e.g. Alice sent $10 to Bob), medical records, personal identities, even computer storage space, or voting data.
- This database is distributed across a peer-to-peer network of computers, meaning it is not stored on one central server, and as such, not controlled or managed by any one party. As such, blockchain sometimes goes by the name “distributed ledger technology.”
- All the information in this database is truthful and immutable i.e. unchanging over time; each piece of data is verified and approved by these computers collectively with cryptography, code and consensus, ensuring one single version of truth.
Unlike a traditional database, which is maintained by a central authority, a blockchain is stored across a network of computers, each of which possesses a complete copy of the data–this is what people mean when they say blockchain enables the “decentralization” of data.
Why is it so important that data is decentralized?
Some people have scoffed at the hype surrounding blockchain, saying that it is “a solution looking for a problem.” What they fail to see is that we do have a problem–one that relates to data control, ownership and privacy.
Blockchain gives us the data equivalent of “having our cake and eating it.” First, it takes control of data from the hands of powerful trusted third parties that do not always act in the interests of its customers, and puts it in the hands of multiple parties.
At the same time, it ensures that all parties have the same version of truth, without a sole authority dictating what this truth should be (think about how two friends try to reenact what happened during a particularly wild party the night before and you can immediately appreciate how hard this is to achieve!)
This single version of truth enables not only sound decision-making, planning and governance at government level, but enables collaboration between people who normally have no reason to trust each other. This doesn’t sound all that big of a deal until you translate it into the practicalities of life.
Imagine buying a house with the ease of sending an email–instant, fuss-free, with almost zero cost (with an instant mortgage plan to boot), because:
- You know the seller really has the rights to the house you are buying without having to go through lawyers or agents
- Your seller knows you will really pay him once he hands over the years because of a “smart contract,” a self-executing contract stored on the blockchain that automatically executes the terms of the contract when certain conditions are met, and can enforce the terms of an agreement without the need for third-party oversight.
This is but one of the countless possibilities with blockchain technology.
The biggest misconception about blockchain
Many people think that blockchain is all about cryptocurrencies or tokens, but this could not be further from the truth. In fact, it’s the complete opposite.
Blockchain is essentially a technology to establish consensus in a decentralised system. It does this by recording and sharing data across all the nodes of the blockchain network so that everyone in the network can see and verify the data. This results in a shared version of truth that businesses and individuals can use to work with each other.
Where crypto comes in is that it acts as an economic incentive to encourage people to perform the computational work for this verification process. To quote Buterin again, “In order to have a decentralised database, you need to have security. In order to have security, you need to have incentives.” This is important for public networks, but may not be required in private consortium networks (explained in “Types of blockchain” in below section.)
To put it another way, it’s really all about the data. Accurate, truthful data is of enormous value to society because it enables unhindered collaboration between two parties, which in turn drives value exchange and overall wealth creation. The crypto is just a way of verifying and safeguarding that data.
What is the difference between Bitcoin and blockchain?
Bitcoin and blockchain are often spoken about in the same breath, but they are actually two very different things. Bitcoin is a digital currency that can be used to buy goods and services; instead of being backed by governments or hard commodities like gold, it is backed by blockchain technology, which is based on the discipline of cryptography. Blockchain is the underlying technology that enables bitcoin and other cryptocurrencies to exist.
To put it another way, blockchain is the technology and Bitcoin is the application, just like the internet is the technology and email is an application. And just as the internet has been used for other applications such as web surfing, social media, e-commerce, blockchain is finding various applications beyond cryptocurrency.
Can blockchain be used without cryptocurrency?
Yes, blockchain can be used without cryptocurrency, but cryptocurrency cannot function without blockchain. A blockchain without cryptocurrency simply refers to a distributed ledger that tracks and stores data across multiple computers. This data can be anything from confidential voting data, medical records, artwork/intellectual property (which is where NFTs come in), digital identities or supply chain data–the possibilities are nearly endless (we take a closer look at this below.)
Who invented blockchain?
The earliest version of a blockchain was invented by scientists Stuart Haber and Scott Stornetta to solve a vexing problem–the authentication of digital documents: how could you be sure the version you were looking at was the original and had not been altered? In 1991, they released a paper in which they first described a digital hierarchy system called “blockchain.”
Scott Stornetta (left) and Stuart Haber discussing digital time stamps in 1991, about 20 years before Bitcoin was created (Photo by Bob Ono)
What is blockchain mining?
Blockchain mining refers to the process of creating and adding new blocks of data to the blockchain. This is done by “nodes” i.e. computers which are connected to the blockchain. New blocks are created and uploaded to the network after all the data in the block has been verified and accepted. In return for their verification work, these nodes are rewarded with cryptocurrency. Let’s take a look at this in greater detail below.
How does blockchain work?
The security and immutability of blockchains are achieved through a two-step approach.
The first is via the usage of private and public keys and cryptographic signatures. Private and public keys are strings of randomized numbers and letters used to authenticate messages/transactions in the form of data, which then goes onto the block.
When a block is created, it generates a random number called a nonce. The nonce generates a block header hash—a “fingerprint” that’s unique to the block. If anything in a block is altered, its hash changes.
The block also contains the previous block’s hash, which helps prevent tampering. When something does happen to a block, the hash changes. As a result, the following block no longer stores the previous block’s hash, making all subsequent blocks invalid. An attacker would have to regenerate the hash of every invalid block.
Characteristics of mined blocks in a blockchain (Source: ResearchGate)
For enhanced security, blockchains also utilize consensus mechanisms to authenticate transactions on a distributed ledger. A consensus mechanism is an algorithm that requires nodes to work together and agree on the legitimacy of any transaction made on a blockchain. In other words, it is what secures the blockchain.
The most common consensus mechanism is proof of work (PoW), which slows down the creation of new blocks. In simple terms, PoW requires miners to use specialized computers and expend effort to solve a mathematical puzzle for each block.
Miners race against each other to guess the puzzle; the first one to do so gets to add their block to the chain and will receive a reward in the blockchain’s cryptocurrency for their work. If an attacker tampers with one block, they will need to solve mathematical puzzles for all the following blocks, which will require a significant amount of computational resources. Other more energy-efficient mechanisms, such as the proof of stake (PoS) model, have also been introduced as alternatives to PoW.
With the implementation of a consensus mechanism, even if an attacker successfully adds a malicious block, the block will still need to pass verification by the majority blocks before it gets appended to the chain. If the nodes discover a block is invalid, they can reject the block, and it will not be added to the blockchain. This is how a blockchain achieves security and immutability.
The process flow of a blockchain network (Source: ResearchGate)
Is Bitcoin the first blockchain?
When it comes to cryptocurrencies, Bitcoin is often seen as the pioneer. It was the first decentralized digital currency, and it remains the most well-known cryptocurrency today. However, some experts argue that Bitcoin is not actually the first blockchain.
The earliest form of cryptocurrency, called “b-money”, was proposed by computer engineer Wei Dai in 1998. Wei is well known for his work in cryptography and cryptocurrencies. This system used a decentralized ledger to record transactions, but it lacked a way to enforce consensus between users. This consensus is critical; without it, we would not know if someone is double spending their money.
As a result, b-money was never implemented. However, the ideas proposed in the b-money white paper laid the foundation for later cryptocurrencies, including Bitcoin. So while Bitcoin may not be the first blockchain, it is certainly one of the most influential.
What are the different types of blockchain?
There are different types of blockchain, each with its own strengths and weaknesses.
- Public blockchains are open to anyone and allow anyone to participate in the network i.e. permissionless and decentralized. This decentralization makes public blockchains extremely secure, but it also makes them slow and pricey. Examples of public blockchains include Bitcoin (BTC), Ethereum (ETH), and Solana (SOL).
- Private blockchains, on the other hand, are permissioned networks managed by a single entity, and can thus be faster and more efficient, The entity determines which user can be a node. An example of a private blockchain is Ripple (XRP). However, these types of blockchains are less secure given they have a single point of failure.
- Consortium blockchains are somewhere in between, run by a group of collaborating organizations, wherein each member owns a portion of the network. An example of a consortium blockchain is Quorum, which is developed by JP Morgan.
The different types of blockchains (Source: ResearchGate)
For more information, check out our guide to the different types of blockchains.
How can blockchain improve supply chains?
As our world becomes increasingly interconnected, the need for efficient and reliable supply chains has never been greater. Unfortunately, traditional supply chains are often hampered by inefficient coordination and a lack of transparency. Blockchain technology has the potential to transform supply chains by providing a decentralized platform for up-to-date data sharing to track food production from farm to table.
This has huge implications for food fraud. For example, it has been widely reported that up to 80% of what is marketed as pure olive oil, is in fact other types of unhealthy vegetable oil. Along the same lines, it is reasonable to suspect that much of the fresh produce marketed as “organic” and priced at a premium are in fact, not very organic at all. Blockchain can at least alleviate this to a certain extent.
Blockchain could help reduce environmental impact by streamlining supply chains. For example, if you know exactly where your product comes from and how it was made, you can be sure that you’re not buying from companies that use child labor or dangerous chemicals.
VeChain is one such blockchain offering end-to-end traceability for supply chains. By using VeChain, businesses can track their products from production all the way to the retail shelf. In addition, VeChain provides data that can be used to improve product quality and safety.
Similarly, in the healthcare industry, blockchain can be used to store medical records and track patient data. This not only safeguards sensitive information, but it also makes it easier for doctors and patients to access crucial health information.
There are many more applications of blockchain in other industries which go beyond the scope of this article, including natural disaster management, real estate, insurance, smart cities, and so on.
What is the connection of blockchain with the Internet of Things (IoT)?
The Internet of things (IoT) refers to the growing network of physical devices that are connected to the Internet—including everything from thermostats to cars to manufacturing equipment. In 2021, there is an estimate of 11.3 billion IoT devices in use around the world, according to Statista.
Number of IoT connected devices worldwide (in billions) from 2019 to 2021, with forecasts from 2022 to 2030 (Source: Statista.com)
These devices are collecting massive amounts of data, which can be used to improve efficiency and effectiveness in various industries. However, this data is often siloed within individual organizations, creating a single point of failure that is prone to cyberattacks.
Equally worrying, given the exponentially large amounts of data that will be generated with the growing use of AI, data privacy and ownership becomes a pressing concern–so much of our lives is dependent on digital devices nowadays. Whoever controls the data, controls everything.
Blockchain could provide a solution by creating a secure and decentralized way to store and share this data. This would allow different organizations to access the data they need while preventing data control by any single entity, which in turn protects the privacy and freedom of individual users.
Limitations of blockchain technology
One of the biggest issues facing blockchain technology is its scalability. Scalability refers to the ability of a system to process large volumes of transactions at a time. Currently, blockchain networks like Bitcoin can only handle a limited number of transactions per second. This is due to the fact that all participants in the network have to come to a consensus about which transactions are valid.
As more and more people start using blockchain technology, this scalability issue will become more and more pronounced. Unless a solution is found, blockchain networks will simply not be able to keep up with the demand.
2) Energy consumption
Another issue with blockchain technology is its energy consumption. Because each node in a blockchain network needs to verify every transaction, this verification process requires a lot of energy (some experts have argued that this is an intended feature of blockchain to secure the network.) It has been estimated that the Bitcoin network alone consumes as much energy as the country of Denmark. This is not sustainable in the long run and it is something that needs to be addressed if blockchain technology is going to be used on a large scale.
3) Security flaws
Despite its reputation for being secure, blockchain technology is not immune to security flaws. In fact, there have been a number of high-profile hacks on blockchain networks in recent years.
One of the most notable examples is the DAO hack of Ethereum in 2016, which resulted in the loss of over $50 million worth of Ether. Some analysts have argued that the attacker exploited a flaw in the blockchain, and thus it was technically not a “hack.” Bitcoin itself has had flaws over the years which were fixed (by voluntary “watchmen” programmers) before anyone could take advantage of them.
These security concerns need to be addressed if blockchain technology is going to be used for mission-critical applications.
4) Lack of regulation
Another issue facing blockchain technology is the lack of regulation. Because blockchain networks are decentralized, there is no central authority that can impose rules and regulations. This lack of regulation could pose a problem in the future, as it could lead to abuse and misuse of the technology.
How To Invest In Blockchain?
There’s no way to directly invest in blockchain or blockchain technology. However, you can invest in cryptocurrency by purchasing cryptocurrency on a cryptocurrency exchange like Phemex. If the cryptocurrency market’s volatility is too risky, you can buy shares of a cryptocurrency trust like Grayscale Bitcoin Trust or an exchange-traded fund (ETF). Users with a high tolerance for risk can also participate in an initial coin offering (ICO) where they purchase a new cryptocurrency currently in development to support the team.
Blockchain is notoriously difficult to understand. The technology is still in its early stages, and there is a lot of confusing jargon associated with it. What’s more, the very nature of blockchain makes it hard to visualize. The learning curve is steep, and it can be tough to wrap your head around all the concepts involved all at one go.
But the struggle is part of the fun of learning isn’t it? Our suggestion–continue to learn about it and talk to others about your learning journey. Sometimes, one perspective or angle is all that’s needed to make things click. If it’s any consolation, most people don’t get it by reading the first blockchain book they come across.
The potential of blockchain is vast, and it does not seem to be going away anytime soon, if at all. Those who are able to overcome the challenges of understanding it will be well-positioned to reap the rewards.