Blockchain technology is changing the world. Discover how it works, its history, and its applications in finance, supply chain, healthcare, and more.
A blockchain is a digital ledger that records and tracks transactions across a network of computers. Each transaction is first verified by network participants and then added to a “block,” which is like a collection of entries in a database. These blocks are time stamped and connected in a sequential chain, hence the name “blockchain.”
This technology, sometimes referred to as distributed ledger technology (DLT), allows users to engage in direct transactions without the need for third parties, like a bank or government. It has three primary characteristics: it’s decentralized, immutable, and anonymous.
- Decentralized: Instead of a central authority, the blockchain exists on a peer-to-peer network of computers.
- Immutable: Because a majority of the network must confirm every transaction, it is very difficult to alter information recorded onto a blockchain.
- Anonymous: While the transactions themselves are publicly viewable, the users involved are not recorded and remain unnamed.
History of blockchain technology
The conceptual origins of blockchain technology date back to 1991, when the physicist, Stuart Haber, and the cryptographer, W. Scott Stornetta, published a paper titled, “How to Time-Stamp a Digital Document.” However, the first implementation of a digital ledger appeared in 2009 with the invention of Bitcoin by the developer(s) known as Satoshi Nakamoto. Bitcoin allowed users to own and digitally transfer tokens of stored value through a decentralized peer-to-peer network.
When first implemented, blockchain technology and Bitcoin were one and the same, as blockchain technology as we know it today was pioneered by Bitcoin. It was not until 2014 that the technology was separated from the currency, giving rise to Blockchain 2.0. Since then, a variety of non-monetary applications have been explored and developed, from smart contracts to supply-chain tracking.
How does blockchain work
A blockchain works like a database in that it collects and stores information. Every block within the chain has a unique identifier, called a “hash.” Because the hash is created from the block’s data and the previous block’s hash, the chain is both continuous and highly secure.
Every blockchain has a consensus mechanism, or a set of rules, for verifying transactions and ensuring agreement among network participants. The consensus mechanism is specific to the type of blockchain being used. For example, Bitcoin verifies transactions through “Proof-of-Work.” This is a very energy intensive process in which the network of computers have to solve a cryptographic puzzle in order to generate a valid hash.
By contrast, Ethereum verifies transactions through “Proof-of-Stake,” where validators are chosen from within the network based on how much cryptocurrency they hold and how much of it they are willing to pledge as collateral.
Key features of blockchain technology
What makes blockchain technology unique is the way that its information is stored and accessed. Unlike a traditional database, which stores and manages its information in a centralized fashion, the blockchain is decentralized and completely transparent. This means that copies of the entire blockchain are distributed across every computer within its network. Each contributor is called a “node,” and consensus algorithms ensure that these copies are synchronized. If one copy does not match, the entire chain is invalid.
The redundancy of the blockchain helps preserve the integrity of the data. For example, if a malicious agent attempted to modify a single transaction within an earlier block, the other nodes would verify the block hashes and reject the modification. This adds a level of security to the overall blockchain, as an attacking group would have to control at least 51% of the network to alter it.
The other key feature of distributed ledger technology is its transparency. All transactions can be viewed, either by extracting metadata from the blockchain and examining it directly or through the use of blockchain explorers, which allow for real-time monitoring.
Why is blockchain technology important
One of the major innovations of blockchain technology is the way it democratizes data storage. The code for most blockchains is completely open-source, meaning anyone can view the code and suggest upgrades. If a majority of the network approves of the changes, then they can be implemented. The decentralized nature also means that every user has access to a copy of the complete blockchain. Any time a new block is added, the change is reflected across all computers on the network.
Ultimately, distributed ledger technology allows anyone to use it, irrespective of race, ethnicity, gender, or national origin. It is accessible for people living in rural areas who do not have a brick-and-mortar bank nearby, and it can provide a safer alternative for people living in regions with less reliable administrative and/or financial institutions.
Benefits of blockchain technology
The advantages of blockchain technology include greater speed, accuracy, and security. When it comes to traditional banking, a transaction can sometimes take a few days to process and the institutions themselves only operate during prescribed business hours. A digital ledger, on the other hand, is always up and running. And some transactions can be completed in seconds or minutes depending on network congestion.
In addition, blockchains benefit from greater accuracy because the verification process is done by computers rather than humans. The consensus algorithms add an extra level of protection. Even if a computer were to make an error, it would only affect one copy of the blockchain and would immediately be rejected by the rest of the network.
These consensus protocols are one of the reasons why blockchains are so secure. Another reason is their immutability. Because each block has its own unique hash, which is partly derived from the preceding block’s unique hash, there is no way to make a change without generating an entirely new hash for that block and every subsequent one. This would take extraordinary computing power — more than all the nodes combined — since the changes would have to be applied to every copy of the blockchain faster than new blocks can be added. Otherwise, if the new blocks do not agree with the existing ones, then the other nodes will reject the changes.
What is blockchain technology used for?
Beyond banking and currency, blockchain technology can be used in a variety of industries. It can efficiently track supply chains, like the path of a commodity as it travels from farm to buyer. It can be used to store and protect property records or health records. It can facilitate and automate transactions through smart contracts. These are agreed-upon terms that are coded within the blockchain; once they are satisfied, the smart contract then executes the transaction on behalf of the users. Blockchain technology can even be applied to voting and elections as a way to reduce fraud, increase transparency, and expedite the delivery of results.
Conclusion
As blockchain technology continues to evolve, so too does its transformative potential. Since the invention of Bitcoin, thousands of cryptocurrencies have been leveraging blockchain’s capabilities, and as its applications continue to rapidly expand, there could be dramatic changes to the way people, businesses, and entire industries operate. Whether it is increasing efficiency, security, accuracy, or cost-effectiveness, this technology seems poised to play an important role in the way we keep records and exchange information.
We hope this article helped demystify some of the foundational technology that underpins most of today’s modern cryptocurrencies. If you’d like to start your crypto journey, register for a Binance.US account or download the Binance.US app today.
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