As you navigate the crypto world, you’ll most definitely have come across the word ‘blockchain.’ This is because blockchain is the very technology that powers transactions in the cryptocurrency world. Beyond just thinking of it as the buzzword of the moment, why not get into the nitty-gritty of it and learn more about how it works? In this Nebeus blog post, we’ll run through some blockchain basics with you to get you started.
So, what exactly is blockchain?
Generally speaking, a blockchain is a digital record of all transactions that have taken place across a network, called a ledger, which is then duplicated and distributed to all computer systems across that network. This ledger is then validated using a consensus protocol by all network participants. Transactions are recorded into the ledger by blocks, with a maximum amount of transactions per block. Each transaction goes through multiple blocks of validation before it is considered fully confirmed. When you put all of the blocks together across time, you get a chain of blocks, hence the name blockchain.
What are the benefits of blockchain?
It has numerous important properties that make it perfect for use to support cryptocurrencies and other use cases. The three main benefits to this technology are that it is transparent, tamper-proof, and anonymous. This empowers it to track important data across a wide variety of systems.
Blockchains tend to be transparent, given the fact that they are distributed ledgers. This means that generally speaking, data about the transaction will be available online and accessible to anyone. This can usually be found in the form of blockchain explorers on the internet.
That said, there are also private blockchains, called permissioned ledgers, which may restrict access to such information. This may be the case when information tends to be more sensitive, especially in industries and use cases beyond cryptocurrencies.
On the other hand, blockchains also bring about benefits due to their immutable nature. In other words, once an action or transaction has taken place on the blockchain, it is impossible to alter. This is because of how this technology works, which we’ll explain further below with an example. Once the transaction is recorded, it is immediately tracked and broadcast to the entire system. Any attempt to alter a transaction will not stack up against the already verified copies of the transaction records on other computers in the network.
Finally, blockchains are anonymous. While some may claim that this makes the technology useful to malicious actors, its benefits are undeniable. The anonymity helps ensure the confidentiality of the identity of whoever is executing the transaction, allowing them to transact freely and openly.
How exactly does it work in crypto?
Let’s use an example involving a Bitcoin transaction. Let’s say that a user decides to send some Bitcoin to a friend. This transfer of Bitcoin is executed, with this action being recorded and sent to a network of computer systems. These are known as nodes.
The nodes in the network then race to confirm the transaction using a series of computer algorithms, solving a computing puzzle, to then complete a new block where the transaction is recorded. Once this is confirmed, the action of sending Bitcoin is added to a block on a distributed ledger. This then has to be validated and confirmed by the rest of the network before it is recorded and ‘chained’ to all previous transactions.
This process is then repeated as and whenever a new transaction occurs.
In addition to tracking transactions between users, blockchain is also used to track digital asset transfers and in smart contracts.
Other uses of blockchain beyond cryptocurrencies
Beyond cryptocurrencies, blockchain has also impacted plenty of other industries, revolutionizing use cases. Some examples include blockchain being used to track music royalties, track property title deeds, monitor logistics, supply chains, and generate advertising insights, amongst plenty of other use cases.
If you’ve been in the crypto world for a while, you would also be familiar with how blockchain is used to track NFT and digital asset ownership and how they are incorporated with smart contracts.
One theme that you may have noticed is that blockchain is predominantly used to track and monitor data. Whether it involves records of ownerships or just simply charting the story of where certain materials and shipments have been, blockchain clearly captures digital footprints across these fields.
While these technologies have existed already for many years, they are still relatively young compared to many other existing technologies on the web. Like any new and disruptive technology, blockchain and cryptocurrencies have raised many regulatory concerns. It still remains to be seen how various stakeholders across industries and regulators will respond to these concerns.
However, as blockchain slowly gains traction and goes mainstream, it won’t be surprising to see even more innovative use cases surfacing. For those who see the true potential in blockchain technologies, the future is here.