What is a blockchain?
Let’s learn more about one of the most common terms being thrown around in the crypto space. Here we discuss blockchain technology, how it works, and what it is used for.
Topics to read before diving into this lesson:
At the end of the lesson, you will be able to answer the following:
What is a blockchain?
How does a blockchain work?
What is blockchain technology used for?
What are the advantages and disadvantages of blockchain technology?
What is a blockchain?#Copy URL to this article section
In the web3 world, you will hear the word “blockchain” being used in many conversations. From an everyday tweet to the complexities of Ask-Me-Anythings (AMAs), the term undeniably builds notice amongst cryptocurrency enthusiasts. Why is that?
Because, simply put, blockchains are what web3 technology is built on. Let’s find out what that means in the article below.
Blockchain technology in our world
Blockchain, sometimes known as “Distributed Ledger Technology” (DLT) is a public digital ledger or database distributed across an entire network of computers. This database is used to record and store any kind of data digitally. Most importantly, its popularity stems from the fact that the data inside any blockchain cannot be changed, hacked, or cheated.
Instead of using tables to organize entries, the blockchain uses blocks that are linked to each other as new data is entered. This happens across many computers in a network instead of in one centralized server, making the process of storing information entirely different from your usual database.
How does a blockchain work?#Copy URL to this article section
Think of brick walls and how each brick is stacked on the other, intact and unmoving. After one brick comes another, and another, and new bricks are stacked on old bricks until they shape into a sturdy wall. Like a Jenga tower before it’s poked and prodded, the structure should not fall if each piece remains united and together.
And in blockchain technology, it does.
A brick wall and how it's comparable to blockchain technology
In the scenario, the bricks represent the “blocks” that a blockchain collects and stores our data in. Blocks have storage capacity limits, and when a block gets filled, it is closed and linked to another block. These blocks are linked together using cryptography in order to form our wall—the “chain”—thus, creating a “blockchain.”
Every time a new block is created, the data gets stored chronologically. This makes befouling the blockchain extremely difficult because a hacker would not only need to change the block they’d tamper with, but also all the other blocks linked to it to avoid detection. As such, the blockchain is a great place to store records of financial transactions
What is blockchain technology used for?#Copy URL to this article section
Truthfully, as it is a way to store data, the blockchain can be used for almost anything. However, it was popularized by pseudonymous developer Satoshi Nakamoto when they released the whitepaper for Bitcoin back in 2008, making blockchains primarily known for reliable security and transparency in finance-related industries such as NFT marketplaces and cryptocurrencies.
Bitcoin, a well-known cryptocurrency
In relation to this, it is nice to remember that the blockchain is not limited to assets and digital currency; there are many other fields that integrate (and will integrate) blockchains in their tracking systems. This includes processes on things like music, travel, or human resources, to name a few.
Below are some examples of how blockchains can improve the systematic flow in said areas.
Prevents illegal sharing or distribution of music files
Ensures the proper compensation for the artist are met
Traces luggage, especially for multiple and international flights
Identifies passengers swiftly by utilizing the readily-accessible data
The blockchain can be utilizing in your travels, too!
Eliminates the need to run individual verification checks on potential employees
Tracks payments and expenses, making tax payments much easier for both employers and employees
Basically, if it’s something your paper and pen can track, or content your excel sheets can compute, the blockchain is able to execute it faster, smoother, and easier for all those involved.
What are the advantages and disadvantages of blockchain technology?#Copy URL to this article section
Like most things in this world, it is important to assess the pros and cons to formulate educated decisions. Below is a breakdown of some advantages and disadvantages of blockchain technology.
Advantages#Copy URL to this article section
Security at its finest
Private and public cryptography keys are one of the best ways—if not the best way—to ensure safe transactions. The digital signature feature makes corruption of data almost impossible.
Decentralized for everyone and anyone
In traditional finance, you need the approval of authorities like governments or banks before a transaction. With blockchain technology, this step is completely removed and is replaced with mutual consensus of users. As a whole, the blockchain offers a new perspective: everyone can see the data, but they can’t corrupt it.
With the power of math and coding, the blockchain is programmable and can generate systematic actions, events, and payments automatically when the criteria of the trigger are met.
It is, in layman's terms, just really hecking convenient.
Disadvantages#Copy URL to this article section
The Proof-of-Work problem
Mining is a process that verifies and adds new transactions to the blockchain; complex mathematical problems are computed to advance, thus it demands sophisticated hardware. This entire concept is called Proof-of-Work.
PoW is expensive and consumes a great amount of energy. In the long run, it may cause detrimental effects to our environment. Thankfully, this obstacle is on its way to improvement with a new system called Proof-of-Stake transitioning into the blockchain over the next few years.
Proof-of-Stake for better energy consumption
Legal formalities and regulation debate
Blockchain technology applications are prohibited in some countries. They do not promote its use and sometimes go as far as completely banning it in some commercial sectors. The technology also faces challenges with financial institutions as it is a new and unfamiliar form of payment.
Admittedly, working with web3 technology calls for its members to have significant computer literacy. Many things can go wrong in a space as open and decentralized as this is. It is imperative that crypto enthusiasts understand the fundamentals of the blockchain, and continuously expand their knowledge as the technology ages, but that is a privilege that not a lot of people have.
Overall, the technology behind blockchains is relatively young which, despite the downsides that may occur, presents an entirely new and buildable opportunity for anyone interested in the space. It helps to learn and comprehend this new innovation to make use of it so it can serve us better.