SHORT ANSWER: Blockchains are distributed ledgers — the underlying infrastructure used to support cryptocurrencies like BTC and other decentralized applications.
Amid the current crypto market rally, you may be wondering how it all works. It starts with a technology called blockchain. Blockchains support your favorite cryptocurrencies like BTC, DOGE, ETH, SOL and TAO. If you bought some of these tokens, you need to understand the underlying infrastructure behind them. Whether you know about blockchain or not, this article will give you the necessary information to understand blockchains so you can be more informed in the upcoming cycle.
What is Blockchain?
Blockchains are an innovative and relatively new technology that first emerged in 2009 when the pseudonymous creator Satoshi Nakamoto invented the concept, creating the Bitcoin network. At a high level, blockchains are digital ledgers that store data in blocks connected. These blocks are strung together in canonical order, creating a chain. Blockchains are a more digestible way to refer to digital ledgers or distributed databases.
How Does a Blockchain Work?
Blockchains are distributed networks that provide decentralization, meaning there isn’t a central point of control or failure. This distribution and its consensus mechanisms are what make blockchains decentralized. Blockchains are cryptographically encrypted, enhancing security with complex mathematical equations. The cryptographic features of blockchains enable them to be immutable, meaning that once a block has been created it cannot be altered. Data is constantly being added to the blocks and the blockchain’s current state represents the cumulative history of all previous transactions. Since these transactions are recorded in chronological order, unchangeable and decentralized, any network participant can observe the state of the blockchain, making it transparent.
Why is Blockchain Important?
Blockchain technology has spurred innovations that have benefited humanity. It is a customizable data structure that can be permissionless (decentralized) or permission-based (centralized) and has various use cases. Blockchains are distributed ledgers or databases that are secure since there is no central point of failure, making them excellent for data storage and transparency. Through consensus mechanisms, blockchains use incentives to align interests in borderless communities.
Blockchains are revolutionizing various industries, from finance to supply chain management, by providing a trustless and efficient way to handle and store data. Blockchains eliminate the need for centralized intermediaries, giving individuals more control over their data and assets while maintaining security and transparency. Public blockchain networks are open source, meaning developers can contribute and build on top of them, fostering innovation and creating novel ecosystems and applications. As the world becomes more digitized, blockchains will play a pivotal role in shaping the future, providing the foundation for a more secure, transparent and equitable society.
Types of Blockchain Networks
While notable blockchain networks like Bitcoin and Ethereum are public networks, there are also other adaptations of blockchains.
- Public blockchain networks: Public blockchains, often called permissionless networks (decentralized), allow anyone to join, participate in and view transactions on the network without needing permission from a central authority. Public networks include Bitcoin, Ethereum, Solana and Bittensor.
- Private blockchain networks: Private blockchains are permissioned (centralized) networks controlled by a single entity, limiting access and visibility to selected participants. They are used for supply chain management at enterprise-level companies with many moving pieces. These companies capture the efficiency, security and transparency of blockchain while limiting access to selected individuals within the organization.
- Hybrid blockchain networks: Hybrid blockchain networks combine elements of both public and private networks, allowing for controlled access to the network while still maintaining some level of decentralization.
- Consortium blockchain networks: Consortium blockchains are networks governed by a group of organizations, where control is distributed among participants in a public, private or hybrid structure.
Main Features of Blockchain Technology
Three key features make blockchain technology so effective:
- Decentralization: The most important feature of blockchain is its inherent decentralization. Without a single centralized point of failure, the network reaps many rewards, such as increased security and democratized decision-making. Decentralization means that blockchains are not only permissionless but do not require trust between parties to execute agreements and uphold the network.
- Immutability: Blockchains are digital ledgers. Once a block has been added to the chain, it is highly unlikely to be reversed. To change the block history, bad actors would need to control 51% or more of the network, requiring an insurmountable amount of capital and computing. This high immutability makes blockchain secure, accurate and transparent.
- Consensus: How do you make sure all participants support the network? Consensus mechanisms are used in blockchain to ensure all nodes (computers) in the network agree on the current state of the network. In a decentralized network, decision-making (consensus) is distributed among participants. With decision-making decentralized, the network can be run efficiently without a centralized authority ensuring operation. There are many consensus mechanisms, the most popular being proof of work (PoW) used in the Bitcoin network and proof of stake (PoS) used in the Ethereum network. Consensus mechanisms use incentives like mining rewards (PoW) and staking rewards (PoS) to ensure participants act in the networks’ best interests.
Popular Use Cases of Blockchain
The most popular use of public blockchains is decentralized finance (DeFi). DeFi uses blockchain networks to democratize access to financial tools and resources that much of the world doesn’t have access to. The ethos of DeFi is that you control your funds, and no authority can manipulate them.
Cryptocurrency is used on DeFi platforms, allowing anyone to participate. The use of blockchains in supply chain management has been efficient. In a supply chain, there are tons of moving parts that are often hard to keep track of. Blockchain acts as a ledger that digitizes and tracks products and their movements. This functionality is beneficial as organizations can see these transactions in real-time, which are accurate and secure, optimizing the entire supply chain.
Pros and Cons of Blockchain
Advantages of Blockchain
- Decentralization: Operating on a decentralized network, blockchains eliminate the need for centralized intermediaries, providing the infrastructure for anyone to be a part of. Decentralization has many benefits from increased control over assets to more fair decision making.
- Enhanced security: Blockchains are highly secure through cryptography and are distributed, meaning there isn’t a central point of failure. This makes blockchains less susceptible to hacks since it's more difficult to hack an entire network vs. one centralized entity.
- Transparency and immutability: Once a transaction has been added to the blockchain, it is improbable it would be reversed, bringing accuracy to the data. Additionally, the state of the network is visible to all participants, making blockchains transparent.
- Speed and costs: Blockchains enable faster settlement of transactions and cheaper fees compared to traditional methods like bank transfers.
Disadvantages of Blockchain
- Scalability: Many blockchain networks must make trade-offs between scalability, security and decentralization. This trade-off is called the blockchain trilemma, as all three cannot happen equally., which leads to a variety of scalability issues that developers work to solve every day.
- Regulatory frameworks: Blockchain technology's novelty, complexity and decentralized aspects make it hard to regulate. Regulatory ambiguity can slow innovation and adoption as it is perceived as more risky.
- Adoption challenges: Along with regulatory uncertainty, the current user experience on many platforms and protocols is generally not something the average person can navigate. Onboarding Web2 users to Web3 will be one of the most challenging yet most important tasks for the industry to achieve mainstream adoption, helping realize blockchain's full potential.
Is Blockchain Secure?
Blockchains are incredibly secure because of cryptographic encryption, decentralized network structures and consensus mechanisms. Specifically, blockchain uses hash functions and public key cryptography to achieve immutability and security. Additionally, the network is distributed across many nodes, so there isn’t a central point of failure, making it less susceptible to hacks. Consensus mechanisms democratize decision-making so bad actors cannot manipulate the network, furthering security without a central authority.
Blockchain vs. Bitcoin
The Bitcoin network created by Satoshi Nakamoto, was the first implementation of blockchain technology. Bitcoin is the native currency used on the Bitcoin network to facilitate peer-to-peer transactions. So, while blockchain and Bitcoin are often grouped, given their interlinked history, blockchain is the underlying infrastructure that supports cryptocurrencies like Bitcoin and networks like Ethereum. The functions of blockchain extend far beyond Bitcoin, including innovations across finance, supply chain management, healthcare, voting systems and countless other industries.
Blockchains and Beyond
Blockchains are digital ledgers, or databases, that store transaction data in blocks added to previous blocks, creating a chain. Blockchain’s infrastructure provides many benefits, such as decentralization, enhanced security, increased transparency and faster settlements. The vast capabilities of blockchain have led to countless innovations across sectors, from finance to supply chain management. Blockchain is still a complex and hard-to-understand concept to the average person. To reap the benefits of decentralization, increasing the adoption of blockchains will be a key deciding factor. The blockchain ecosystem is massive, with over 1,000 public blockchains and limitless potential for significant impact. Increasing blockchain literacy will be critical in ushering in the new era of the internet and society.
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About Gianluca Miller
Gianluca Miller’s crypto journey started in 2019 when he sought alternative assets to diversify his investment portfolio. With a keen interest in innovative technologies, he became increasingly involved in Web3 through trading crypto and participating in DeFi protocols. Over the last few years, he has become a blockchain evangelist, fascinated with the tech’s utility and impactability. Gianluca contributes to Benzinga, is working on a Defi research project through Blockchain UCSB, and continues to expand his Web3 acumen daily. He loves learning, analyzing new projects and market conditions, and building relationships with industry leaders.