Blockchain uses a combination of data encryption and distribution to make sure every transaction on the ledger is both verified and viewable by others. No matter who sees it, the ledger will always reflect the same thing — a transparent set of data. When applied to finance, blockchain technology lets everyone who can view the ledger see a list of all assets and who owns them along with all transactions made.
A simple blockchain definition
A blockchain is a decentralized record of data that’s continuously updated so that everyone viewing the blockchain sees the exact same data at the same time. Complex encryption guarantees that newly-added data is the same for everyone viewing a blockchain ledger. Much of cryptocurrency’s value comes from blockchain’s decentralized and transparent system of recording data.
Why is blockchain important?
Blockchain is important because it simplifies business activities, preventing corruption or institutional interference. The permanent record of payments is universally accessible and verifiable, reducing risk of human error and exploitation. Blockchain technology is faster, cheaper, and tamper-proof — unlike traditional financial institutions.
How does blockchain work?
Blockchain works by recording a timestamped transaction, producing an encrypted digital signature, and using the network’s computing power to verify the encrypted signature. Verification happens by “proof of work,” which is when a computer has to solve a complex problem.
Every block is linked to the previous block in the chain by a hyper-complex mathematical problem related to the data in that previous block. The “hash” of the previous block — basically, the solution to the problem — is included in the new block, along with a record of all the latest transactions executed since the last block was added (usually minutes or hours ago). Other computers on the blockchain check the accuracy of the hash and verify the validity of the new block.
Every block in the chain is linked to the previous block by complex mathematical problems.
Decentralization means that there isn’t a signal, centralized authority making decisions or controlling assets. The distributed nature of blockchain means that each participant has the same level of access as everyone else. That means that nobody can gain enough power individually to compromise the use of the technology collectively.
The difference between blockchain and Bitcoin
The difference between blockchain and bitcoin is that blockchain is the technology or system for recording data that allows for live-updated information with no chance of counterfeit. Bitcoin, by contrast, is a cryptocurrency in which transactions are recorded using blockchain technology.
Blockchain is the technology; cryptocurrency (e.g., Bitcoin) is the application.
Using bitcoin would not have been possible without blockchain. But blockchain technology is designed to preserve the integrity of the currency, not any specific financial situation or position. For example, the security of your cryptocurrency wallet depends on many other factors, and you should spend some time studying them before investing in crypto.
What is blockchain technology used for?
Blockchain has many uses and applications across a variety of industries. The immutable nature of blockchain makes it useful not just for virtual money, but also for record-keeping in general.
A blockchain’s lack of a centralized authority means that money can be transacted in any circumstance. Traditional banks may be vulnerable to data breaches, privacy concerns, central bank decisions, and unstable governments. Blockchain technology avoids these problems, while removing the need for a third party to oversee or process transactions. On a blockchain, transactions happen directly between two parties and are completed within minutes.
While it sounds miraculous, problems can arise with the software built around the blockchain, especially when considering different cryptocurrency infrastructure. Research which cryptocurrency exchange is the best for your situation to help you mitigate risk.
Healthcare is an example of an industry where blockchain is used for something other than financial reasons. Health records can be stored via blockchain where they’ll never be altered or tampered with. However, health professionals should take extra caution when documenting their patients’ medical history, reducing the risk of later malpractice due to inaccurate information that can’t be corrected later.
A property deed can also be recorded on the blockchain, providing an official record of land ownership that can’t be faked. The use of a blockchain prevents the need to track down physical records about the property, and a sale can happen directly between buyer and seller.
Suppliers can use the blockchain to record the origins of materials they’ve purchased, making them available for all to see. The authenticity of the product can always be looked up, as can approved labels like Fair Trade, Local, and Organic.
Types of blockchain networks
Blockchains have many different implementations, and a business may want to choose one blockchain type over another depending on what they’re using it for.
Public blockchain networks
Public blockchain networks operate as public databases on open-source software, meaning that anyone with an internet connection can view a list of the network’s transaction history. These blockchain platforms maintain their integrity through cryptography and “proof of work” — the process that verifies the most recent transactions.
People primarily use public blockchains to exchange and mine cryptocurrencies like Bitcoin, Ethereum, and Litecoin. It’s a common misconception that blockchain networks like Bitcoin are anonymous, when in fact they’re only confidential. When a user makes a public transaction, their unique code (or public key) is recorded on the blockchain. Their personal information isn’t.
However, if a person has made a Bitcoin purchase in the past on an exchange that requires identification, then the person’s identity is linked to their blockchain address by default.
Private blockchain networks
Private blockchain networks operate on closed networks, and they tend to work best for private businesses and organizations. The authority or owner determines who can be a member of the blockchain network and what rights they have. But private blockchain networks are only partially decentralized, because there are some access restrictions in place.
Ripple, a digital currency exchange network for businesses, is an example of a private blockchain. Companies that use private blockchains can also customize their accessibility and authorization preferences, network parameters, and other important security options.
Hybrid blockchains combine elements from both private and public blockchain networks. Businesses can set up private, permission-based systems alongside a public system. They may want to control access to specific data stored in the blockchain while keeping the rest of the data public. Hybrid blockchains also allow public members to check if private transactions have been completed.
Consortium blockchains also combine public and private networks, and they contain several nodes of access with different permissions. A set of organizations may opt for this type of blockchain to share data — a forum closed off to the public, but maintained by organizations with shared interests. Internal transparency along is important where collaboration is concerned, and consortium blockchain infrastructure offers a more private way to exchange information.
Advantages of blockchain technology
Blockchain’s rapid growth is due, among other reasons, to the wide scope of its benefits. In fact, blockchain technology may have already started affecting your professional life.
Here are some of the biggest benefits of blockchain technology:
Blockchain doesn’t restrict its functionality depending on who’s using it. It’s a reliable system of payment and valuation that seeks the shortest distance between sender and receiver. Some people or entities may be barred from opening bank accounts, but anybody with a blockchain app can send or receive payments. What’s more, you don’t have to wait for a transaction to go through.
Additional security and privacy
It’s nearly impossible to fudge a ledger when dozens (or billions) of computers are checking and corroborating it — almost as if your invested money is backed up on computers worldwide. The failure of a bank’s computer system is catastrophic, but the chances are virtually zero that a blockchain’s information would be lost due to system failure.
The most valuable result of the creation of blockchain is this: it offers a system of cryptography, decentralization, and consensus that’s completely reliable and requires almost no human maintenance.
Human involvement is taken entirely out of the picture when it comes to preserving the accuracy of data on the blockchain system. The chain of blocks on the ledger are recorded and verified with hyper-complex mathematical problems that only a computer can solve. Not only that, all the other computers need to agree on the solution. The consensus requirement ensures that data is copied 100% accurately.
All activity is visible on a public blockchain, such as those supporting the biggest cryptocurrencies like Bitcoin. Anybody with internet access can watch transactions happen live. The money goes where you tell it to, and the record of the transaction sits permanently in the ledger.
Banks provide a service. They let you make purchases with a credit card, and they verify every purchase made with that credit card. This requires an IT system and employees to maintain it — businesses pay for that maintenance with a processing fee.
With blockchain tech, no third-party verification is needed, because the blockchain harnesses civilian computing power to generate and verify cryptocurrency.
Risks of blockchain technology
Along with the pros outlined above, blockchain, like any new technology, also comes with a few cons. Here are some of the disadvantages of blockchain technology.
The problem with regulated banks is that you don’t know if you can trust the government doing the regulating. That’s where the blockchain trading protocol comes in: nobody with governmental authority can come in and control how you send or receive money. But, lack of regulation is a double-edged sword.
An institutional authority may enter the picture and take your side in case a bank is caught doing something illegal. But if a cryptocurrency creator manages to steal all of the assets traded in their exchange, you may be completely out of luck.
Data storage limitations
The storage capacity of a blockchain is one of the most pressing issues when it comes to the scalability of blockchain computing. Consensus requires that the blockchain contains 100% of the same data in exactly the same order across all systems.
So if the blockchain grows to 1TB of data, all users will be expected to have that space. The temporary solution is to use storage outside of the blockchain, but that defeats the purpose of the data accuracy and privacy guaranteed when using blockchain tech in the first place.
While many cryptocurrencies are large enough for most individuals to chip in at a modest fee, blockchain transactions are checked and verified only by massive amounts of computing power. Bitcoin farmers generate new bitcoin with rigs that fill warehouses with expensive equipment. Blockchains require a great deal of money and energy to operate.
Blockchain has a major impact on the world's energy consumption. Verifying transactions in the blockchain requires powerful computers consuming massive amounts of electricity and lots of time. Bitcoin alone uses around 150 terawatt-hours of electricity every year, which in turn has a massive effect on carbon monoxide emissions. And, that’s just one blockchain network.
Blockchains may update faster and more often than banks can process transactions, but updates still don’t happen instantly. Transactions only go through (are verified) when a new block is added, and that depends on when a Bitcoin farmer successfully generates it. You may still be stuck waiting several hours for a transaction to go through.
Used in illicit activities
The confidentiality of blockchain has made it attractive for criminal use. Illegal services are often booked on the dark web and paid for with cryptocurrency that sits on a blockchain, because it’s difficult to track the buyer and seller on a blockchain’s distributed database — unless they’ve used an exchange connected with their personal information. Until the FBI shut it down and arrested its founder, the facilitated the confidential sale of illegal substances, counterfeit goods, hacked email passwords, and much more.
Hackers today have also devised new ways to target regular users who’ve never even heard of the blockchain. Bitcoin miner malware commandeers the processing power of an unwitting user’s computer, using it to help generate cryptocurrency. This is a type of hacking that only exists because of Bitcoin, and it can render your computer completely unusable — even if it leaves your personal information and funds untouched.
Loss of private key
Every crypto investor’s nightmare is losing all the money they’ve entrusted to the blockchain because they couldn’t keep track of their private key. The private key is what provides access to the funds you’re managing with the blockchain. Everyone in the world has access to Bitcoin’s public ledger blockchain, but it’s up to you to keep your private key safe.
Protect your personal information with AVG BreachGuard
Blockchain security may be pretty robust, but with so many records of our personal credentials floating around online, there’s always a chance that our private data could be exposed.
Data-monitoring software like AVG BreachGuard alerts you if your personal accounts have been compromised in a leak. It also provides 24/7 risk monitoring, allows you to remove your personal information from data-broker lists, and even gives you tips on how to make all your accounts more private. Protect your personal information and keep your investments secure with AVG BreachGuard.