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Non-fungible tokens (NFTs), Cryptocurrencies, Bitcoin, Ethereum, Stablecoins, Altcoins, and the Metaverse are some of the "blockchain" terms trending on the internet since Bitcoin started its monster rally last year.
Of course, these concepts are blockchain native, and you might be thrown off at first if you're not familiar with the terminology.
Due to the complex nature of some technical terms contained in blockchain technology, it is not uncommon to ask yourself questions like "what is blockchain technology?" and "how does blockchain work?"
This article covers the basics of the technology that powers it all. And also aims to help you better understand some of the technical "jargon" you may have encountered in the crypto space as a beginner.
Blockchain technology has enormous use cases and has been applied to sectors like fintech, banking, marketing, health care, gaming, and even real estate. So it's no wonder many describe the concept as a disruptive technological innovation that will change the world. But first, let's get started with "What blockchain really is."
In plain terms, a blockchain is a distributed ledger that records transactions efficiently, permanently, and verifiably. It operates as an extensive database that allows digital information to be shared and distributed among computer network nodes. You can think of it as a digitally distributed database open to anyone with an internet connection.
The Blockchain is capable of keeping track of how much money or assets everyone has. Let's not forget that an asset can be tangible (cash, car, or house) or intangible (intellectual property, copyrights, patents). The point is that you can store anything of value on the Blockchain. This also means the Blockchain can make payments, track orders, and more.
Ordinarily, the Blockchain is managed by a peer-to-peer network responsible for validating a new block. Each block on the Blockchain contains a hash of the previous block, timestamp, and transaction data.
Non-fungible tokens (NFTs), Cryptocurrencies, Bitcoin, Ethereum, Stablecoins, Altcoins, and the Metaverse are some of the "blockchain" terms trending on the internet since Bitcoin started its monster rally last year.
Of course, these concepts are blockchain native, and you might be thrown off at first if you're not familiar with the terminology.
Due to the complex nature of some technical terms contained in blockchain technology, it is not uncommon to ask yourself questions like "what is blockchain technology?" and "how does blockchain work?"
This article covers the basics of the technology that powers it all. And also aims to help you better understand some of the technical "jargon" you may have encountered in the crypto space as a beginner.
Blockchain technology has enormous use cases and has been applied to sectors like fintech, banking, marketing, health care, gaming, and even real estate. So it's no wonder many describe the concept as a disruptive technological innovation that will change the world. But first, let's get started with "What blockchain really is."
In plain terms, a blockchain is a distributed ledger that records transactions efficiently, permanently, and verifiably. It operates as an extensive database that allows digital information to be shared and distributed among computer network nodes. You can think of it as a digitally distributed database open to anyone with an internet connection.
The Blockchain is capable of keeping track of how much money or assets everyone has. Let's not forget that an asset can be tangible (cash, car, or house) or intangible (intellectual property, copyrights, patents). The point is that you can store anything of value on the Blockchain. This also means the Blockchain can make payments, track orders, and more.
Ordinarily, the Blockchain is managed by a peer-to-peer network responsible for validating a new block. Each block on the Blockchain contains a hash of the previous block, timestamp, and transaction data.
All data stored on the Blockchain is secured using cryptography -an encryption method that keeps data secure. In addition, the details of all transactions performed on the Blockchain are duplicated and distributed across all computer systems on the Blockchain, making it visible to all users.
The importance of blockchain technology is evident in the fact that it provides immediate and transparent data that is stored in an immutable ledger and shared among members of the network. This ultimately reduces the risk of fraud, manipulation, and corruption.
While many argue that blockchain technology developed alongside bitcoin, this is not entirely true. And although the first use case of blockchain technology was the innovation of Bitcoin in 2008, conversations surrounding blockchain technology have been in talks since 1982. When David Chum, a Berkeley programmer, invented an untraceable payment system that separated the transaction from the person making the transaction.
Another major breaking point was in 1992, when three brothers, Stuart Haber, Scott Stornetta, and Dave Bayer, developed what was known as the Merkle tree: A data structure that served to encode blockchain data more securely. Their discovery allowed the collection of several documents into one block.
In 1997, Adam Beck introduced the first proof-of-work algorithm. It served as the foundation for Hal Finney's reusable proof of work, which allowed users to transfer digital tokens.
The most significant breakthrough for blockchain technology was in October 2008. When a whitepaper proposed the adaptation of a virtual currency, Bitcoin was published by a person/ organization under the pseudonym Satoshi Nakamoto.
It explained a new approach to sending money directly from the sender to the receiver without an intermediary. Bitcoin is the first innovation of Blockchain Technology.
As bitcoin grew in popularity, more people realized that the capability of the Blockchain was beyond just the creation of digital currencies like bitcoin. Instead, the same technology had more use cases, and one could employ the capabilities of blockchain technology for other purposes. This led to innovations like "smart contracts" on a blockchain system called Ethereum.
Ethereum allows other financial instruments like loans also to be represented. Other innovations include; Proof of stake and blockchain scaling.
Photo by Coingrammar
The bone of blockchain technology is to create a safe environment for the sharing and transferring potentially valuable data. And the type of data shared depends on the Blockchain where it is shared. If, for example, the Blockchain you are interacting with is crypto-based, the data on the Blockchain would include the transaction's full details and the sender's and recipient's wallet addresses.
When a transaction occurs on the Blockchain, such transaction is recorded as a "block" of data. Therefore, when there is a new transaction on the Blockchain, such transaction is added to the pre-existing block and distributed to all participants.
Every transaction on the Blockchain is secured using hashing. Therefore, any information stored on the Blockchain is immutable. This is why Blockchain is also called distributed ledger technology (DLT).
The concept of a decentralized database managed by multiple participants is known as Distributed Ledger Technology. A technique intended to timestamp documents to prove that such transaction exists and took place at a particular time. This is an essential feature of Blockchain technology that separates it from other types of databases.
The innovation of blockchain technology is what guarantees the security of a data record, which in turn ensures trust among users.
A block is a section of data. Each block typically contains a group of data and comprises a list of actions or transactions performed on the block. The first block created is called the Genesis block. The genesis block is a special block because it is the start of the blockchain creation process. Any block created after the genesis block points to it with subsequent blocks added to form a chain.
Another participant of the blockchain network is the node. They are a network of computers that make up the infrastructure of blockchain technology. Nodes are also capable of validating transactions and propagating new blocks. If a new node joins the Blockchain, it is given a copy of the chain. However, to make changes to the Blockchain, such actions must be approved by the blockchain network.
Hashing is a cryptographic technique that uses complex algorithms to create a hash from a piece of data. Once a block is created, the hash is calculated. The Hash identifies the components of a block and its contents. Think of it in terms of the uniqueness of a fingerprint. If anyone tries to tamper with a block or swap in a fake block, the hash will change, and this will break the chain.
Mining is a process of blockchain creation by which bitcoin and other cryptocurrencies generate new coins and verify new transactions. It is a competitive process in which miners solve answers to complex mathematical algorithms. The miner who solves the cryptographic puzzle first gets to add the next block to the process and is entrusted with the validation of the transaction.
Improved data security and transparency Because of the immutable nature of blockchain technology, there is high security, and you can rest assured of the accuracy of data. In addition, the information is shared transparently, reducing the likelihood of fraud and making it impossible to manipulate data in any way.
Faster processing time Transactions completed on the Blockchain are quicker to complete because of the technology's speed.
The cost of transactions is low By eliminating third-party validations like those we experience when we want to send money using traditional banks, we are reducing the cost of sending money to a friend or family member in another country, for instance.
IT takes away certain restrictions Blockchain technology allows anyone to use it by removing age, ethnicity, race, or geographic location restrictions—the world bank estimates over 1.7 billion people to be bankless. With blockchain technology, some of these people can access financial services. All that is required is an internet connection.
It removes intermediaries Blockchain technology's significant advantage is that it removes the need for intermediaries. It eliminates the third-party validation process and all the costs attached to it. Since Blockchain is an open source distributed ledger capable of data authentication and verification, the technology can also be triggered to action. The use of smart contracts in blockchain technology is an evident use case.
More efficient transfers
Almost everyone can attest to the annoying feeling when you're late to the bank on a Friday evening. It is very likely that the banks may not process such transactions. The reason for this, as we know, is that banks close pretty early on Fridays and do not work on weekends. However, Blockchain has no limitation as to its days of operation. Hence, transactions are completed more efficiently.
The public Blockchain is a distributed ledger system that is non-restrictive and open to everyone with an internet connection to join. They are created with open-source code and can be viewed and used by anyone. The most popular use cases of public Blockchain are cryptocurrencies. Bitcoin and Ethereum are examples of a public blockchain. The setbacks of a public blockchain include a lack of privacy and weak security.
The private Blockchain is just like the public Blockchain. However, the difference is that it is restrictive and permission-based. In addition, it operates within a closed network where only selected members are part of the network.
Private blockchains operate more centrally because the organization governs the network and is in charge of the accessibility of the Blockchain. Only its members can see the transaction on the Blockchain.
Private blockchains are common in the corporate business-business space. For example, it is used for supply chain management, voting, etc. A common example of a private blockchain is Hyperledger.
A consortium blockchain is a permissioned blockchain managed by more than one organization. Unlike private blockchains, where the Blockchain is controlled by one organization, Consortium blockchains are more decentralized, making them more secure. Here, multiple organizations can share the responsibilities of maintaining a blockchain. Therefore, a consortium blockchain is ideal for businesses that require participants to be permissioned and responsible.
This implies that more than one organization can act as a node on this Blockchain and exchange information or do mining. They are used by government organizations, e.g., banks and government organizations. Example Energy web foundation.
It is a more flexible type of Blockchain that uses private permission-based and public permission-less Blockchain features. This allows them to control what data is open to the public and who can control the data stored on the Blockchain.
Blockchain is revolutionizing businesses' operations and improving operational efficacy in industries worldwide. Business leaders have seen how Blockchain is helping them build more efficient processes and new financial models. Booz Allen Hamilton consulting firm wrote that the government could also benefit from using blockchain-based applications.
To them, the decentralized blockchain system offers transparency, allowing all participants to see and verify data. The firm also reported that the government of some countries, Estonia, Sweden, and Georgia, is experimenting with a blockchain-based land registry that will enable multiple parties to possess the registry. If successful, this will prevent property disputes altogether or help resolve situations of conflicts.
The finance sector as a whole has benefitted a lot from blockchain technology. The fact that most financial institutions are centralized is no news. And because they are centralized, they are subject to human alteration and manipulation. Therefore, unlike in the centralized banking system, where information can be manipulated, blockchain technology eliminates any alteration by ensuring that data is spread among several nodes in different locations.
The traditional banking system is flawed with so many issues, the impact of which is faced by consumers. This is because traditional banks are so unreliable. For instance, centralized banks may have limitations on completing a transaction on weekends.
However, by integrating Blockchain into the banking industry and using a peer-to-peer system, customers can see their transactions in less than 10 minutes without geographical restrictions. This is because Blockchain never sleeps.
The integrity of the electoral process is vital to gaining the reliability and trust of voters. This is why proponents of blockchain technology have suggested the use of blockchain technology as the solution to preventing fraud in the electronic voting process.
The transparent and distributed nature of the technology, if employed in the voting process, has the capacity to curb manipulation and fraud. Not only does it strengthen the data security, but by creating time stamps for each entry, it also makes data easily accessible and impossible to tamper with.
Since blockchain technology's inception, cryptocurrencies have been its most popular use case. The reason why this is is not far-fetched. A cryptocurrency is a digital, encrypted, and decentralized medium of exchange with no central authority that maintains the currency's value. Cryptocurrencies use blockchain technology to keep a tamper-resistant record of transactions to track who owns what; this makes it impossible to make copies of crypto holdings or attempt to spend a unit of crypto twice.
In addition to other use cases, blockchain technology can completely revolutionize the healthcare industry. However, at the moment, the health sector is faced with challenges varying from the insecurity of medical records, outdated technological practices susceptible to hacks and cyber attacks, and lack of authenticity and origin of medical products.
Blockchain technology could provide a new pattern in healthcare by making room for a more efficient and secure database. Also, when employed in the health sector, the open nature of blockchain technology encourages data transparency and security at every stage of the healthcare supply chain and provides secure access to patient records.
While mainstream adaptation is yet to be achieved, the revolution has already begun. Major healthcare companies are looking into the applicability of the technology in the healthcare sector. Examples are: Med rec, Dynosticcs, hashed health.
Blockchain Technology is also instrumental in tracking and authenticating the origin of purchased materials, especially in the food industry. This is obvious in the case of the partnership between Walmart and IBM, as reported by Forbes.
Tracking products with blockchain technology encourages traceability along the entire supply chain involved in the supply chain management system.
Despite the relevance and popularity of blockchain technology, predictions concerning its potential are still mixed. This is because the technology is still in its early stages. And as Blockchain reaches more record-breaking heights, its capabilities will become hard to ignore.
For instance, so many businesses and organizations are currently faced with the issue of cybersecurity and data tampering. Blockchain technology, known to keep data secure and immutable, can prevent anyone from tampering with data.
This emphasizes the implication blockchain technology will have on various organizations and the economy at large. Hence, there is no doubt that the technology will go mainstream. Therefore, business leaders and key economic players must be more familiar with the technology.
Since you're at the end of this article, it is safe to say that you now have a basic understanding of blockchain technology. Perhaps, you want to go deeper and see how you can also be involved in the space. You do not need to fret; there are ways in which you can completely go from being a novice to a blockchain guru.
Find below additional resources to keep you going:
Connect with me on Twitter
All data stored on the Blockchain is secured using cryptography -an encryption method that keeps data secure. In addition, the details of all transactions performed on the Blockchain are duplicated and distributed across all computer systems on the Blockchain, making it visible to all users.
The importance of blockchain technology is evident in the fact that it provides immediate and transparent data that is stored in an immutable ledger and shared among members of the network. This ultimately reduces the risk of fraud, manipulation, and corruption.
While many argue that blockchain technology developed alongside bitcoin, this is not entirely true. And although the first use case of blockchain technology was the innovation of Bitcoin in 2008, conversations surrounding blockchain technology have been in talks since 1982. When David Chum, a Berkeley programmer, invented an untraceable payment system that separated the transaction from the person making the transaction.
Another major breaking point was in 1992, when three brothers, Stuart Haber, Scott Stornetta, and Dave Bayer, developed what was known as the Merkle tree: A data structure that served to encode blockchain data more securely. Their discovery allowed the collection of several documents into one block.
In 1997, Adam Beck introduced the first proof-of-work algorithm. It served as the foundation for Hal Finney's reusable proof of work, which allowed users to transfer digital tokens.
The most significant breakthrough for blockchain technology was in October 2008. When a whitepaper proposed the adaptation of a virtual currency, Bitcoin was published by a person/ organization under the pseudonym Satoshi Nakamoto.
It explained a new approach to sending money directly from the sender to the receiver without an intermediary. Bitcoin is the first innovation of Blockchain Technology.
As bitcoin grew in popularity, more people realized that the capability of the Blockchain was beyond just the creation of digital currencies like bitcoin. Instead, the same technology had more use cases, and one could employ the capabilities of blockchain technology for other purposes. This led to innovations like "smart contracts" on a blockchain system called Ethereum.
Ethereum allows other financial instruments like loans also to be represented. Other innovations include; Proof of stake and blockchain scaling.
Photo by Coingrammar
The bone of blockchain technology is to create a safe environment for the sharing and transferring potentially valuable data. And the type of data shared depends on the Blockchain where it is shared. If, for example, the Blockchain you are interacting with is crypto-based, the data on the Blockchain would include the transaction's full details and the sender's and recipient's wallet addresses.
When a transaction occurs on the Blockchain, such transaction is recorded as a "block" of data. Therefore, when there is a new transaction on the Blockchain, such transaction is added to the pre-existing block and distributed to all participants.
Every transaction on the Blockchain is secured using hashing. Therefore, any information stored on the Blockchain is immutable. This is why Blockchain is also called distributed ledger technology (DLT).
The concept of a decentralized database managed by multiple participants is known as Distributed Ledger Technology. A technique intended to timestamp documents to prove that such transaction exists and took place at a particular time. This is an essential feature of Blockchain technology that separates it from other types of databases.
The innovation of blockchain technology is what guarantees the security of a data record, which in turn ensures trust among users.
A block is a section of data. Each block typically contains a group of data and comprises a list of actions or transactions performed on the block. The first block created is called the Genesis block. The genesis block is a special block because it is the start of the blockchain creation process. Any block created after the genesis block points to it with subsequent blocks added to form a chain.
Another participant of the blockchain network is the node. They are a network of computers that make up the infrastructure of blockchain technology. Nodes are also capable of validating transactions and propagating new blocks. If a new node joins the Blockchain, it is given a copy of the chain. However, to make changes to the Blockchain, such actions must be approved by the blockchain network.
Hashing is a cryptographic technique that uses complex algorithms to create a hash from a piece of data. Once a block is created, the hash is calculated. The Hash identifies the components of a block and its contents. Think of it in terms of the uniqueness of a fingerprint. If anyone tries to tamper with a block or swap in a fake block, the hash will change, and this will break the chain.
Mining is a process of blockchain creation by which bitcoin and other cryptocurrencies generate new coins and verify new transactions. It is a competitive process in which miners solve answers to complex mathematical algorithms. The miner who solves the cryptographic puzzle first gets to add the next block to the process and is entrusted with the validation of the transaction.
Improved data security and transparency Because of the immutable nature of blockchain technology, there is high security, and you can rest assured of the accuracy of data. In addition, the information is shared transparently, reducing the likelihood of fraud and making it impossible to manipulate data in any way.
Faster processing time Transactions completed on the Blockchain are quicker to complete because of the technology's speed.
The cost of transactions is low By eliminating third-party validations like those we experience when we want to send money using traditional banks, we are reducing the cost of sending money to a friend or family member in another country, for instance.
IT takes away certain restrictions Blockchain technology allows anyone to use it by removing age, ethnicity, race, or geographic location restrictions—the world bank estimates over 1.7 billion people to be bankless. With blockchain technology, some of these people can access financial services. All that is required is an internet connection.
It removes intermediaries Blockchain technology's significant advantage is that it removes the need for intermediaries. It eliminates the third-party validation process and all the costs attached to it. Since Blockchain is an open source distributed ledger capable of data authentication and verification, the technology can also be triggered to action. The use of smart contracts in blockchain technology is an evident use case.
More efficient transfers
Almost everyone can attest to the annoying feeling when you're late to the bank on a Friday evening. It is very likely that the banks may not process such transactions. The reason for this, as we know, is that banks close pretty early on Fridays and do not work on weekends. However, Blockchain has no limitation as to its days of operation. Hence, transactions are completed more efficiently.
The public Blockchain is a distributed ledger system that is non-restrictive and open to everyone with an internet connection to join. They are created with open-source code and can be viewed and used by anyone. The most popular use cases of public Blockchain are cryptocurrencies. Bitcoin and Ethereum are examples of a public blockchain. The setbacks of a public blockchain include a lack of privacy and weak security.
The private Blockchain is just like the public Blockchain. However, the difference is that it is restrictive and permission-based. In addition, it operates within a closed network where only selected members are part of the network.
Private blockchains operate more centrally because the organization governs the network and is in charge of the accessibility of the Blockchain. Only its members can see the transaction on the Blockchain.
Private blockchains are common in the corporate business-business space. For example, it is used for supply chain management, voting, etc. A common example of a private blockchain is Hyperledger.
A consortium blockchain is a permissioned blockchain managed by more than one organization. Unlike private blockchains, where the Blockchain is controlled by one organization, Consortium blockchains are more decentralized, making them more secure. Here, multiple organizations can share the responsibilities of maintaining a blockchain. Therefore, a consortium blockchain is ideal for businesses that require participants to be permissioned and responsible.
This implies that more than one organization can act as a node on this Blockchain and exchange information or do mining. They are used by government organizations, e.g., banks and government organizations. Example Energy web foundation.
It is a more flexible type of Blockchain that uses private permission-based and public permission-less Blockchain features. This allows them to control what data is open to the public and who can control the data stored on the Blockchain.
Blockchain is revolutionizing businesses' operations and improving operational efficacy in industries worldwide. Business leaders have seen how Blockchain is helping them build more efficient processes and new financial models. Booz Allen Hamilton consulting firm wrote that the government could also benefit from using blockchain-based applications.
To them, the decentralized blockchain system offers transparency, allowing all participants to see and verify data. The firm also reported that the government of some countries, Estonia, Sweden, and Georgia, is experimenting with a blockchain-based land registry that will enable multiple parties to possess the registry. If successful, this will prevent property disputes altogether or help resolve situations of conflicts.
The finance sector as a whole has benefitted a lot from blockchain technology. The fact that most financial institutions are centralized is no news. And because they are centralized, they are subject to human alteration and manipulation. Therefore, unlike in the centralized banking system, where information can be manipulated, blockchain technology eliminates any alteration by ensuring that data is spread among several nodes in different locations.
The traditional banking system is flawed with so many issues, the impact of which is faced by consumers. This is because traditional banks are so unreliable. For instance, centralized banks may have limitations on completing a transaction on weekends.
However, by integrating Blockchain into the banking industry and using a peer-to-peer system, customers can see their transactions in less than 10 minutes without geographical restrictions. This is because Blockchain never sleeps.
The integrity of the electoral process is vital to gaining the reliability and trust of voters. This is why proponents of blockchain technology have suggested the use of blockchain technology as the solution to preventing fraud in the electronic voting process.
The transparent and distributed nature of the technology, if employed in the voting process, has the capacity to curb manipulation and fraud. Not only does it strengthen the data security, but by creating time stamps for each entry, it also makes data easily accessible and impossible to tamper with.
Since blockchain technology's inception, cryptocurrencies have been its most popular use case. The reason why this is is not far-fetched. A cryptocurrency is a digital, encrypted, and decentralized medium of exchange with no central authority that maintains the currency's value. Cryptocurrencies use blockchain technology to keep a tamper-resistant record of transactions to track who owns what; this makes it impossible to make copies of crypto holdings or attempt to spend a unit of crypto twice.
In addition to other use cases, blockchain technology can completely revolutionize the healthcare industry. However, at the moment, the health sector is faced with challenges varying from the insecurity of medical records, outdated technological practices susceptible to hacks and cyber attacks, and lack of authenticity and origin of medical products.
Blockchain technology could provide a new pattern in healthcare by making room for a more efficient and secure database. Also, when employed in the health sector, the open nature of blockchain technology encourages data transparency and security at every stage of the healthcare supply chain and provides secure access to patient records.
While mainstream adaptation is yet to be achieved, the revolution has already begun. Major healthcare companies are looking into the applicability of the technology in the healthcare sector. Examples are: Med rec, Dynosticcs, hashed health.
Blockchain Technology is also instrumental in tracking and authenticating the origin of purchased materials, especially in the food industry. This is obvious in the case of the partnership between Walmart and IBM, as reported by Forbes.
Tracking products with blockchain technology encourages traceability along the entire supply chain involved in the supply chain management system.
Despite the relevance and popularity of blockchain technology, predictions concerning its potential are still mixed. This is because the technology is still in its early stages. And as Blockchain reaches more record-breaking heights, its capabilities will become hard to ignore.
For instance, so many businesses and organizations are currently faced with the issue of cybersecurity and data tampering. Blockchain technology, known to keep data secure and immutable, can prevent anyone from tampering with data.
This emphasizes the implication blockchain technology will have on various organizations and the economy at large. Hence, there is no doubt that the technology will go mainstream. Therefore, business leaders and key economic players must be more familiar with the technology.
Since you're at the end of this article, it is safe to say that you now have a basic understanding of blockchain technology. Perhaps, you want to go deeper and see how you can also be involved in the space. You do not need to fret; there are ways in which you can completely go from being a novice to a blockchain guru.
Find below additional resources to keep you going:
Connect with me on Twitter
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