Blockchain technology is the technology that underlies cryptocurrency, enabling it to exist as a secure method of moving and validating transactions and information. In this sense, you could think of blockchain as akin to Microsoft Windows — a software platform — on which a variety of other software (such as cryptocurrency) is developed.
Here’s what blockchain technology is, how it works and why it’s so popular.
How blockchain works
Blockchain is a software application that tracks data by storing it in blocks that are then chained together chronologically. Think of a blockchain as a running receipt of transactions or data that are validated and stored and can be viewed later. Blockchain technology can underlie many different applications, such as cryptocurrency, smart contracts, tracking information and almost any other digital process that could require observation.
In the case of cryptocurrency, computers validate the movement of money from person to person over time, leaving a permanent record that can be accessed later, like a long receipt of every transaction ever made. When Bitcoin was officially released in 2009, it brought the advantages of blockchain technology to popular consciousness.
Blockchain technology is often decentralized, meaning that the ability to write to the database is given to a network of computers, as is the case with many cryptocurrencies. This distributed ledger, as it is often called, tracks the data using the redundant power of the networked computers to validate the data. Each computer has access to this public record, and new transactions are added to the receipt or ledger once they’re verified by the networked computers.
Due to this process of validation and the cryptography it uses, blockchain is very secure, creating a record that is almost irreversible. This level of security helped cryptocurrency become an asset that people can buy and sell.
How is a blockchain different from a normal database?
A blockchain database stores data in blocks, and when a block is filled with data, it is connected or “chained” to the preceding block. The chain continues indefinitely, with successive blocks of information added to previous blocks, as long as the computers managing the database continue to operate it. And because blockchain amasses data over time, it is a history of that data in the order in which it was irreversibly recorded in the blockchain.
In contrast, a typical database may simply be a table, albeit possibly a very large one, that organizes data according to specific attributes. A typical database needn’t have a chronology and previously recorded data may be altered in the database. But like a blockchain, a typical database may limit who can access, store and retrieve information from it.
How transparent is blockchain?
Blockchain is all about tracking the movement of information, and so by its very design, it’s intended to be highly transparent, at least if you’re able to access the blockchain database storing the information. To establish transparency, however, you need a secure database that’s resistant to hacking. Blockchain technology stores information in a secure way that must also record any alterations made to a given blockchain, so that there’s a record of changes.
Blockchain does allow a “permission-less” public ledger to be viewed by computers (or “nodes”) on the network. By joining the network, you (or anyone with access) will be able to see the information that has been recorded, even if the data may offer anonymity or semi-anonymity. So users can look at all transactions in a given blockchain across time.
Public blockchains vs. private blockchains
While public blockchains allow anyone to access the database, private blockchains can limit access to specific people or groups, perhaps those within an organization using a blockchain.
For example, Bitcoin’s distributed ledger is publicly verifiable, even if you cannot directly see who is making a transaction. You can trace transactions in the cryptocurrency back over time and see where money has moved and to which accounts. (This is one way that legal authorities can trace cryptocurrency to those they suspect of cheating the taxman.)
However, other blockchains may remain private or “permissioned,” meaning that users must be authorized to enter data or transact through the blockchain. In these blockchains, users may remain fully anonymous and transparency is limited by those controlling the database.
So while blockchain may allow transparency in its design, there are also questions of who has the ability to see a blockchain, who or what is observed and who does the observing. The answers to these questions — and blockchain’s transparency — depend on politics and power.
Why is blockchain technology so popular?
Blockchain has become popular because it can be used in various applications, notably cryptocurrencies, and it can offer various benefits:
- Decentralization. A blockchain database can be decentralized and validated by the networked computers that are allowed to access it. This decentralization allows the computers to correct the database if conflicting information enters the blockchain.
- Irreversibility. A decentralized blockchain validates information and produces a nearly irreversible record of transactions, for example, in Bitcoin. Once bitcoins are moved and the transaction has been validated, it’s recorded permanently.
- Security. Blockchain offers security in a variety of ways. For example, its irreversibility leads to security for transactions. And if information is altered, the blockchain identifies that it has been altered.
- Accuracy. The redundancy of a distributed network means transactions are validated repeatedly, helping to keep accuracy high across the database.
- Transparency. Blockchain allows transactions in a cryptocurrency, for example, to be displayed in a public ledger, even if the accounts owning a given currency remain anonymous or semi-anonymous.
- Trust-less. Because of the way that it validates information, a blockchain can be operated without either side of a transaction knowing each other or validating the transaction.
- Robustness. Blockchain can enable many different processes and technologies.
Blockchain can also be used for smart contracts, contracts that are automatically validated and executed when the terms of the contract are fulfilled, which is one of the key features of the Ethereum cryptocurrency.
Can you invest in blockchain?
It’s not possible to invest directly in blockchain, since it’s just a database application. However, you can invest in companies and other organizations that use blockchain technology.
One of the most obvious places is cryptocurrency, which has become a hot market. You’ll want to thoroughly understand what you’re buying and where the opportunities to profit are. If you’re looking to go this route, check out the best brokers and exchanges for trading cryptocurrency.
You also have the ability to invest in companies that are using blockchain in their own business. Here are some of the top blockchain ETFs, their top holdings and how much they charge.
Blockchain enables the creation and development of cryptocurrencies, but it has the potential to offer a lot more in terms of its ability to track and verify a whole range of data. So it could become a vital part of new applications that track, manage and control data, physical objects, legal agreements, payments, royalties and so much more.