What is blockchain?
While Bitcoin remains the talk of the town, many people still wonder: what is blockchain technology that is at the core of all new cryptocurrencies? Blockchain is the database technology that distributes a database across a computer network, thus making it nearly impenetrable for hackers. Although blockchain is primarily associated with cryptocurrency, its potential use is thought to be much wider.
Simply put, blockchain is a digital ledger that stores the data and is distributed across a network of computers, known as nodes. What blockchain is used for is recording the cryptocurrency transactions, ownership of NFTs, etc.
What makes blockchain unique is a fully decentralized state. In this, blockchain is strikingly different from all previously known database technologies. Excel spreadsheets or traditional databases were used to store the data in one place under a single administrator. With blockchain, multiple – identical – copies of a database are stored on multiple computers, known as nodes, that constitute a network.
This is precisely the reason why this new technology was given its name: a ledger is a “chain” of individual “blocks” of data. Whenever the information gets updated, it comes as a new “block” that needs to be added to the “chain”, and all the nodes have to update the data accordingly. And this is where blockchain is different again.
How blockchain works
Trying to see what blockchain is good for one has to understand why this technology is thought to be so secure. Before a new block is added to the chain, most of the nodes must verify and confirm that this new data is legitimate. In the world of cryptocurrency transactions, verification might mean that the nodes eliminate fraud. Such oversight was impossible with the old databases. Moreover, since all transactions are cryptographic, the nodes must solve complex mathematical equations to process them. In the end, after all verifications, we obtain a secure digital chain that contains all information about all transactions with the data.
Despite being a new kind of technology, blockchains are operated using traditional mechanisms. A public blockchain allows any user to read, write, and audit the data. However, as nodes are not controlled by anyone, in particular, it is hard to alter any transactions. A private blockchain belongs to an organization or a group, and an established owner can alter the data. The private blockchain is akin to a traditional in-house data storage system, although it also uses a network of multiple nodes for better security.
How to use blockchain?
Blockchain technology is used for financial services, in voting systems, and most recently, in arts. However, it has primarily been linked to Bitcoin. So, what is cryptocurrency blockchain?
Blockchain lies at the core of several leading cryptocurrencies, e.g. Bitcoin or Ethereum. All users’ transactions with these assets are recorded on a blockchain. Both technology and the assets that it supports depend on each other. Arguably, unless cryptocurrencies really take off, blockchain will never demonstrate its full potential. At the moment, due to the high volatility of cryptocurrencies, investors are reluctant to buy them. But this may change in the future, as transactions involving digital assets become widely available.
At present, even as the momentum for Bitcoin is building, blockchain continues to be seen as a niche technology. The transactions have their limits, and energy costs need to be addressed. However, some analysts compare it to the Internet that has taken several decades to get to the current stage. So, when pondering the question of what is blockchain one can be certain: blockchain will have a profound impact on all kinds of transactions and interactions between people. This alone makes it worthwhile to monitor this technology and invest in it.