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What is Blockchain? A Simple Explanation for Beginners

Catharina D.
March 22, 2023
5 min

We are confident that you might have heard the word "blockchain" in the past couple of years, especially with the rise of Bitcoin and other cryptocurrency mentions in the media.

The origins of the bitcoin technology can be traced back to as early as 1991. The whole concept of blockchain technology was first introduced in 2008 by an unknown person or group of people using the pseudonym "Satoshi Nakamoto" in a white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." The white paper describes how blockchain technology can create a decentralized digital currency like Bitcoin. Since then, blockchain technology has evolved and been adopted in various industries for various applications beyond just digital currency.

Understanding Blockchain: Blockchain and Cryptocurrency

First of all, blockchain is not the same as cryptocurrency. Blockchain is a standalone, cutting-edge technology that embodies a digital ledger that records transactions (or any other valuable information).

Think of a traditional accounting ledger that's written by hand in a book. Now, envision the same type of ledger, but in a digital form where a computer stores records of various transactions in a single, decentralized database. This decentralized database is called blockchain, and literally represents a chain of blocks. Blockchain can be used to track the ownership and transfer of assets, such as real estate or intellectual property, to provide secure and transparent supply chain management and to create an immutable record of data or information. Essentially, anything of value can be recorded on blockchain, making it a valuable tool for businesses and organizations of all types.

So, while cryptocurrency is just one application of blockchain, the technology has the potential to revolutionize the way we store, manage, and secure information in virtually every industry.

Blockchain Is Decentralized, And That's a Good Thing

Why is this a good thing? It means that blockchains do not rely on a single central authority. Let's get back to our hand-written ledger analogy. Usually, all the records in such ledgers are made by an accountant or a group of people, which can lead to mistakes, manipulation, and the like. Besides, how do you know the records in such a ledger are true?

On the contrary, blockchain is decentralized because it operates on a distributed network of computers that work together to maintain the integrity and integrity of the blockchain. In other words, the network must agree on the records' truthfulness. Such a network comprises individual computers or nodes (what they're called in the blockchain world) and is called a Peer-to-Peer Network.

Each network participant (a node, a computer) has a copy of the blockchain, which is a complete and transparent record of all transactions that have taken place on the network. When a new transaction is initiated, it is verified by multiple nodes in the network before being added to the blockchain. This verification process ensures that the transaction is valid and has not been tampered with. It is called a Consensus Protocol.

Because no single central authority controls the blockchain, it is resistant to censorship and manipulation. It is also highly transparent, as all transactions are publicly recorded on the blockchain and can be viewed by anyone accessing the network.

The decentralized nature of blockchain makes it highly secure and reliable, as it is not vulnerable to the failures or corruption of a single central authority. With that said, it is not possible to change a record without changing the entire chain because every record on the blockchain (or block) contains information about the previous one. If the whole chain is altered, it is no longer valid.

Immutability is a feature of blockchain provided by a cryptographic hash function. While the mathematics behind it is complicated, the job of hash on the surface is straightforward: transform data in every record into a string of numbers and make them deterministic and irreversible. In other words, thanks to cryptography, every record is unique, and no outputs can be derived from the original inputs. Therefore, it is impossible to manipulate the ledger since one can't just erase, override or add new data to the existing records.

And here, we're coming closer to the mining concept, also known as Proof-of-Work or Proof-of-Stake. Once the agreement regarding the validity of transactions between nodes is achieved, a new block is added to a chain. On top of that, new blocks are added. In the Bitcoin blockchain, every block contains a summary of some of the most recent transactions.

Blockchain Technology Applications

Now that we know how blockchain works, we can look at its applications. We've learned that while blockchain technology is a critical component of cryptocurrency, it is not the same. Cryptocurrency is a specific application of blockchain technology that allows for creating and transferring digital currency without the need for a central authority, such as a bank or government. Cryptocurrencies use blockchain technology to securely and transparently record and verify transactions. Still, they are just one of many possible applications of blockchain technology.

Blockchain technology has been applied across a wide range of industries, including:

Financial Services: Blockchain has been used in the financial sector for various purposes, such as cross-border payments, trade finance, and securities trading. For example, JPMorgan Chase uses blockchain to improve money transfers, and Mastercard has 89 patents based on blockchain technology.

Supply Chain Management: Blockchain can help to improve supply chain transparency, traceability, and efficiency, by allowing for the tracking of goods from the point of origin to the end consumer. For example, Walmart uses blockchain to create an automated process for handling invoices and payments of their numerous third-party freight carriers. Companies like DHL and FedEx use blockchain to automate commercial processes and bring more transparency to stakeholders and customers.

Healthcare: Blockchain can be used to securely manage patient records, improve medical data sharing between healthcare providers, and enable more efficient clinical trials. According to the latest news, Pfizer embraces blockchain technology for drug testing.

Real Estate: Blockchain can facilitate the transfer of property ownership, reduce the risk of fraud, and streamline the real estate transaction process.

Energy and Utilities: Blockchain can be used to track and trade energy credits, enable peer-to-peer energy trading, and improve electricity grid management. Siemens Energy, for example, has launched a blockchain platform to trade renewable energy.

Government: Blockchain can help to improve government services, enhance transparency and accountability, and reduce the risk of fraud and corruption.

These are just a few examples of industries that have applied blockchain technology. As the technology evolves, it is likely to find even more use cases in various sectors.

Catharina D.
March 22, 2023
5 min
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