what is a blockchain

This article aims to provide insight into blockchain technology. It references cryptocurrency, blockchain technology, and real-world use cases. If you are unfamiliar with crypto, read our articles on crypto and DeFi after reading this article.

The Technology Behind Crypto

A blockchain is a digital ledger distributed across a network of computers. It is a permanent and accessible way of recording information that allows for trustless transactions to be performed between two parties. The crypto market, valued at over US$2T today, is built on this same technology.

The properties that make a blockchain what it is are transparency and immutability. This means that information on the blockchain is accessible by anyone, and nothing on the blockchain can ever be tampered with.

While the Bitcoin project was the first to utilize blockchain technology, the beginnings of this idea trace back to 1982. David Chaum, a cryptographer, proposed something like a blockchain in his dissertation titled “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups”. A group of researchers further elaborated on it in 1991 before Satoshi Nakamoto used this idea to create Bitcoin.

How Does Blockchain Technology Work?

As its name suggests, blockchains are a chain of blocks containing information. Each block contains data regarding one or more transactions, a hash, and the hash of the previous block in the chain.

A hash is a key that identifies the blockchain and is calculated based on the contents of the block. If something within the block changes, then the hash also changes. As such, it is effortless to identify if a block has been tampered with. Because each new block contains the previous block’s hash, if the hash of a block changes, every block that comes after it will be deemed invalid as the hashes will no longer be aligned.

When a transaction occurs on the blockchain, it will be broadcast to the whole network. All transactions that were broadcast to the network during the same time period are then gathered to form a block. Then, everyone else on the network will agree on whether it is a valid block, and it will be added to the blockchain if more than 50% of participants agree on its validity.

Security

Since hashes are easily calculable by computers, it would be simple for a computer to recalculate and replace the hashes of numerous blocks. This makes it possible to replace all the blocks in a blockchain to revalidate it after tampering with its data.

To mitigate this, blockchains use a mechanism called Proof-of-Work (PoW). This requires computers to solve a complex problem to create a new block, slowing down the process. To replace multiple blocks, one would need to recalculate all of the new hashes, and complete proof-of-work for each block, adding to its difficulty. However, proof-of-work requires a lot of energy due to its complexity. This has raised concerns regarding the environmental impact of blockchain technology.

Over the last decade, many new mechanisms have been developed as friendlier alternatives to PoW, such as Proof-of-Stake (PoS), allowing blockchain technology to be more sustainable and scalable. However, the PoW consensus mechanism is still the most secure one to date. It has been a challenge trying to solve the infamous blockchain trilemma of being decentralized, scalable, and secure.

Transparency

Instead of being owned by a centralized entity, blockchains utilize a peer-to-peer network (P2P) to store information. Anyone can join this network and essentially download a full copy of the blockchain. When this happens, their computer becomes a node in the blockchain.

Even if your computer is not a node, you may view any transaction within any blockchain by using a blockchain explorer. An example of this would be Etherscan for the Ethereum network.

Immutability

The decentralization of using a P2P network makes a blockchain even more secure because at least 50% of the nodes need to match up to validate the blockchain. Any blocks that do not align with the majority are deemed invalid and are rejected by the network.

This means that to hack a blockchain, one would need to recalculate all hashes and redo the proof-of-work across at least 50% of all nodes, making it virtually impossible.

Real-World Use of Blockchain Technology

While the most prominent use of blockchain technology today is crypto, it has the potential to revolutionize many industries other than finance. Blockchain technology continues to improve every day, and other than being a digital ledger, we can now do things like proving we have a certain piece of information without revealing what it is, which allows for many more applications.

Here are some examples of ways blockchain technology can be used other than for crypto:

Medical Records

Sharing medical records between healthcare providers is an imperfect process. By putting it on the blockchain, we can prevent data loss or tampering to ensure that nothing gets overlooked when someone is undergoing medical treatment.

Supply Chain and Logistics Tracking

Beyond financial reasons, companies can use a blockchain to be accountable for their business practices. Since blockchains are fully transparent, being able to track a company’s supply chain would prevent exploitation at any point along the production process.

Real Estate Processing

With the development of NFTs and smart contracts, we can feasibly use blockchain technology to process real estate transactions and prove ownership without any intermediaries. Buying property would be more efficient, affordable, and accessible to many more people.

Personal Identification

Since blockchain technology is so secure, it eliminates the need to verify information from third parties. An example would be employers needing to verify that a potential employee’s diploma is legitimate and valid. If this information were readily available on a blockchain, things like hiring could be made much easier and more efficient.

Tracking Royalties for Art and Music

The art and music industries are challenging due to the lack of equity. While famous artists and musicians might make a lot of money, smaller artists tend to get exploited and their work stolen.

The blockchain, which can verify the authenticity of a piece of art at the click of a button, can eliminate the issue of art theft. Smart contracts on the blockchain also ensures that all artists get their fair share of royalties from their work.

Voting Mechanisms

Voting today is a very long and drawn-out process, with the need to count and recount votes. There are sometimes even conspiracy theories about falsified ballots. Poll results can be easily verified and proven authentic with blockchain technology. Voters can also remain anonymous due to the trustless nature of this technology.

Conclusion

Blockchain technology refers to using a public, distributed ledger to store and share information. This makes information accessible, trustless, and has many potential use-cases. Its current most popular use is in the form of cryptocurrencies, where blockchain technology is making finance much more accessible to many people around the planet.

Disclaimer

This publication is provided for informational and entertainment purposes only. Nothing contained in this publication constitutes financial advice, trading advice, or any other advice, nor does it constitute an offer to buy or sell securities or any other assets or participate in any particular trading strategy. This publication does not take into account your personal investment objectives, financial situation, or needs. Treehouse does not warrant that the information provided in this publication is up-to-date or accurate.


Hyperion by Treehouse reimagines workflows for digital asset traders and investors looking for actionable market and portfolio data. Contact us if you are interested! Otherwise, check out Treehouse Academy, Insights, and Treehouse Daily for in-depth research.