What is Blockchain?

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A Blockchain is a way of linking encrypted digital records that is used as the basis of the modern digital economy. It was first developed by Bitcoin founder Satoshi Nakamoto as a way to resolve digital currency’s double-spending problem and it ended up becoming a foundational part of the way that cryptocurrencies are developed and traded in today’s digital economy.

Blockchains create a decentralized record of transactions that can be verified by a network of independently operated servers. This allows for transactions between two parties that do not necessarily know or trust each other without the need to have a third-party step in to mediate.

In recent years blockchain technology has evolved by leaps and bounds, and its potential uses have radically expanded. This includes the development of what is called Blockchain 2.0, meaning the use of smart contracts, secure data transfer, copyright tracking, and other uses beyond cryptocurrency.

Since Bitcoin’s invention, many other platforms that have built themselves by using this innovative new technology. Today there are hundreds of different blockchain based companies, currencies, and applications that are using the technology in increasingly innovative ways.

How Does Blockchain Work?

As mentioned above, blockchain technology was initially developed by Satoshi Nakamoto, the founder of Bitcoin. Bitcoin is known as the first and still most prominent cryptocurrency on the market.

Other cryptocurrencies have since been developed using the basics of Bitcoin, but with their own modifications on the initial formula. Ethereum is one of the most prominent of these currencies, giving added improvements in areas like security and processing efficiency.

Blockchains allow for data to be grouped and processed by individual nodes, which are themselves connected into a block. All blocks in the chain are connected to each other, allowing for open-sourced modifications from individual independent programmers.

The entire blockchain runs on a global ledger that is being constantly updated. New blocks are added to the global ledger, and all other nodes record these additions into their copies of that record. These transactions are all time-stamped, and their record stretches all the way back to the first transaction on the blockchain.

The problem of double spending is one of the main issues that cryptocurrencies had in their developmental stages and blockchains have proven to be an ingenious solution to this issue. Physical currency can only be spent once as it actually changes hands from user to user, however digital currency can be copied, created by unauthorized agents, or otherwise compromised in ways that hard currency cannot.

The traditional way of dealing with this issue was to use a centralized entity such as a bank to manage all transactions, however this requires giving up a portion of any transaction as payment to the third-party agency. It also requires trust in the third-party entity, which can sometimes be an issue.

Starting in 2014, blockchain technology began evolving for purposes beyond simply trading cryptocurrencies. Blockchain 2.0, as it began to be called, started performing more functions built around the idea of smart contracts.

Smart contracts allow two parties to create secure, automatically executed agreements. They have a broad range of applications, especially those built around delayed or conditional payments.

The decentralized nature of the blockchain means that a third party is not needed in order to ensure that both parties receive the appropriate compensation. Smart contracts can also be used to execute bets, tontines, and other transactions more complicated than a simple exchange.

Further improvements to blockchain and smart contract technology have allowed for even more advanced functions such as the creation and tracking of digital copyrights, the encryption of personal data like medical or financial records, and other tasks that require security, secrecy, or trust.

Features and Benefits of Blockchain

Blockchain technology offers a way to make transactions and transfers of data in a way that is both secure and open sourced, publically available and privately encrypted. It allows for the safe exchange of assets without either side having to worry if they will be paid or not.

One of the issues that existed before Bitcoin and other blockchain-based currencies was that if one entity sent an amount of money to another electronically it was all too easy for the receiving party to fail to uphold their end of the agreement.

Many attempts at using the internet to engage in commerce had failed before blockchain technology was developed. Blockchains finally allowed users to make simultaneous transfers without involving a mediating party. Neither party had to worry about the integrity of the other, they simply had to trust the open sourced nature of the code.

The open, decentralized nature of the blockchain offers a number of advantages that centralized networks do not. One benefit is that users save money in the long run because they do not have to give up any portion of the transaction to the mediating group, nor are they ever at the mercy of the third party’s rules, restrictions, processes, or failures.

One benefit is that a centralized system has one major point of failure, which makes it an easy target for hackers. Organizations with centralized data like banks and financial institutions, for example, often store all of their financial information in a single network If that network crashes or is compromised, then all of the data in that network is at risk.

By contrast, with a decentralized network there are thousands of individual points of failure, and if one is compromised it does not necessarily compromise the entire system. Blockchains are more transparent than any centralized ledger would be, and this transparency is part of their security system.

When it is a matter of public record who alters the blockchain and how it is very difficult to attempt to steal the data encrypted on the chain without every other node being aware of the breach. That said, blockchains should not be considered a perfect system and there have been many different times that they have been successfully attacked by hackers.

Some of the most prominent failures of the blockchain security include the DAO hack that resulted in the theft of over 70 million USD worth of Ethereum, the Parity hack worth over 30 million USD of Ethereum, and the Mt. Gox attack that lost over 473 million USD in Bitcoin. The Mt. Gox attack was so extreme that it shut down the exchange permanently and briefly slowed the growth of the industry as a whole.

Many users became wary of this new technology and were reluctant to start to invest due to these high-profile failures. The industry adjusted, however, and the Mt. Gox failure inspired the creation of a number of exchanges that made security their top priority including Coinbase, Kraken, and Gemini.

Hacking and theft will always be an issue with any form of digital code, however the industry works very diligently to stay one step ahead of the thieves that would look to exploit their weaknesses. Other protections that many exchanges have taken include adding FDIC insurance, keeping their assets in cold storage offline, and offering reimbursement to hacked users.

As cryptocurrencies become a larger and larger part of global commerce in general, new issues beyond hacking are beginning to develop, such as the incredible amount of energy that is being consumed by all of the processors that are writing and storing the code for these blockchains.

The linked nature of the data for currencies like Bitcoin means that every transaction is built onto the code of previous transactions. New transactions require greater and greater amounts of energy to process and this output can be difficult to deal with both environmentally and financially.

Later cryptocurrencies have done a better job of accounting for this in their design, however the sheer quantity of available cryptos mean that an enormous amount of power is being expended in their processing, and it is starting to take a toll on the environment.

It remains to be seen how the industry will address this issue going forward, however it seems highly unlikely that cryptocurrencies or the use of blockchain technology is going to decrease any time soon. Billions of dollars’ worth of assets are traded using blockchain technology every day and that amount has, for the most part, only increased over the past years.

Conclusion

The advent of blockchain technology has permanently altered the shape of the global economy. The ability to overcome the double spending problem was one of the major steps forward in the ability to make remote peer-to-peer transactions and opened up an entire new marketplace that previously did not exist.

Since the advent of blockchain technology we’ve seen it change from a simple way to trade assets between two parties to a technology with seemingly limitless applications. Smart contracts allow for delayed or conditional execution, tracking of digital properties, and the transfer of sensitive or proprietary data.

These are still the beginning stages of what is possible with blockchain technology and it will only continue to grow in the coming years. In the future more and more potential uses will be developed, and blockchain systems will become an even more foundational part of the way our global economy functions.

Peter Lehmann

Peter is a blockchain investor and cryptocurrency writer at Vkool.com. Since 2014 Peter has advised blockchain startups and ICOs on content marketing, strategy and business development.

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