BLOCKCHAIN

What Is a Blockchain?

A blockchain is a distributed database that is shared among the nodes of a computer network. As a
database, a blockchain stores information electronically in digital format. Blockchains are best known
for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and
decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity
and security of a record of data and generates trust without the need for a trusted third party.

One key difference between a typical database and a blockchain is how the data is structured. A
blockchain collects information together in groups, known as blocks, that hold sets of information.
Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled
block, forming a chain of data known as the blockchain. All new information that follows that freshly
added block is compiled into a newly formed block that will then also be added to the chain once
filled.

A database usually structures its data into tables, whereas a blockchain, like its name implies,
structures its data into chunks (blocks) that are strung together. This data structure inherently makes
an irreversible time line of data when implemented in a decentralized nature. When a block is filled, it
is set in stone and becomes a part of this time line. Each block in the chain is given an exact time
stamp when it is added to the chain.

KEY TAKEAWAYS

 Blockchain is a type of shared database that differs from a typical database in the way that it
stores information; blockchains store data in blocks that are then linked together via
cryptography.

 As new data comes in, it is entered into a fresh block. Once the block is filled with data, it is
chained onto the previous block, which makes the data chained together in chronological
order.

 Different types of information can be stored on a blockchain, but the most common use so far
has been as a ledger for transactions. 

 In Bitcoin’s case, blockchain is used in a decentralized way so that no single person or group
has control—rather, all users collectively retain control.

 Decentralized blockchains are immutable, which means that the data entered is irreversible.
For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.

How Does a Blockchain Work?

The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. In
this way, a blockchain is the foundation for immutable ledgers, or records of transactions that cannot
be altered, deleted, or destroyed. This is why blockchains are also known as a distributed ledger
technology (DLT).

First proposed as a research project in 1991, 1 the blockchain concept predated its first widespread
application in use: Bitcoin, in 2009. In the years since, the use of blockchains has exploded via the
creation of various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens
(NFTs), and smart contracts.

Transaction Process

Blockchain Decentralization

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Imagine that a company owns a server farm with 10,000 computers used to maintain a database
holding all of its client’s account information. This company owns a warehouse building that contains
all of these computers under one roof and has full control of each of these computers and all of the
information contained within them. This, however, provides a single point of failure. What happens if
the electricity at that location goes out? What if its Internet connection is severed? What if it burns to
the ground? What if a bad actor erases everything with a single keystroke? In any case, the data is
lost or corrupted.

What a blockchain does is to allow the data held in that database to be spread out among several
network nodes at various locations. This not only creates redundancy but also maintains the fidelity of
the data stored therein—if somebody tries to alter a record at one instance of the database, the other
nodes would not be altered and thus would prevent a bad actor from doing so. If one user tampers
with Bitcoin’s record of transactions, all other nodes would cross-reference each other and easily
pinpoint the node with the incorrect information. This system helps to establish an exact and
transparent order of events. This way, no single node within the network can alter information held
within it.

Because of this, the information and history (such as of transactions of a cryptocurrency) are
irreversible. Such a record could be a list of transactions (such as with a cryptocurrency), but it also is
possible for a blockchain to hold a variety of other information like legal contracts, state identifications,
or a company’s product inventory.

To validate new entries or records to a block, a majority of the decentralized network’s computing
power would need to agree to it. To prevent bad actors from validating bad transactions or double
spends, blockchains are secured by a consensus mechanism such as proof of work (PoW) or proof of
stake (PoS). These mechanisms allow for agreement even when no single node is in charge.

Transparency

Because of the decentralized nature of Bitcoin’s blockchain, all transactions can be transparently
viewed by either having a personal node or using blockchain explorers that allow anyone to see
transactions occurring live. Each node has its own copy of the chain that gets updated as fresh blocks
are confirmed and added. This means that if you wanted to, you could track Bitcoin wherever it goes. 

For example, exchanges have been hacked in the past, where those who kept Bitcoin on the
exchange lost everything. While the hacker may be entirely anonymous, the Bitcoins that they
extracted are easily traceable. If the Bitcoins stolen in some of these hacks were to be moved or
spent somewhere, it would be known.

Of course, the records stored in the Bitcoin blockchain (as well as most others) are encrypted. This
means that only the owner of a record can decrypt it to reveal their identity (using a public-private
key pair). As a result, users of blockchains can remain anonymous while preserving transparency.

Is Blockchain Secure?

Blockchain technology achieves decentralized security and trust in several ways. To begin with, new
blocks are always stored linearly and chronologically. That is, they are always added to the “end” of
the blockchain. After a block has been added to the end of the blockchain, it is extremely difficult to go
back and alter the contents of the block unless a majority of the network has reached a consensus to
do so. That’s because each block contains its own hash, along with the hash of the block before it, as
well as the previously mentioned time stamp. Hash codes are created by a mathematical function that
turns digital information into a string of numbers and letters. If that information is edited in any way,
then the hash code changes as well.

Let’s say that a hacker, who also runs a node on a blockchain network, wants to alter a blockchain
and steal cryptocurrency from everyone else. If they were to alter their own single copy, it would no

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longer align with everyone else’s copy. When everyone else cross-references their copies against
each other, they would see this one copy stand out, and that hacker’s version of the chain would be
cast away as illegitimate. 

Succeeding with such a hack would require that the hacker simultaneously control and alter 51% or
more of the copies of the blockchain so that their new copy becomes the majority copy and, thus, the
agreed-upon chain. Such an attack would also require an immense amount of money and resources,
as they would need to redo all of the blocks because they would now have different time stamps and
hash codes. 

Due to the size of many cryptocurrency networks and how fast they are growing, the cost to pull off
such a feat probably would be insurmountable. This would be not only extremely expensive but also
likely fruitless. Doing such a thing would not go unnoticed, as network members would see such
drastic alterations to the blockchain. The network members would then hard fork off to a new version
of the chain that has not been affected. This would cause the attacked version of the token to
plummet in value, making the attack ultimately pointless, as the bad actor has control of a worthless
asset. The same would occur if the bad actor were to attack the new fork of Bitcoin. It is built this way
so that taking part in the network is far more economically incentivized than attacking it.

Bitcoin vs. Blockchain

Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two
researchers who wanted to implement a system where document time stamps could not be tampered
with. But it wasn’t until almost two decades later, with the launch of Bitcoin in January 2009, that
blockchain had its first real-world application.

The Bitcoin protocol is built on a blockchain. In a research paper introducing the digital currency,
Bitcoin’s pseudonymous creator, Satoshi Nakamoto, referred to it as “a new electronic cash system
that’s fully peer-to-peer, with no trusted third party.”2

The key thing to understand here is that Bitcoin merely uses blockchain as a means to transparently
record a ledger of payments, but blockchain can, in theory, be used to immutably record any number
of data points. As discussed above, this could be in the form of transactions, votes in an election,
product inventories, state identifications, deeds to homes, and much more. 

Currently, tens of thousands of projects are looking to implement blockchains in a variety of ways to
help society other than just recording transactions—for example, as a way to vote securely in
democratic elections. The nature of blockchain’s immutability means that fraudulent voting would
become far more difficult to occur. For example, a voting system could work such that each citizen of
a country would be issued a single cryptocurrency or token. Each candidate would then be given a
specific wallet address, and the voters would send their token or crypto to the address of whichever
candidate for whom they wish to vote. The transparent and traceable nature of blockchain would
eliminate both the need for human vote counting and the ability of bad actors to tamper with physical
ballots.

Blockchain vs. Banks

Blockchains have been heralded as being a disruptive force to the finance sector, and especially with
the functions of payments and banking. However, banks and decentralized blockchains are vastly
different.

To see how a bank differs from blockchain, let’s compare the banking system to Bitcoin’s
implementation of blockchain.

How Are Blockchains Used?

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As we now know, blocks on Bitcoin’s blockchain store data about monetary transactions. Today, there
are more than 10,000 other cryptocurrency systems running on blockchain. But it turns out that
blockchain is actually a reliable way of storing data about other types of transactions as well.

Some companies that have already incorporated blockchain include Walmart, Pfizer, AIG, Siemens,
Unilever, and a host of others. For example, IBM has created its Food Trust blockchain to trace the
journey that food products take to get to their locations.3

Why do this? The food industry has seen countless outbreaks of E. coli, salmonella, and listeria, as
well as hazardous materials being accidentally introduced to foods. In the past, it has taken weeks to
find the source of these outbreaks or the cause of sickness from what people are eating. Using
blockchain gives brands the ability to track a food product’s route from its origin, through each stop it
makes, and finally, its delivery. If a food is found to be contaminated, then it can be traced all the way
back through each stop to its origin. Not only that, but these companies can also now see everything
else it may have come in contact with, allowing the identification of the problem to occur far sooner
and potentially saving lives. This is one example of blockchain in practice, but there are many other
forms of blockchain implementation.

Banking and Finance

Perhaps no industry stands to benefit from integrating blockchain into its business operations more
than banking. Financial institutions only operate during business hours, usually five days a week. That
means if you try to deposit a check on Friday at 6 p.m., you will likely have to wait until Monday
morning to see that money hit your account. Even if you do make your deposit during business hours,
the transaction can still take one to three days to verify due to the sheer volume of transactions that
banks need to settle. Blockchain, on the other hand, never sleeps.

By integrating blockchain into banks, consumers can see their transactions processed in as little as
10 minutes—basically the time it takes to add a block to the blockchain, regardless of holidays or the
time of day or week. With blockchain, banks also have the opportunity to exchange funds between
institutions more quickly and securely. In the stock trading business, for example, the settlement and
clearing process can take up to three days (or longer, if trading internationally), meaning that the
money and shares are frozen for that period of time.

Given the size of the sums involved, even the few days that the money is in transit can carry
significant costs and risks for banks. European bank Santander and its research partners put the
potential savings at $15 billion to $20 billion a year. 4 Capgemini, a French consultancy, similarly
estimates that consumers could save up to $16 billion in banking and insurance fees each year
through blockchain-based applications.5

Currency

Blockchain forms the bedrock for cryptocurrencies like Bitcoin. The U.S. dollar is controlled by the
Federal Reserve. Under this central authority system, a user’s data and currency are technically at
the whim of their bank or government. If a user’s bank is hacked, the client’s private information is at
risk. If the client’s bank collapses or the client lives in a country with an unstable government, the
value of their currency may be at risk. In 2008, several failing banks were bailed out—partially using
taxpayer money. These are the worries out of which Bitcoin was first conceived and developed.

By spreading its operations across a network of computers, blockchain allows Bitcoin and other
cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also
eliminates many of the processing and transaction fees. It can also give those in countries with
unstable currencies or financial infrastructures a more stable currency with more applications and a
wider network of individuals and institutions with whom they can do business, both domestically and
internationally.

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Using cryptocurrency wallets for savings accounts or as a means of payment is especially profound
for those who have no state identification. Some countries may be war-torn or have governments that
lack any real infrastructure to provide identification. Citizens of such countries may not have access to
savings or brokerage accounts—and, therefore, no way to safely store wealth.

Healthcare

Healthcare providers can leverage blockchain to securely store their patients’ medical records. When
a medical record is generated and signed, it can be written into the blockchain, which provides
patients with the proof and confidence that the record cannot be changed. These personal health
records could be encoded and stored on the blockchain with a private key, so that they are only
accessible by certain individuals, thereby ensuring privacy.

Property Records

If you have ever spent time in your local Recorder’s Office, you will know that the process of recording
property rights is both burdensome and inefficient. Today, a physical deed must be delivered to a
government employee at the local recording office, where it is manually entered into the county’s
central database and public index. In the case of a property dispute, claims to the property must be
reconciled with the public index.

This process is not just costly and time-consuming—it is also prone to human error, where each
inaccuracy makes tracking property ownership less efficient. Blockchain has the potential to eliminate
the need for scanning documents and tracking down physical files in a local recording office. If
property ownership is stored and verified on the blockchain, owners can trust that their deed is
accurate and permanently recorded.

In war-torn countries or areas that have little to no government or financial infrastructure, and certainly
no Recorder’s Office, it can be nearly impossible to prove ownership of a property. If a group of
people living in such an area is able to leverage blockchain, then transparent and clear time lines of
property ownership could be established.

Smart Contracts

A smart contract is a computer code that can be built into the blockchain to facilitate, verify, or
negotiate a contract agreement. Smart contracts operate under a set of conditions to which users
agree. When those conditions are met, the terms of the agreement are automatically carried out.

Say, for example, that a potential tenant would like to lease an apartment using a smart contract. The
landlord agrees to give the tenant the door code to the apartment as soon as the tenant pays the
security deposit. Both the tenant and the landlord would send their respective portions of the deal to
the smart contract, which would hold onto and automatically exchange the door code for the security
deposit on the date when the lease begins. If the landlord doesn’t supply the door code by the lease
date, then the smart contract refunds the security deposit. This would eliminate the fees and
processes typically associated with the use of a notary, a third-party mediator, or attorneys.

Supply Chains

As in the IBM Food Trust example, suppliers can use blockchain to record the origins of materials that
they have purchased. This would allow companies to verify the authenticity of not only their products
but also common labels such as “Organic,” “Local,” and “Fair Trade.”

As reported by Forbes, the food industry is increasingly adopting the use of blockchain to track the
path and safety of food throughout the farm-to-user journey.

Voting

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As mentioned above, blockchain could be used to facilitate a modern voting system. Voting with
blockchain carries the potential to eliminate election fraud and boost voter turnout, as was tested in
the November 2018 midterm elections in West Virginia. Using blockchain in this way would make
votes nearly impossible to tamper with. The blockchain protocol would also maintain transparency in
the electoral process, reducing the personnel needed to conduct an election and providing officials
with nearly instant results. This would eliminate the need for recounts or any real concern that fraud
might threaten the election.

Pros and Cons of Blockchain

For all of its complexity, blockchain’s potential as a decentralized form of record keeping is almost
without limit. From greater user privacy and heightened security to lower processing fees and fewer
errors, blockchain technology may very well see applications beyond those outlined above. But there
are also some disadvantages.

Pros

 Improved accuracy by removing human involvement in verification

 Cost reductions by eliminating third-party verification

 Decentralization makes it harder to tamper with

 Transactions are secure, private, and efficient

 Transparent technology

 Provides a banking alternative and a way to secure personal information for citizens of
countries with unstable or underdeveloped governments

Cons

 Significant technology cost associated with mining bitcoin

 Low transactions per second

 History of use in illicit activities, such as on the dark web

 Regulation varies by jurisdiction and remains uncertain

 Data storage limitations

Benefits of Blockchains

Accuracy of the Chain

Transactions on the blockchain network are approved by a network of thousands of computers. This
removes almost all human involvement in the verification process, resulting in less human error and
an accurate record of information. Even if a computer on the network were to make a computational
mistake, the error would only be made to one copy of the blockchain. For that error to spread to the
rest of the blockchain, it would need to be made by at least 51% of the network’s computers—a near
impossibility for a large and growing network the size of Bitcoin’s.

Cost Reductions

Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to
perform a marriage. Blockchain eliminates the need for third-party verification—and, with it, their
associated costs. For example, business owners incur a small fee whenever they accept payments
using credit cards, because banks and payment-processing companies have to process those

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transactions. Bitcoin, on the other hand, does not have a central authority and has limited transaction
fees.

Decentralization

Blockchain does not store any of its information in a central location. Instead, the blockchain is copied
and spread across a network of computers. Whenever a new block is added to the blockchain, every
computer on the network updates its blockchain to reflect the change. By spreading that information
across a network, rather than storing it in one central database, blockchain becomes more difficult to
tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the
information, rather than the entire network, would be compromised.

Efficient Transactions

Transactions placed through a central authority can take up to a few days to settle. If you attempt to
deposit a check on Friday evening, for example, you may not actually see funds in your account until
Monday morning. Whereas financial institutions operate during business hours, usually five days a
week, blockchain is working 24 hours a day, seven days a week, and 365 days a year. Transactions
can be completed in as little as 10 minutes and can be considered secure after just a few hours. This
is particularly useful for cross-border trades, which usually take much longer because of time zone
issues and the fact that all parties must confirm payment processing.

Private Transactions

Many blockchain networks operate as public databases, meaning that anyone with an Internet
connection can view a list of the network’s transaction history. Although users can access details
about transactions, they cannot access identifying information about the users making those
transactions. It is a common misperception that blockchain networks like bitcoin are anonymous,
when in fact they are only confidential.

When a user makes a public transaction, their unique code—called a public key, as mentioned earlier
—is recorded on the blockchain. Their personal information is not. If a person has made a Bitcoin
purchase on an exchange that requires identification, then the person’s identity is still linked to their
blockchain address—but a transaction, even when tied to a person’s name, does not reveal any
personal information.

Secure Transactions

Once a transaction is recorded, its authenticity must be verified by the blockchain network.
Thousands of computers on the blockchain rush to confirm that the details of the purchase are
correct. After a computer has validated the transaction, it is added to the blockchain block. Each block
on the blockchain contains its own unique hash, along with the unique hash of the block before it.
When the information on a block is edited in any way, that block’s hash code changes—however, the
hash code on the block after it would not. This discrepancy makes it extremely difficult for information
on the blockchain to be changed without notice.

Transparency

Most blockchains are entirely open-source software. This means that anyone and everyone can view
its code. This gives auditors the ability to review cryptocurrencies like Bitcoin for security. This also
means that there is no real authority on who controls Bitcoin’s code or how it is edited. Because of
this, anyone can suggest changes or upgrades to the system. If a majority of the network users agree
that the new version of the code with the upgrade is sound and worthwhile, then Bitcoin can be
updated.

Banking the Unbanked

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Perhaps the most profound facet of blockchain and Bitcoin is the ability for anyone, regardless of
ethnicity, gender, or cultural background, to use it. According to The World Bank, nearly two billion
adults do not have bank accounts or any means of storing their money or wealth. 6 Nearly all of these
individuals live in developing countries, where the economy is in its infancy and entirely dependent on
cash. 

These people often earn a little money that is paid in physical cash. They then need to store this
physical cash in hidden locations in their homes or other places of living, leaving them subject to
robbery or unnecessary violence. Keys to a bitcoin wallet can be stored on a piece of paper, a cheap
cell phone, or even memorized if necessary. For most people, it is likely that these options are more
easily hidden than a small pile of cash under a mattress. 

Blockchains of the future are also looking for solutions to not only be a unit of account for wealth
storage but also to store medical records, property rights, and a variety of other legal contracts.

Drawbacks of Blockchains

Technology Cost

Although blockchain can save users money on transaction fees, the technology is far from free. For
example, the PoW system mentioned earlier, which the bitcoin network uses to validate transactions,
consumes vast amounts of computational power. In the real world, the power from the millions of
computers on the bitcoin network is close to what Denmark consumes annually.

Despite the costs of mining bitcoin, users continue to drive up their electricity bills to validate
transactions on the blockchain. That’s because when miners add a block to the bitcoin blockchain,
they are rewarded with enough bitcoin to make their time and energy worthwhile. When it comes to
blockchains that do not use cryptocurrency, however, miners will need to be paid or otherwise
incentivized to validate transactions.

Some solutions to these issues are beginning to arise. For example, bitcoin-mining farms have been
set up to use solar power, excess natural gas from fracking sites, or power from wind farms.

Speed and Data Inefficiency

Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s PoW system
takes about 10 minutes to add a new block to the blockchain. At that rate, it’s estimated that the
blockchain network can only manage about seven transactions per second (TPS). Although other
cryptocurrencies such as Ethereum perform better than bitcoin, they are still limited by blockchain.
Legacy brand Visa, for context, can process 24,000 TPS.

Solutions to this issue have been in development for years. There are currently blockchains that are
boasting more than 30,000 TPS.

The other issue is that each block can only hold so much data. The block size debate has been, and
continues to be, one of the most pressing issues for the scalability of blockchains going forward.

Illegal Activity

While confidentiality on the blockchain network protects users from hacks and preserves privacy, it
also allows for illegal trading and activity on the blockchain network. The most cited example of
blockchain being used for illicit transactions is probably the Silk Road, an online dark web illegal-drug
and money laundering marketplace operating from February 2011 until October 2013, when it was
shut down by the FBI.7 

The dark web allows users to buy and sell illegal goods without being tracked by using the Tor
Browser and make illegal purchases in Bitcoin or other cryptocurrencies. Current U.S. regulations
require financial service providers to obtain information about their customers when they open an

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account, verify the identity of each customer, and confirm that customers do not appear on any list of
known or suspected terrorist organizations. This system can be seen as both a pro and a con. It gives
anyone access to financial accounts but also allows criminals to more easily transact. Many have
argued that the good uses of crypto, like banking the unbanked world, outweigh the bad uses of
cryptocurrency, especially when most illegal activity is still accomplished through untraceable cash.

While Bitcoin had been used early on for such purposes, its transparent nature and maturity as a
financial asset has actually seen illegal activity migrate to other cryptocurrencies such as Monero and
Dash. Today, illegal activity accounts for only a very small fraction of all Bitcoin transactions.8

Regulation

Many in the crypto space have expressed concerns about government regulation over
cryptocurrencies. While it is getting increasingly difficult and near impossible to end something like
Bitcoin as its decentralized network grows, governments could theoretically make it illegal to own
cryptocurrencies or participate in their networks. 

This concern has grown smaller over time, as large companies like PayPal begin to allow the
ownership and use of cryptocurrencies on its platform.

What is a blockchain platform?

A blockchain platform allows users and developers to create novel uses of an existing blockchain
infrastructure. One example is Ethereum, which has a native cryptocurrency known as ether (ETH).
But the Ethereum blockchain also allows the creation of smart contracts and programmable tokens
used in initial coin offerings (ICOs), and non-fungible tokens (NFTs). These are all built up around the
Ethereum infrastructure and secured by nodes on the Ethereum network.

How many blockchains are there?

The number of live blockchains is growing every day at an ever-increasing pace. As of 2021, there
are more than 10,000 active cryptocurrencies based on blockchain, with several hundred more non-
cryptocurrency blockchains.9

What’s the difference between a private blockchain and a public blockchain?

A public blockchain, also known as an open or permissionless blockchain, is one where anybody can
join the network freely and establish a node. Because of its open nature, these blockchains must be
secured with cryptography and a consensus system like proof of work (PoW).

A private or permissioned blockchain, on the other hand, requires each node to be approved before
joining. Because nodes are considered to be trusted, the layers of security do not need to be as
robust.

Who invented blockchain?

Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two
mathematicians who wanted to implement a system where document time stamps could not be
tampered with. In the late 1990s, cypherpunk Nick Szabo proposed using a blockchain to secure a
digital payments system, known as bit gold (which was never implemented).

What’s next for blockchain?

With many practical applications for the technology already being implemented and explored,
blockchain is finally making a name for itself at age 27, in no small part because of bitcoin and
cryptocurrency. As a buzzword on the tongue of every investor in the nation, blockchain stands to
make business and government operations more accurate, efficient, secure, and cheap, with fewer
middlemen.

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As we prepare to head into the third decade of blockchain, it’s no longer a question of if legacy
companies will catch on to the technology—it’s a question of when. Today, we see a proliferation of
NFTs and the tokenization of assets. The next decades will prove to be an important period of growth
for blockchain.

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