What Is a Blockchain?

A blockchain is a distributed database or ledger shared across a computer

network's nodes. They are best known for their crucial role in cryptocurrency
systems, maintaining a secure and decentralized record of transactions, but they
are not limited to cryptocurrency uses. Blockchains can be used to make data in
any industry immutable—meaning it cannot be altered.

Since a block can’t be changed, the only trust needed is at the point where a user
or program enters data. This reduces the need for trusted third parties, such as
auditors or other humans, who add costs and can make mistakes.

Since Bitcoin's introduction in 2009, blockchain uses have exploded via the
creation of various cryptocurrencies, decentralized finance
(DeFi) applications, non-fungible tokens (NFTs), and smart contracts.

Key Takeaways

 Blockchain is a type of shared database that differs from a typical

database in the way it stores information; blockchains store data in blocks
linked together via cryptography.

 Different types of information can be stored on a blockchain, but the most

common use has been as a transaction ledger.

 In Bitcoin’s case, the blockchain is decentralized, so no single person or

group has control—instead, all users collectively retain control.

 Decentralized blockchains are immutable, which means that the data

entered is irreversible. For Bitcoin, transactions are permanently recorded
and viewable to anyone.
Investopedia / Xiaojie Liu

How Does a Blockchain Work?

You might be familiar with spreadsheets or databases. A blockchain is

somewhat similar because it is a database where information is entered and
stored. The key difference between a traditional database or spreadsheet and a
blockchain is how the data is structured and accessed.

A blockchain consists of programs called scripts that conduct the tasks you
usually would in a database: entering and accessing information, and saving and
storing it somewhere. A blockchain is distributed, which means multiple copies
are saved on many machines, and they must all match for it to be valid.

The Bitcoin blockchain collects transaction information and enters it into a 4MB
file called a block (different blockchains have different size blocks). Once the
block is full, the block data is run through a cryptographic hash function, which
creates a hexadecimal number called the block header hash.

The hash is then entered into the following block header and encrypted with the
other information in that block's header, creating a chain of blocks, hence the
name “blockchain.”

Transaction Process

Transactions follow a specific process, depending on the blockchain. For

example, on Bitcoin's blockchain, if you initiate a transaction using
your cryptocurrency wallet—the application that provides an interface for the
blockchain—it starts a sequence of events.

In Bitcoin, your transaction is sent to a memory pool, where it is stored and

queued until a miner picks it up. Once it is entered into a block and the block
fills up with transactions, it is closed, and the mining begins.
Every node in the network proposes its own blocks in this way because they all
choose different transactions. Each works on their own blocks, trying to find a
solution to the difficulty target, using the "nonce," short for number used once.

The nonce value is a field in the block header that is changeable, and its value
incrementally increases with every mining attempt. If the resulting hash isn't
equal to or less than the target hash, a value of one is added to the nonce, a new
hash is generated, and so on. The nonce rolls over about every 4.5 billion
attempts (which takes less than one second) and uses another value called the
extra nonce as an additional counter. This continues until a miner generates a
valid hash, winning the race and receiving the reward.

Generating these hashes until a specific value is found is the "proof-of-work"

you hear so much about—it "proves" the miner did the work. The sheer amount
of work it takes to validate the hash is why the Bitcoin network consumes so
much computational power and energy.

Once a block is closed, a transaction is complete. However, the block is not

considered confirmed until five other blocks have been validated. Confirmation
takes the network about one hour to complete because it averages just under 10
minutes per block (the first block with your transaction and five following
blocks multiplied by 10 equals 60 minutes).

Not all blockchains follow this process. For instance, the Ethereum network
randomly chooses one validator from all users with ether staked to validate
blocks, which are then confirmed by the network. This is much faster and less
energy intensive than Bitcoin's process.

Blockchain Decentralization

A blockchain allows the data in a database to be spread out among several

network nodes—computers or devices running software for the blockchain—at
various locations. This creates redundancy and maintains the fidelity of the data.
For example, if someone tries to alter a record on one node, the other nodes
would prevent it from happening by comparing block hashes. This way, no
single node can alter information within the chain.

Because of this distribution—and the encrypted proof that work was done—the
blockchain data, such as transaction history, becomes irreversible. Such a record
could be a list of transactions, but private blockchains can also hold a variety of
other information like legal contracts, state identifications, or a company's
inventory. Most blockchains wouldn't "store" these items directly; they would
likely be sent through a hashing algorithm and represented on the blockchain by
a token.

Blockchain Transparency

Because of the decentralized nature of the Bitcoin blockchain, all transactions

can be transparently viewed by downloading and inspecting them or by
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 a
bitcoin wherever it goes.

For example, exchanges have been hacked in the past, resulting in the loss of
large amounts of cryptocurrency. While the hackers may have been anonymous
—except for their wallet address—the crypto they extracted is easily traceable
because the wallet addresses are stored on the blockchain.

Of course, the records stored in the Bitcoin blockchain (as well as most others)
are encrypted. This means that only the person assigned an address can reveal
their identity. As a result, blockchain users can remain anonymous while
preserving transparency.

Is Blockchain Secure?

Blockchain technology achieves decentralized security and trust in several ways.

To begin, 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, previous blocks cannot be altered.

A change in any data changes the hash of the block it was in. Because each
block contains the previous block's hash, a change in one would change the
following blocks. The network would generally reject an altered block because
the hashes would not match. However, a change can be accomplished on smaller
blockchain networks.

Not all blockchains are 100% impenetrable. They are distributed ledgers that
use code to create the security level they have become known for. If there are
vulnerabilities in the coding, they can be exploited.

A new and smaller chain might be susceptible to this kind of attack, but the
attacker would need at least half of the computational power of the network (a
51% attack). On the Bitcoin and other larger blockchains, this is nearly
impossible. By the time the hacker takes any action, the network is likely to
have moved past the blocks they were trying to alter. This is because the rate at
which these networks hash is exceptionally rapid—the Bitcoin network hashed
at a rate of around 640 exahashes per second (18 zeros) as of September 2024.1

The Ethereum blockchain is not likely to be hacked either—again, the attackers

would need to control more than half of the blockchain's staked ether. As of
September 2024, over 33.8 million ETH has been staked by more than one
million validators.2 An attacker or a group would need to own over 17 million
ETH, and be randomly selected to validate blocks enough times to get their
blocks implemented.3

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
timestamps could not be tampered with.4 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.

Bitcoin

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.”5

The key thing to understand is that Bitcoin uses blockchain as a means to

transparently record a ledger of payments or other transactions between parties.

Blockchain

Blockchain can be used to immutably record any number of data points. The
data can be 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

various 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. For example, a voting system could work such that
each country's citizens would be issued a single cryptocurrency or token.
Each candidate could then be given a specific wallet address, and the voters
would send their token or crypto to the address of whichever candidate they
wish to vote for. The transparent and traceable nature of blockchain would
eliminate 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 a disruptive force in the finance sector,

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 blockchain implementation.

How Are Blockchains Used?

As we now know, blocks on Bitcoin’s blockchain store transactional data.

Today, tens of thousands of other cryptocurrencies run on a blockchain. But it
turns out that blockchain can be a reliable way to store other types of data as
well.

Some companies experimenting with blockchain include Walmart, Pfizer, AIG,

Siemens, and Unilever, among others. For example, IBM has created its Food
Trust blockchain to trace the journey that food products take to get to their
locations.6

Why do this? The food industry has seen countless outbreaks of E. coli,
salmonella, and listeria; in some cases, hazardous materials were 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 allows brands to track a food product’s route from its origin,
through each stop it makes, to delivery. 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—potentially saving lives. This
is one example of blockchain in practice, but many other forms of blockchain
implementation exist or are being experimented with.

Banking and Finance

Perhaps no industry stands to benefit from integrating blockchain into its

business operations more than personal 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 the money in your account.

Even if you 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 might see their transactions

processed in minutes or seconds—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. Given the sums involved, even the few days the money is
in transit can carry significant costs and risks for banks.

The settlement and clearing process for stock traders can take up to three days
(or longer if trading internationally), meaning that the money and shares are
frozen for that period. Blockchain can, in theory, drastically reduce that time.

Currency

Blockchain forms the bedrock for cryptocurrencies like Bitcoin. This design also
allows for easier cross-border transactions because it bypasses currency
restrictions, instabilities, or lack of infrastructure by using a distributed network
that can reach anyone with an internet connection.

Healthcare

Healthcare providers can leverage blockchain to store their patients’ medical

records securely. When a medical record is generated and signed, it can be
written into the blockchain, which provides patients with 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 to specific individuals, thereby ensuring privacy.

Property Records

If you have ever spent time in your local Recorder’s Office, you will know that
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.

Proving property ownership can be nearly impossible in war-torn countries or

areas with little to no government or financial infrastructure and no Recorder’s
Office. If a group of people living in such an area can leverage blockchain, then
transparent and clear timelines of property ownership could be maintained.

Smart Contracts

A smart contract is computer code that can be built into the blockchain to
facilitate transactions. It operates under a set of conditions to which users agree.
When those conditions are met, the smart contract conducts the transaction for
the users.

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.7

Voting

As mentioned above, blockchain could 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.8

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 some blockchains

 Low number of 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 thousands of

computers and devices. This removes almost all people from 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 and not be accepted by
the rest of the network.

Cost Reductions
Typically, consumers pay a bank to verify a transaction or a notary to sign a
document. Blockchain eliminates the need for third-party verification—and,
with it, their associated costs. For example, business owners incur a small fee
when they accept credit card payments because banks and payment-processing
companies have to process those 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 significantly more difficult to tamper
with.

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. Financial
institutions operate during business hours, usually five days a week—but a
blockchain runs 24 hours a day, seven days a week, and 365 days a year.

On some blockchains, transactions can be completed and considered secure in

minutes. 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 anyone with an

internet connection can view a list of the network’s transaction history.
Although users can access transaction details, they cannot access identifying
information about the users making those transactions. It is a common
misperception that blockchain networks like Bitcoin are fully anonymous; they
are actually pseudonymous because there is a viewable address that can be
associated with a user if the information gets out.

Secure Transactions
Once a transaction is recorded, its authenticity must be verified by the
blockchain network. After the transaction is validated, it is added to the
blockchain block. Each block on the blockchain contains its unique hash and the
unique hash of the block before it. Therefore, the blocks cannot be altered once
the network confirms them.

Transparency

Many blockchains are entirely open source. This means that everyone can view
its code. This gives auditors the ability to review cryptocurrencies like Bitcoin
for security. However, it also means 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.

Private or permission blockchains may not allow for public transparency,

depending on how they are designed or their purpose. These types of
blockchains might be made only for an organization that wishes to track data
accurately without allowing anyone outside of the permissioned users to see it.

Alternatively, there might come a point where publicly traded companies are
required to provide investors with financial transparency through a regulator-
approved blockchain reporting system. Using blockchains in business
accounting and financial reporting would prevent companies from altering their
financials to appear more profitable than they really are.

Banking the Unbanked

Perhaps the most profound facet of blockchain and cryptocurrency is the ability
for anyone, regardless of ethnicity, gender, location, or cultural background, to
use it. According to The World Bank, an estimated 1.4 billion adults do not have
bank accounts or any means of storing their money or wealth.9 Moreover, nearly
all of these individuals live in developing countries where the economy is in its
infancy and entirely dependent on cash.

These people are often paid in physical cash. They then need to store this
physical cash in hidden locations in their homes or other places, incentivizing
robbers or violence. While not impossible to steal, crypto makes it more difficult
for would-be thieves.

Drawbacks of Blockchains
Technology Cost

Although blockchain can save users money on transaction fees, the technology
is far from free. For example, the Bitcoin network's proof-of-work system to
validate transactions consumes vast amounts of computational power. In the real
world, the energy consumed by the millions of devices on the Bitcoin network is
more than the country of Pakistan consumes annually.10

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 energy from wind farms.

Speed and Data Inefficiency

Bitcoin is a perfect case study of the vinefficiencies 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).11 Although other cryptocurrencies, such as
Ethereum, perform better than Bitcoin, the complex structure of blockchain still
limits them. Legacy brand Visa, for context, can process 65,000 TPS.12

Solutions to this issue have been in development for years. There are currently
blockchain projects that claim tens of thousands of TPS. Ethereum is rolling out
a series of upgrades that include data sampling, binary large objects (BLOBs),
and rollups. These improvements are expected to increase network participation,
reduce congestion, decrease fees, and increase transaction speeds.13

The other issue with many blockchains 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 in the future.

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 the FBI shut it down.14

The dark web allows users to buy and sell illegal goods without being tracked by
using the Tor Browser and make illicit purchases in Bitcoin or other
cryptocurrencies. This is in stark contrast to U.S. regulations, which require
financial service providers to obtain information about their customers when
they open an account. They are supposed to verify the identity of each customer
and confirm that they do not appear on any list of known or suspected terrorist
organizations.15

Illicit activity accounted for only 0.34% of all cryptocurrency transactions in

2023.16

This system can be seen as both a pro and a con. It gives anyone access to
financial accounts, but allows criminals to transact more easily. Many have
argued that the good uses of crypto, like banking the unbanked, outweigh the
bad uses of cryptocurrency, especially when most illegal activity is still
accomplished through untraceable cash.

Public perception of blockchain and cryptocurrencies, in particular, remains

uneasy. High-profile collapses of once-trusted cryptocurrency brokers, such
as Mt. Gox back in 2014, or FTX in November 2022, persistence of
various crypto scams, and general skepticism towards new technology and its
bold promises, all contribute to ongoing public skepticism about a decentralized
future. As of 2024, 44% of Americans still say they will never purchase a
cryptocurrency.17

Regulation

Many in the crypto space have expressed concerns about government regulation
of cryptocurrencies. Several jurisdictions are tightening control over certain
types of crypto and other virtual currencies. However, no regulations have yet
been introduced that focus on restricting blockchain uses and development, only
certain products created using it.

Data Storage

Another significant implication of blockchains is that they require storage. This

may not appear to be substantial because we already store lots of information
and data. However, as time passes, the growing blockchain use will require
more storage, especially on blockchains where nodes store the entire chain.

Currently, data storage is centralized in large centers. But if the world transitions
to blockchain for every industry and use, its exponentially growing size would
require more advanced techniques to make storage more efficient, or force
participants to continually upgrade their storage.
This could become significantly more expensive in terms of both money and
physical space needed, as the Bitcoin blockchain itself was over 600 gigabytes
as of September 15th, 2024—and this blockchain records only bitcoin
transactions.18 This is small compared to the amount of data stored in large data
centers, but a growing number of blockchains will only add to the amount of
storage already required for the digital world.19

What Exactly Is a Blockchain?

Simply put, a blockchain is a shared database or ledger. Bits of data are stored in
files known as blocks, and each network node has a replica of the entire
database. Security is ensured since the majority of nodes will not accept a
change if someone tries to edit or delete an entry in one copy of the ledger.

What Is a Blockchain in Easy Terms?

Imagine you typed some information into a document on your computer and
sent it through a program that gave you a string of numbers and letters (called
hashing, with the string called a hash). You add this hash to the beginning of
another document and type information into it. Again, you use the program to
create a hash, which you add to the following document. Each hash is a
representation of the previous document, which creates a chain of encoded
documents that cannot be altered without changing the hash. Each document is
stored on computers in a network. This network of programs compares each
document with the ones they have stored and accepts them as valid based on the
hashes they generate. If a document doesn't generate a hash that is a match, that
document is rejected by the network.

What Is a Blockchain for Beginners?

A blockchain is a distributed network of files chained together using programs

that create hashes, or strings of numbers and letters that represent the
information contained in the files. Every network participant is a computer or
device that compares these hashes to the one they generate. If there is a match,
the file is kept. If there isn't, the file is rejected.

The Bottom Line

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

As we 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. Tomorrow,
we may see a combination of blockchains, tokens, and artificial intelligence all
incorporated into business and consumer solutions.

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