Blockchain Fact: What Is it, How It Works, and How It can be Used

What Is a Blockchain?

A blockchain is a distributed database or ledger shared among a computer network's

nodes. They are best known for their crucial role in cryptocurrency systems for
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—the term used to describe the inability to be altered. Because there is no
way to change a block, the only trust needed is at the point where a user or program
enters data. This aspect reduces the need for trusted third parties, which are usually
auditors or other humans that add costs and make mistakes.

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. But 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

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be valid. The blockchain collects transaction information and enters it into a block,
like a cell in a spreadsheet containing information. Once it is full, the information is
run through an encryption algorithm, which creates a hexadecimal number called the
hash. The hash is then entered into the following block header and encrypted with the
other information in the block. This creates a series of blocks that are chained
together.

Transaction Process

Transactions follow a specific process, depending on the blockchain they are taking
place on. 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 or validator picks it up.
Once it is entered into a block and the block fills up with transactions, it is closed and
encrypted using an encryption algorithm. Then, the mining begins.

Blockchain Decentralization

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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 not only creates redundancy but maintains the fidelity of the data. For
example, if someone tries to alter a record at one instance of the database, the other
nodes would prevent it from happening. This way, no single node within the network
can alter information held within it.

Because of this distribution—and the encrypted proof that work was done—the
information and history (like the transactions in 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 inventory.

Blockchain Transparency

Because of the decentralized nature of the Bitcoin 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 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 are easily traceable because the
wallet addresses are published 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 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, previous blocks cannot be changed.

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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 reject an altered block because the hashes would not
match.

For instance, imagine that a hacker runs a node on a blockchain network and wants
to alter a blockchain and steal cryptocurrency from everyone else. If they were to
change their copy, they would have to convince the other nodes that their copy was
the valid one.

They would need to control a majority of the network to do this and insert it at just
the right moment. This is known as a 51% attack because you need to control more
than 50% of the network to attempt it.

Timing would be everything in this type of attack—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 fast—the
Bitcoin network hashed at 348.1 exahashes per second (18 zeros) on April 21, 2023.

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. 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.”

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.

How Are Blockchains Used?

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

more than 23,000 other cryptocurrency systems are running on a blockchain. But it
turns out that blockchain is a reliable way of storing data about other types of
transactions.
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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.

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.

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 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 size of 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 could drastically reduce that time.

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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.

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 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 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.

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In war-torn countries or areas with little to no government or financial infrastructure
and no Recorder’s Office, proving property ownership can be nearly impossible. If a
group of people living in such an area can leverage blockchain, then transparent and
clear timelines of property ownership could be established.

Smart Contracts

A smart contract is a computer code that can be built into the blockchain to facilitate
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. The smart
contract would automatically send the door code to the tenant when it was paid. It
could also be programmed to change the code if rent wasn't paid or other conditions
were met.

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

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.
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.

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