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What is a blockchain? The technology behind cryptocurrencies explained



SUMMARY


Blockchain technology is a distributed ledger that connects a decentralized network through which users can send transactions and create applications without the need for a central authority or server. Blockchain is the foundation for networks such as Bitcoin and Ethereum, as well as thousands of applications that are useful and add value in industries as diverse as finance, fashion, and gaming. With continued innovation, blockchain could be a foundational technology for our digital future.



CONTENT

  • Blockchain technology explained

  • Key features of blockchain technology

  • Industries that benefit from blockchain networks

  • Concerns related to blockchain technology



BLOCKCHAIN TECHNOLOGY EXPLAINED


In simple terms, a blockchain is a shared ledger of data - e.g. transactions or code - that is aggregated into blocks, verified, and then accepted as part of the blockchain by a network of distributed users through a consensus mechanism. Since each verified block of data contains a unique signature of the data in the previous block, they are inextricably linked to form a "blockchain". A network-based consensus mechanism is the way a blockchain protocol agrees on how its underlying technical architecture should work.


The decentralized nature of blockchain networks makes industries like cryptocurrencies and decentralized finance (DeFi) possible - as Bitcoin and Ethereum prove - and supports thousands of applications across the spectrum of business and human interaction.


Blockchain networks are powered by systems with aligned incentives. A well-functioning public blockchain requires a community of users, node operators, developers, and miners who all play a role in a mutually beneficial network ecosystem. Example: In many blockchain networks, rewards such as newly minted cryptocurrency or transaction fees motivate network participants to compete with each other in validating transactions and creating new blocks. This incentive and validation structure also protects the network from criminal or fraudulent activity.


The intellectual roots of blockchain can be traced back to cryptographers in the early 1980s. However, the modern blockchain industry began with Bitcoin, a peer-to-peer (P2P) protocol for digital payments released in January 2009 by pseudonymous creator Satoshi Nakamoto. Derived from Bitcoin, Bitcoin (BTC) is the largest cryptocurrency by market capitalization and the best-known application of blockchain technology. Ethereum, launched in 2015, is the second largest cryptocurrency by market capitalization and has further developed the technology. Ethereum builds on the basic principles of Bitcoin's blockchain technology with a different goal: to support an ecosystem of decentralized applications (dApps), platforms, and digital assets.


There are different types of blockchains, each suitable for different use cases. Bitcoin and Ethereum, for example, are public blockchains that, as open source software, allow anyone to use or build upon their technology without the need for a trusted third party to facilitate transactions. Alternatively, there are private blockchains that restrict participation in the network through a system of permissions and are often used by companies that want to make their internal company processes more efficient.



KEY FEATURES OF BLOCKCHAIN TECHNOLOGY


Blockchain relies on a decentralized network of users to validate and record transactions, rather than a central authority. This feature makes blockchain transactions constant, fast, secure, inexpensive, and tamper-proof.

  • Constant: Blockchain networks operate globally and around the clock.

  • Fast: Transactions are transmitted directly from the sender to the recipient without the need for one or more intermediaries.

  • Secure: The distributed network of nodes underlying a blockchain provides collective security against hacks and failures.

  • Cost-effective: Without centralized, rent-seeking intermediaries, blockchain platforms operate at a lower cost.

  • Tamper-proof: Data is transparent and cannot be altered once it is time-stamped on the ledger. Likewise, anyone can view the transactions on public blockchain networks.


INDUSTRIES THAT BENEFIT FROM BLOCKCHAIN NETWORKS


Blockchain technology has proven useful for a wide range of industries - from finance to supply chain and real estate to gambling. By using smart contracts - i.e. self-executing code stored and accessible on an immutable blockchain - businesses and individuals can avoid the costs and often ambiguities associated with conducting routine business with third parties.


Blockchain technology is also well suited to payments, as demonstrated by Bitcoin, Bitcoin Cash (BCH), Litecoin (LTC), and numerous other cryptocurrencies that focus on payments. Blockchain is in many ways more efficient and globally accessible than traditional third-party payment providers.


In addition, industries that rely on efficient and secure data ownership and control mechanisms, such as healthcare, the Internet of Things (IoT), and digital identity, are finding new innovative solutions based in large part on blockchain network protocols. Through public-key cryptography - where users are given a public key to receive transactions and a private key to send transactions - blockchains allow users to remain pseudonymous and the transmission of data to remain secure.



CONCERNS RELATED TO BLOCKCHAIN TECHNOLOGY


Nevertheless, blockchains are not entirely immune to hacks or centralized control, especially in the absence of a robust ecosystem of network participants or a proven consensus mechanism. Blockchains also differ in their level of decentralization and throughput - the amount of data they can process in a given period of time. Much of the attention is on solving the so-called blockchain trilemma - balancing and maximizing scalability, decentralization, and security in one network.


Other concerns about blockchain touch on environmental issues. For example, the proof-of-work (PoW) consensus mechanism typically requires huge amounts of electricity to operate. Other concerns relate to technological complexity and the intimidation factor that blockchain technology can pose to companies and individuals, respectively.


The rapid emergence of cryptocurrencies on the global financial stage was only the first step on the road to making blockchain technology an integral part of the economy and our daily lives. More and more industries are experimenting with the technology, and more and more people are learning about the benefits and advantages that Blockchain-based products and services can bring to their daily lives. The growth of the blockchain industry shows no signs of slowing down, and the technology holds great promise to become part of the digital architecture of our world in the future or to supplant it altogether.

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