What Is A Blockchain?

A blockchain is a kind of database invented in 2008 that stores and secures information in sequential blocks. Unlike the case with traditional databases, a blockchain’s contents are not kept on a single server. Instead, a copy of the entire database is recorded and stored in each computer, or node, operating the network. Anyone in the world can operate a node if they want to. What’s more, blockchains are fully transparent for anyone to monitor and verify.

Blocks of data are chained together by a network of miners or validators. Miners are most commonly associated with BitcoinBTC
, where participants enlist powerful computers in a race to solve a complex mathematical problem to earn bitcoin. Validators typically refer to participants on blockchains where operators post digital asset holdings as collateral in exchange for the right to add transactions to the blockchain and earn rewards in kind. You can think of either process as updating a database. These decentralized setups are intended to make blockchains more secure than traditional databases, which are often plagued by what is known as a single point of failure. One compromised login, for example, can give an attacker access to the entire kingdom.

Blockchains come with tradeoffs. The validating process can make some chains slow. For example, the Bitcoin network can process 4.6 transactions a second while Visa’sV
rate is 1,700. Right now, EthereumETH
can only handle a dozen or so. Many developers are working on ways to achieve faster processing times, and some newer platforms such as SolanaSOL
, CardanoADA
and AlgorandALGO
claim to be able to handle thousands of transactions a second. Still, centralized solutions are faster on the whole.

Why Use A Blockchain?

That brings us to the next question. Why would anyone need a decentralized database? It depends on the problem that you are looking to solve and how that aligns with a blockchain’s characteristics. A common tradeoff is that blockchains sacrifice speed and efficiency for security, transparency and decentralization. Putting your company’s transaction information on a blockchain won’t be the best option when you can update an Excel file or collaborate with coworkers on a Google Drive.

Blockchains’ biggest advantage is replacing intermediaries. Public administrators, bankers and lawyers may someday all find themselves out of work because of blockchains.

Let’s look at bitcoin, for example. People with reliable banking infrastructure often don’t see the need for decentralized money. In countries with hyperinflating currencies and inaccessible or corrupt banking systems, however, bitcoin can preserve savings simply by being money that does not rely on governments or banks for minting, transfer, and access. Add smart-contract-based infrastructure, and blockchains can replicate the traditional banking system in a decentralized and permissionless way.

Another example, one with growing popularity today, is non-fungible tokens (NFTs) displacing intermediaries in digital art. As opposed to working through dealers, artists can register their work directly on a blockchain and post it to an NFT marketplace. Ownership is verified on the blockchain and transferred to the highest bidder through a smart contract. Not only does going direct to the consumer increase artists’ profit margins, but they can program a royalty to be paid to their digital wallets every time a work is resold. Many different kinds of content creators can benefit from the ability to transfer digital ownership of intellectual property via blockchains.

What About Private Blockchains?

Most people think of digital assets such as bitcoin and ethereum when they hear the word blockchain. That’s because public blockchains are supported by network participants who are compensated with each network’s token. What if users want the security and transparency of a blockchain but don’t need the decentralization or tokens to encourage behavior?

Private blockchains are used to upgrade conventional corporate systems. Shipping and logistics giant Maersk uses blockchain technology to track supply chains and process marine insurance claims. BoeingBA
uses a blockchain-enabled air-traffic-control system to communicate with and track drones. Honeywell maintains transparency with blockchained aircraft records. New York-based signature bank offers a blockchain-based 24/7/365 instantaneous payment system based on a privatized version of Ethereum to help clients move funds around the world in an instant.

The Future of Blockchain

No one knows what the future holds, but there are several developments that give us insight into what blockchains will look like years from now. For one thing, they will get better and faster over time. The public blockchain industry is also working hard on interoperability, or the ability of different blockchains to talk to one another, and friendlier user interfaces for decentralized applications.

Second, there are historic parallels between blockchain and the early Internet. Private blockchains are kind of like the “intranet” idea, compared with public blockchains. Time will tell if one or both survive. Blockchain tokens are also subject to speculative bubbles as investors try to find the next AmazonAMZN
and avoid the next Pets.com.

Blockchain is here to stay. We can know who is who and who owns what without relying on a single party to clear transactions or update its database. Blockchains may be part of our daily lives in the near future.