As a newbie to the world of crypto, the jargon can initially be overwhelming and hard to follow. Related and yet distinct terms are sometimes used interchangeably, and when used correctly, are often glossed over to get to the harder stuff. But dw, we got you.

‍Pros And Cons Of Blockchain Technology

Pros:

• Equal Access
• Increased Security
• Transparency

Cons:

• Learning Curve
• High Energy Costs
• Government Regulations

Defining Blockchain

So what exactly is blockchain? Blockchain is a digital, decentralized and public ledger used to record transactions. It gets its name from the shape in which the information is stored: a chain of data-filled blocks that are strung together one by one. Easy enough so far, right? While blockchain technology has gained momentum through its ability to support cryptocurrencies, it has other use cases in industrial supply chains, such as the food industry (imagine being able to trace exactly where an ingredient in your burger patty comes from).  

Blockchain technology is so innovative because it is a decentralized, secure and transparent way to store and share information. 

Why Was Blockchain Created?

Research scientists Stuart Haber and W. Scott Stornetta first proposed this idea in 1991 as a solution to the tampering or altering of digital documents. They achieved this by including a timestamp on every new document or piece of information coming in, which permanently writes it into a timeline.  

They were also behind the groundbreaking idea of storing data on a chain of cryptographically secured blocks. Once a block is filled with information, it is then chained to the previous block and becomes part of the blockchain. Some blockchains are immutable, meaning once validated, transaction data cannot be altered. This unique structure is what makes blockchain so secure and impenetrable.

How Does It work?

Decentralization

One thing that comes up a LOT in the crypto world is decentralization. Most blockchains, notably the Bitcoin network, are decentralized ledgers. What we mean by this is that there is no central authority figure managing the ledger. It is important to note that centralized blockchains do also exist but are less important (for the purposes of this article).

Let’s use Bitcoin as a case study. Bitcoin is a cryptocurrency (the first actually), which means it’s a digital or virtual currency, secured by powerful cryptography. Bitcoin uses blockchain technology to record transactions in a transparent and secure way. Nearly all major cryptocurrencies, including Ethereum, Litecoin, and Bitcoin Cash, are powered by blockchain technology.

The custodians of the Bitcoin network are called nodes. The computers, or nodes, supporting the decentralized Bitcoin network are distributed across the globe. Each node is linked together in a peer-to-peer (P2P) network, meaning that each node can feed info to or take info from another node. This allows cryptocurrency transactions to occur on the blockchain without the need for an intermediary or central server. It also means anyone can run their device as a node.  

The nodes make sure that each transaction happens properly. Every node has its own complete copy of the Bitcoin blockchain with a record of all past transactions, which allows for cross-referencing in case of errors - it also protects against the double-spend problem that may occur on other ledger systems. As a result, no single node can alter information without being detected or approved by the majority. And the network is consistently working to verify and secure the blockchain.

But how do nodes agree on what gets added to the blockchain? Every new cryptocurrency transaction must be approved before being added. This is achieved through consensus algorithms that allow all the devices on a distributed network to sync up. There are several types of consensus algorithms, including Proof-of-Work, Proof-of-Stake, and Proof-of-Authority.

The Bitcoin network uses Proof-of-Work (PoW) as its consensus algorithm. While the technology itself is older than Bitcoin, its use for cryptocurrencies began after Satoshi Nakamoto proposed it in his 2008 Bitcoin whitepaper. In PoW, nodes called miners hash new block data until a valid solution is found. Hashing is the process of generating a fixed-size value (output) from a string of characters (input). In crypto, this process is called (you guessed it) mining.  

Once a miner finds a valid hash (one that meets the specific requirements set by the protocol), the new block is shared with the entire network. If validated, this new block is then added to all copies of the blockchain.

Security

While critics often harp about the potential risks of entering the crypto space, blockchain technology is in fact very secure because of its decentralized structure. The Bitcoin network has never been successfully hacked. When we leave our money to a bank or other centralized organization, we are trusting it will be kept safe. Blockchain on the other hand was designed to be trustless, meaning all stakeholders can use it without needing to rely on any other user. This is because blockchain is a public ledger, and all transactions must be verified by the entire network.

As we’ve already seen, blocks are chronologically ordered, and each block has a timestamp. It also has a “hash” (a unique code of letters and numbers used to identify it) along with the hash of the previous block. So even if a block were to be hacked, it would immediately stand out and be quickly cast aside.

To successfully hack into a blockchain, the hacker would have to control the majority of the network. This means having access to and changing 51% of the blockchain copies to a new approved chain - while this is technically possible, it would require massive amounts of energy and money. It would also be against the hacker’s interests, as the invalid version of the blockchain and the asset itself would soon decrease in value. The economic incentives for keeping the blockchain secure thus far outweigh the gains from attacking it.

Transparency

We’ve briefly touched on this, but we’ll say it again: most blockchains are transparent. This means the transactions are continually being updated and are available to the public. As a result, the movement of assets is traceable and accessible. It also prevents data manipulation and allows the details and terms of every transaction to be fully visible and irreversible. This transparency is what makes blockchain technology appealing for a number of different industries.  

Interestingly, while blockchain is public and open-source, it also provides increased privacy. Unlike in traditional finance, cryptocurrency transactions do not require you to provide personal information. This can protect users from identity theft or hacks.

Takeaways

Blockchain technology is revolutionary because it is an immutable, decentralized, and transparent ledger system. It prioritizes equal access, as anyone can participate and view transactions that are taking place. Blockchain is also highly secure due to its underlying structure, making hacking it both unappealing and virtually impossible.

Many cryptocurrencies are built using blockchain technology. Some of them, like Bitcoin, use blockchain purely as a digital ledger to store and transfer value. Ethereum, the second-largest cryptocurrency (by market cap), uses blockchain instead as a platform for decentralized applications (dApps). These apps provide a range of services, from trading and fundraising to gaming.

There are some challenges surrounding the use of blockchain worth mentioning here. Most major cryptocurrencies use PoW as their consensus algorithm, which consumes a lot of energy. This environmental concern is being addressed by the adoption of other consensus algorithms (Ethereum 2.0) and the exploration of more sustainable energy sources. Blockchain’s steep learning curve and complexity can also stand in the way of widespread adoption. Not to mention central authorities nervously looking to regulate the crypto space as its ecosystem grows.  

However, blockchain and the protocols it supports are becoming increasingly recognized by and essential to global finance and technology. Now comfortably settling into its 40th year, blockchain is undoubtedly here to stay.