What is Blockchain Technology?

Widely hailed as one of the most pivotal innovations of the 21st century, blockchain technology is well on its way to disrupting the very notions of money, ownership, governance, and more. 

Since the advent of the first blockchain (the Bitcoin blockchain) in 2008, the blockchain landscape has exploded with innovation, and there is now a diverse array of different blockchains in operation, creating a broader blockchain landscape beyond bitcoin. Most of these are publicly available, but there are also private blockchains that have been tailored toward a specific use case. 

But what exactly is blockchain? And how are they being used today? In this lesson, we’ll provide an introduction to the technology, and examine how its unique properties are being used to power entire new industries. By the end of this lesson you should be able to explain what a blockchain is and list out its key properties and general uses.

What is a Blockchain?

A blockchain is a simple database that is stored and managed by a large number of specialized computers running blockchain software, known as nodes. Unlike a regular database, information that has been added to a blockchain cannot be deleted or changed — it can only be extended in one direction with additional information (in the form of blocks). 

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Blockchains are arranged as a string of blocks, each of which is comprised of a bundle of transactions that have been submitted to the network by its users. These blocks are linked together into a chain in chronological order — hence the term blockchain (block-chain). Transactions include anything that sends or requests data to/from the blockchain and can include smart contract calls, cryptocurrency transfers, or requests to read information from a smart contract.

The contents of these blocks (i.e. their transactions) can be checked at any time using a block explorer — similar to how online payments can be checked by logging into your bank account. However, unlike a bank, anybody is free to check the details of anybody else’s transactions, with the sender and recipient address, as well as the amount transferred being publicly available.

It should be noted that cryptocurrency addresses are simple hex strings (e.g. 0x000000000000000000000000000000000000dEaD). These do not contain any personally identifying information. Because of this, the participants can be considered pseudonymous. 

Given that blockchains are secured and updated by a large number of participants (typically miners or validators), these players need a way to come to an agreement about the current state of the network and which transactions should be included in the next block. Crucially, this system needs to be highly resistant to corruption and also essentially unbreakable.

This is accomplished using a consensus system. This basically sets the rules that all network participants must abide by, and determines who gets to add transactions to a block before it is added to the blockchain. Most consensus systems include rewards to ensure that participants process transactions honestly (to claim the reward) as well as deterrents to prevent dishonesty. It should be noted that nodes generally operate automatically and rewards/penalties are distributed automatically based on the rules set by the consensus system. 

Most blockchains require users to pay a fee when submitting a transaction, this usually goes to the miners as an additional reward for their efforts — i.e. helping to secure the network, ensuring redundancy, and processing transactions. A technology known as public key cryptography is used to allow users to manage their own accounts on the blockchain — only authorized transactions (signed by the private key holder) will be accepted for processing. 

Many modern blockchains are known as smart contract platforms. This means they are able to run arbitrary code that can form the backbone of decentralized applications (DApps) — essentially decentralized versions of regular applications. Platforms like Ethereum, BNB Chain, and Solana now host thousands of DApps, many of which now have millions of users. 

Key Properties

Though there are now dozens of independent blockchains in operation, the vast majority of public blockchains share a variety of key properties. These include:

• Immutability: As we previously touched on, a blockchain is a permanent record of all the transactions that were conducted over an associated decentralized network. Since these transactions can include transfers of value (e.g. cryptocurrency transfers) or storage of important records or data, it is important that these transactions cannot be reversed once they have been completed. Else this would lead to double spending (essentially the same funds being spent multiple times). 

• Security: Unlike typical databases, which require a controlling entity to keep them secure, blockchains are normally secured by a large and diverse network of nodes. Each node does its part to ensure the integrity of the network and provides a great deal of redundancy on the network. Transactions are secured by essentially unbreakable cryptography and the entire network is extremely resistant to denial of service attacks — giving blockchains impressive uptime (99.98% for Bitcoin). 

• Decentralization: Blockchains are unusual among databases in that they are not hosted on a centralized computer. Instead, dozens, hundreds, or potentially even thousands of backups are spread across a decentralized network of computers. This provides an incredible degree of redundancy and ensures the network has no single point of failure. 

• Permissionless access: Because blockchains are generally decentralized, they are typically also permissionless — meaning users do not need authorization to access or participate in the network. This is in stark contrast to typical financial and web services, where you generally need to apply for an account or provide your personal details to register. This makes it ideal for those who lack access to traditional financial infrastructure (i.e. the “unbanked”) since no identity or credit checks are needed to transact with cryptocurrencies or interact with DApps. 

• Censorship resistance: Centralized platforms can be prone to censorship — either by the controlling company or various governments. Blockchains are essentially impervious to censorship. This means it is not possible for anybody to intercept or block transactions while ensuring anybody can access the blockchain and any associated decentralized applications at any time.

• Self-sovereignty: Blockchains allow users to take full control of their assets thanks to the use of public key cryptography. Through the use of a private key and associated public address, users can send and receive cryptocurrencies without relying on centralized financial infrastructure. They can also move their funds between wallets, places, and countries with zero restrictions and at little to no cost. 

• Transparency: Despite the popular belief that blockchains are private and anonymous, most blockchains are, in fact, fully public and transparent — this includes popular blockchains like Bitcoin, Ethereum, and BNB Chain. This means that transactions are recorded on a public ledger and the public address of any participants and the smart contracts they interact with are included. 

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It should be noted that blockchain isn’t the only decentralized ledger technology that boasts many of these features. Another technology, known as a directed acyclic graph (DAG) offers similar, if not better, capabilities — but also has its drawbacks. Two of the most popular DAG implementations include Tangle and Hashgraph. These are outside of the scope of this lesson, but it is worth bearing in mind that there are other technologies competing with blockchain. 

How Can It Be Used?

As you might be aware, cryptocurrencies are one of the defining use cases of blockchain technology. They allow users to take full control of their finances, without relying on centralized custody providers, financial institutions, or governments. For the first time, they allow funds to be sent across borders nearly instantly, at low cost, with ease. 
But the technology can be used for so much more. Blockchain has now demonstrated its potential in dozens of industries, ranging from healthcare to supply chain management, cybersecurity, data storage, insurance, real estate, education, banking, and more. 

Some of the more ambitious applications include:

Decentralized storage networks (DSNs)

Today, the vast majority of files are stored on either centralized servers or personal computers. These generally lack strong security and most files don’t have a backup — which can spell disaster if it is corrupted or lost for any reason. Blockchain can be used to solve this by powering decentralized storage networks which can be used to encrypt and split files over a large number of storage providers (user-operated nodes). If a single storage provider gets breached, the user's data remains safe, since it is incomplete, encrypted, and redundant. Users can then retrieve their files from the network in a similar way to the BitTorrent Protocol. Instead of paying centralized cloud storage providers, users instead pay users that contribute their excess storage and bandwidth to the network using cryptocurrencies. This makes it far cheaper, more secure, and more resistant than cloud storage services.

‍Examples include Filecoin, Swarm, and BitTorrent. 

Decentralized finance (DeFi)

Although cryptocurrencies are a prime example of decentralized financial technology, recent advancements have gone much further. There is now an entire ecosystem of decentralized financial services which are completely powered by blockchain technology. These are gradually encroaching on the types of services you would expect from traditional banks and financial institutions — albeit without the centralization and high costs. These include decentralized trading platforms, loan providers, insurance providers, hedge funds, prediction markets, savings accounts, and more. Since these are decentralized, they can generally be accessed by anyone, from anywhere, at any time, and many now offer capabilities that simply cannot be matched by centralized platforms — such as automatic portfolio management and liquidity aggregation. 

Examples include Uniswap (decentralized trading), Nexus Mutual (decentralized insurance), and Compound (open lending). 

Decentralized Autonomous Organizations (DAOs)

DAOs are powerful blockchain-based organizations that allow a global network of users to work together and decide on various matters. They feature a flat organizational structure and are widely thought of as the future of governments, corporations, and businesses due to their high efficiency and inclusivity. Today, there are well over 6,000 DAOs in operation, with more than 1.7 million participants. These include simple DAOs used to organize investments among a large number of users, governance DAOs that allow participants to govern an associated product or service, and DAOs that help users organize and collaborate on various tasks. Blockchain allows anybody to participate in a DAO through the use of so-called “governance tokens” — which are somewhat similar to shares in that they allow holders to vote on governance proposals that were put forward by other users.‍

Examples include BitDAO, Lido, and Merit Circle. 

The Metaverse

Blockchain technology is quickly becoming a cornerstone technology of the “metaverse” — an interconnected landscape of virtual worlds, within which users can shop, work, socialize, relax, and more. Widely described as the future of the internet, the metaverse is expected to provide the next generation of online experiences and will provide a pervasive, persistent, and dynamic environment that is at least partly owned and governed by the users. Blockchain technology is being used to power several aspects of the metaverse, including user-owned decentralized real estate, in-game crypto economies and microtransactions, decentralized marketplaces and trading platforms, user governance, and on-chain identity solutions. Though the metaverse is still in its early stages of development, several current-generation metaverses are built on top of popular blockchains like Ethereum and BNB Chain are among the most accessible ways to first get to grips with blockchain technology and cryptocurrencies. 

Examples include Decentraland, The Sandbox, and XANA. 

Though many of its applications are still in their early stages of development, thousands of companies are now leveraging blockchain technology in their products, services, and R/D efforts. The rapid adoption of the technology has positioned the blockchain industry as one of the fastest growing sectors in recent years — and is predicted to grow at a CAGR of 68.4% per year.

As a technology still somewhat in its infancy, the full capabilities of blockchain technology are still being unraveled. Likewise, the technology has faced some growing pains — namely in the form of scalability and accessibility — which are being tackled by a huge number of engineers and developers worldwide.

Slowly but surely, it is demonstrating its potential to become one of the defining technologies of this era. 

Lesson Recap TL:DR

• Blockchains are decentralized databases that are stored on a large number of computers. Specialized computers, known as nodes or miners, maintain the integrity of the blockchain and are responsible for bundling user-submitted transactions into blocks, which are then added to the chain. 
• Blockchains have a variety of unique properties which means they can be used for a huge variety of use cases. In particular, their security, decentralization, and immutability make them well-suited for financial applications. 
• Although cryptocurrencies are the best-known use case of blockchain, the technology is now in the process of disrupting dozens of different industries. Today, blockchain technology is being used by individuals, businesses, and even governments worldwide, and is helping to power an entire ecosystem of decentralized applications (DApps) — including trading platforms, games, file storage solutions, social media platforms, and more.

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Resources Used:

1. Satoshi N. (2008) "Bitcoin: A Peer-to-Peer Electronic Cash System", https://www.ussc.gov/sites/default/files/pdf/training/annual-national-training-seminar/2018/Emerging_Tech_Bitcoin_Crypto.pdf
2. Jakobsson, M., Juels, A. (1999) "Proofs of Work and Bread Pudding Protocols(Extended Abstract)." In: Preneel, B. (eds) Secure Information Networks. IFIP — The International Federation for Information Processing, vol 23. Springer, Boston, MA.  https://link.springer.com/chapter/10.1007/978-0-387-35568-9_18
3. Nick S. (1996) "Smart Contracts: Building Blocks for Digital Markets." https://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_cont

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