Definition

blockchain

What is blockchain?

Blockchain is a record-keeping technology designed to make it impossible to hack the system or forge the data stored on it, thereby making it secure and immutable.

It is a type of distributed ledger technology (DLT), a digital system for recording transactions and related data in multiple places at the same time. Each computer in a blockchain network maintains a copy of the ledger to prevent a single point of failure, and all copies are updated and validated simultaneously.

Blockchain is also considered a type of database but differs substantially from conventional databases in how it stores and manages information. Instead of storing data in rows, columns, tables and files as traditional databases do, blockchain stores data in blocks that are digitally chained together. In addition, a blockchain is a decentralized database managed by computers belonging to a peer-to-peer network instead of a central computer like in traditional databases.

The cryptocurrency Bitcoin, launched in 2009, was the first popular application to successfully use blockchain. As a result, blockchain has been most often associated with Bitcoin and alternatives such as Dogecoin and Bitcoin Cash.

However, the use of blockchain has expanded to other applications since Bitcoin's inception.

Logistics companies use blockchain to track and trace goods as they move through the supply chain. Government central banks and the global financial community have been testing blockchain technology as a foundation for digital currency exchange. And various industries, including the legal community and entertainment, are using blockchain as the basis for smart contracts and other mechanisms for transferring and protecting intellectual property rights.

In fact, many industries are now exploring blockchain-based applications as a secure and cost-effective way to create and manage a distributed database and maintain records for digital transactions of all types.

As a result, blockchain is increasingly viewed as a solution for securely tracking and sharing data between multiple business entities.

How blockchain and distributed ledger technology work

Blockchain works via a multistep process, which in simple terms happens as follows:

  1. An authorized participant inputs a transaction, which must be authenticated by the technology.
  2. That action creates a block that represents that specific transaction or data.
  3. The block is sent to every computer node in the network.
  4. Authorized nodes verify the transaction and add the block to the existing blockchain. (Nodes in public blockchain networks are referred to as miners; they're typically paid for this task -- often in a process called Proof of Work, or PoW -- usually in the form of cryptocurrency.)
  5. The update is distributed across the network, which finalizes the transaction.

These steps take place in close to real time and involve a range of elements. Figure 1 shows the block creation and verification steps in more detail.

diagram of how blockchain works
Figure 1. The five main steps in executing and verifying transactions and data in a blockchain.

A blockchain ledger consists of two types of records, individual transactions and blocks. The first block consists of a header and data that pertain to transactions taking place within a set time period. The block's timestamp is used to help create an alphanumeric string called a hash.

After the first block has been created, each subsequent block in the ledger uses the previous block's hash to calculate its own hash.

Before a new block can be added to the chain, its authenticity must be verified by a computational process called validation or consensus. At this point in the blockchain process, a majority of nodes in the network must agree the new block's hash has been calculated correctly. Consensus ensures that all copies of the blockchain distributed ledger share the same state.

Once a block has been added, it can be referenced in subsequent blocks, but it cannot be changed.

If someone attempts to swap out a block, the hashes for previous and subsequent blocks will also change and disrupt the ledger's shared state.

When consensus is no longer possible, other computers in the network are aware that a problem has occurred and no new blocks will be added to the chain until the problem is solved.

Typically, the block causing the error will be discarded and the consensus process will be repeated.

Blockchain, digital currency, cryptocurrency and Bitcoin explained

The terms blockchain, cryptocurrency and Bitcoin are frequently lumped together, along with digital currency; sometimes they're erroneously used interchangeably.

Although they're all under the umbrella of distributed ledger technology, each one is a distinct entity.

  • Blockchain is the technology; more specifically, it's the technology that constructs a decentralized digital ledger that enables exchanges between multiple parties in a secure, immutable manner.
  • Digital currency refers to any form of currency that is available only in digital or electronic form and shared without an intermediary. This includes digital money issued by governments and central banks as well as cryptocurrency. Digital currency is sometimes called digital money, electronic money, electronic currency or cyber cash.
  • Cryptocurrency is a digital asset that can be exchanged on a blockchain network. It is a subset of digital currency. It is not issued by government entities. Think of cryptocurrency as tokens issued by private entities or groups that can be used to pay for items sold by those who also operate in the blockchain network. As of May 2021, market research website CoinMarketCap listed 4,993 different publicly traded cryptocurrencies. Bitcoin is the first cryptocurrency and still the most famous example.

Blockchain examples and use cases

Like all emerging technologies, blockchain continues to mature and gain acceptance as more companies across various industries learn to use it.

Examples of its use in commercial areas include the following:

  • In April 2021, Live Nation SAS, the France-based operations of the global entertainment company of the same name, launched TixTo.Me powered in part by blockchain company Aventus Network.
  • Sales involving non-fungible tokens (NFTs) also took off in 2021, with a growing number of people around the world embracing the technology. An NFT is a digital asset representing all or portions of real-world objects such as art or music. They're bought, sold and traded online and became a popular way to buy and sell digital artwork.
  • In October 2020, PayPal, the online payment platform, launched a new service that enables users to buy, hold and sell cryptocurrency.
  • In early 2020, blockchain company Theta Labs partnered with Google Cloud. The partnership will allow Google Cloud users to deploy and run nodes from Theta's blockchain network.
  • Ticketmaster, the entertainment ticketing software and services company, in 2018 announced it bought the blockchain technology provider Upgraded, which converts traditional tickets into secure interactive digital assets.
  • In 2016, the online retail company Overstock.com used blockchain to sell and distribute more than 126,000 company shares. That marked the first time a publicly traded company used blockchain to support stock transactions. R3, a global consortium of financial institutions, also uses the blockchain-like Corda platform to record, manage and synchronize financial information using blockchain APIs for specific platforms.

Banks and financial institutions across the globe continue to be leaders in blockchain adoption. Other industries, including healthcare, government and technology, are furthering their use of blockchain to enable the secure exchange of data such as personal health information, digital assets like downloaded entertainment and real estate deeds. Manufacturing and similar businesses also see potential to use blockchain to manage smart contracts and track materials as they move through supply chains (see Figure 2).

Walmart Canada blockchain freight invoicing application
Figure 2. Walmart Canada was among the first companies to deploy a practical application that combines blockchain with IoT to automate freight invoicing.

Types of blockchain

Blockchain platforms can be either permissionless or permissioned (see Figure 3). Permissioned blockchains require approval to access, making them essentially private blockchains. Permissionless blockchain does not require permission to enter the blockchain network. In a public, permissionless blockchain like Bitcoin, every node in the network can conduct transactions and participate in the consensus process. In a private, permissioned chain like Multichain, every node might be able to perform transactions, but participation in the consensus process is restricted to a limited number of approved nodes.

Numerous blockchain platforms are available, but three of the most prominent are Ethereum blockchain, Hyperledger Fabric and OpenChain.

Ethereum blockchain is a widely used, open source and custom-built blockchain platform considered to be an industry-leading choice for enterprise applications.

Hyperledger Fabric is another open source blockchain platform. Used by industries such as finance and manufacturing, it is designed for permissioned networks. Hyperledger Fabric can also be used for decentralized hosting and storage of applications that employ smart contracts.

OpenChain is an open source blockchain platform for organizations that want to manage and preserve digital assets. An administrator of an OpenChain blockchain will define the rules used in the ledger. Users can then exchange value on the ledger by adhering to the rules.

permissioned vs. permissionless blockchain
Figure 3. Whether a blockchain is permissioned (private) or permissionless (public) determines many of its performance, transparency and security features.

Blockchain adoption considerations

Any enterprise considering whether to implement a blockchain application should first consider whether it really needs blockchain to achieve its objectives. Blockchain does indeed have several significant benefits, particularly in security, but it's not a replacement for all database needs.

In fact, conventional, centralized databases are often the better option in many circumstances, especially when speed and performance are critical and transactions only happen inside the enterprise or between a limited number of entities where trust has been fully established.

In choosing a blockchain platform, an organization should keep in mind which consensus algorithm to use. The consensus algorithm is a core piece of a blockchain network and one that can have a big impact on speed. It is the procedure through which the peers in a blockchain network will reach agreement about the present state of the distributed ledger. This helps establish trust between users of the blockchain.

There are four standard methods blockchain and other distributed database platforms use to arrive at a consensus. Common consensus algorithms include the following:

  • PoW, which is used to select a miner for the next block generation. Generally, public platforms choose PoW algorithms because they are easy for other network nodes to verify.
  • Practical Byzantine Fault Tolerance (pBFT), an algorithm designed to work in asynchronous systems.
  • Proof of Stake (PoS), algorithms that are commonly used as alternatives to PoW. They work by having validators invest in the currency of the system by keeping some of their coins as stake. The validators then begin validating blocks.
  • Delegated Proof of Stake (DPoS), algorithms for a voting and election process designed to protect against malicious use or centralization in the blockchain.

Advantages of blockchain

Experts cite several key benefits to using blockchain.

  • Security is probably the most significant advantage. It is almost impossible to corrupt a blockchain because the information is shared and continually reconciled by thousands, even millions, of computers. Blockchain also has no single point of failure.
  • Transactions can be more efficient than in non-DLT-based transactional systems, though public blockchains can sometimes suffer from slow speed and inefficiency.
  • It's resilient: There is no problem if one node goes down because all the other nodes have a copy of the ledger.
  • It provides trust between participants on a network. Confirmed blocks are very difficult to reverse, which means data is difficult to remove or change.
  • It can be cost effective because it often reduces the expense associated with transactions by eliminating middlemen and third parties.

Disadvantages of blockchain

Experts say blockchain also has potential drawbacks, risks and challenges.

  • With public blockchains, there are questions about ownership and who is responsible when problems arise.
  • There are also questions about whether organizations are capable of or willing to invest in the infrastructure needed to build, participate and maintain a blockchain-based network.
  • Changing data in a blockchain typically takes a lot of work.
  • Users have to keep track of their private keys to avoid losing their money.
  • Storage can grow to be very large over time, which risks the loss of nodes if the ledger becomes too large for users to download.
  • Blockchain is susceptible to 51% attacks, which is a specific attack designed to overwhelm other participants in the network and change blocks.

Blockchain privacy and security

Security is seen as one of the major advantages of blockchain. Blocks are always stored chronologically, and it is extremely difficult to change a block once it has been added to the end of the blockchain. Each block has its own hash code and the hash code of the block that comes before it. If a hacker tries to edit a block, the block's hash will change, meaning the hacker would have to change the next block's hash in the chain, and so on. Therefore, to change one block, a hacker would have to change every other block that comes after it, which would take a massive amount of computing power.

Despite the use of consensus algorithms, blockchain is still susceptible to 51% attacks in which an attacker has more than 50% control over all the computing power on a blockchain, gaining the ability to overwhelm the other participants on the network. This type of attack is unlikely, though, because it would take a large amount of effort and a lot of computing power to execute.

History of blockchain

A protocol similar to blockchain was first proposed in a 1982 dissertation by David Chaum, an American computer scientist and cryptographer.

In 1991, Stuart Haber and W. Scott Stornetta worked on furthering the description of a chain of blocks secured through cryptography. From this point on, some individuals began working on developing digital currencies.

In 2008, a developer or group of developers working under the pseudonym Satoshi Nakamoto developed a white paper that established the model for blockchain, including the hash method used to timestamp blocks. One year later, in 2009, Satoshi Nakamoto implemented a blockchain using the currency Bitcoin. To this day, no one knows for sure who Satoshi Nakamoto really is.

Interest in enterprise application of blockchain has grown since then as the technology evolved and as blockchain-based software and peer-to-peer networks designed for enterprise use came to market.

Enterprise leaders started to look more seriously at the technology early on, seeing more and more potential as early as 2014, when blockchain technology started to become more distinct from the idea of a specific currency. At that time, experts started to see blockchain's potential for financial transactions in general as well as its potential for other organizational transactions.

Actual adoption was slow. In 2019, Gartner found that just 1% of CIOs were adopting blockchain. Just a little more than that -- 8% -- were in short-term planning for looking into or implementing blockchain, with financial services, life sciences and healthcare among the industries with the highest rates of blockchain adoption.

The 2020 Global Blockchain Survey from Deloitte showed further growth in enterprise interest in the technology: In 2018, 43% of responding C-suite executives said blockchain will be critical and a top-five strategic priority. The number climbed to 53% in 2019 and to 55% in 2020.

This was last updated in June 2021

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