By Julia Beyers
Summary: Everyone has probably heard about blockchain, but do we really understand how this technology works and what application it has found in modern life? In this article, we will look at the basic concepts of blockchain and explain everything you need to know in simple terms.
Blockchain technology is on everyone’s mind these days. With the ongoing cryptocurrency bull market, almost everyone has heard about this tech at least once in their lives. After all, the decentralized ledger that makes up the blockchain is essential for registering crypto transactions.
However, many investors have limited knowledge about this technology and immediately link it to cryptocurrencies. But blockchain has some incredible use cases in addition to being a vessel for crypto transactions. This article has the goal to introduce you to the basics of blockchain tech and its many applications across various industries.
First, let’s begin with some essential knowledge on how this tech came to be and the science behind it.
What Is Blockchain and How Does It Work?
The first practical implementation of blockchain tech came with the release of Bitcoin. It was initially used as a decentralized ledger to record the transactions in an immutable manner. Transactions are organized in blocks and chained to each other through cryptography — hence the name “blockchain.”
The most important characteristic of blockchains is their decentralized nature. The ledger is distributed to thousands, sometimes millions of different computers around the world. This decentralization means that there is no single entity that governs the blockchain. As such, transactions are made peer-to-peer, without the need for a third party to allow them or provide escrow.
What Are the Types of Blockchain?
That being said, this decentralization can have different levels regarding the permission of accessing the blockchain network. Let’s see what these types of blockchains are.
First, we have public blockchains, which anyone, anywhere in the world can access and use. These aren’t governed by a single entity, are permissionless, and rely on an algorithm for the issuance of new tokens. As long as an individual has the required hardware, they can become a validator on the network. A cryptocurrency such as Bitcoin can be considered a public blockchain.
Private blockchains use a private network governed by a single entity. While in a public blockchain, anyone can access the network, in private blockchains they will need to get permission from the governing body. These blockchains are often used for operational purposes in businesses.
Consortium blockchains are networks governed by multiple private entities. These too are permission networks, where each entity from the consortium has a say in who and how can use the blockchain’s functionalities.
Finally, we have hybrid blockchains, which are a combination of private and public networks. In this case, the network is layered, where the outer levels are usually public, and inner levels are governed by a private entity.
Main Advantages of Blockchain
To provide you with the benefits of blockchain technology, we will focus on public blockchains, first and foremost.
As we previously mentioned, decentralization is the core element of all blockchains. Without a single governing body, all the assets are created following a consensus algorithm, which is usually open-source and available for audit by anyone. This also gives the ability to the users to transact directly with each other and retain full ownership of their assets.
Improved Security and Privacy
The decentralized nature of blockchains gives them additional security. Because the ledger is distributed to thousands of different participants, hackers are unable to exploit a single point of failure. Moreover, the cryptography is virtually unhackable, and assets in a wallet cannot be compromised unless there’s a user error.
Additionally, while entirely transparent, the distributed ledger is also pseudonymous. This means that transactions aren’t linked to the user’s identity, providing additional privacy.
Another benefit of blockchain transactions is their reduced cost, especially when compared with traditional financial transactions via banks. This makes them incredibly versatile for international money transfers, as their borderless nature doesn’t incur any additional conversion fees.
Visibility and Traceability
The blockchain ledger is entirely transparent and free for anyone to review. A single transaction can be traced back to its origin, and users can investigate its source. This is incredibly useful in situations where tracking is essential, such as the logistics industry.
Blockchain in Action: Use Cases
Thanks to the implementation of smart contracts, blockchain has gained hundreds of use cases over the years. These decentralized applications can be used to automate the blockchain and represent anything of value through tokenized assets. Below are some of the most common examples.
Governments can use blockchain technology to eliminate corruption by increasing transparency in the administrative process. Moreover, it creates a trustless environment, where users can easily access relevant information. Blockchain can make elections more transparent and eliminate any kind of doubt regarding their outcome.
Banking and Financial Services
Through the rise of decentralized finance, we have seen blockchain revolutionize the financial system as we know it. Today, individuals can rely on smart contracts to access advanced financial instruments such as lending or accessing a line of credit. Moreover, smart contracts can act as an impartial intermediary between peers for borrowing assets. People without access to a solid banking infrastructure can finally take part in the global economy.
One of the major applications of blockchain is in the logistics sector. Blockchain’s permissionless nature can offer an easy on-and-off ramp for new actors in the supply chain. Moreover, it provides full traceability of the products in the chain, allowing to completely eliminate the always-growing problem of counterfeit items. It also allows consumers to access the product’s origin, which makes it easy to incentivize the fair market.
Blockchain technology was made popular by cryptocurrencies but is gaining traction in other industries as well. In the past couple of years, this tech has managed to disrupt finances by providing a real alternative to our aging, flawed financial system. And this is just the beginning. We are bound to see blockchain increase its presence in other industrial sectors and become the driving force of the upcoming metaverse everyone is talking about.