With increasing inflation, financial greed, and a lack of innovative investment opportunities, blockchain technology offers a safe haven for many traders and investors. But what if you’re not sure what blockchain is and how it works? We’ll dive into the concept of blockchain, what its pros and cons are, and blockchain’s potential for technology.
1. Blockchain explained
A blockchain is a distributed, electronic database that records cryptocurrency transactions. Many computer devices around the globe share this database, and it is viewable to anyone. Blockchain technology enables online transfers without the use of intermediaries like governments or banks.
1.1. How blockchain technology works
Blockchains are not standard databases. They structure data differently. A traditional database displays data in tables and charts, like you’d find in good old Excel. Blockchains, on the other hand, collect data in groups called blocks.
Like all units of data, blocks have limited storage capabilities. Once they’re filled up with transaction data, blocks are closed and attached to the previous block using cryptographic methods. This happens every time a block is formed, which creates a chain of data. Hence, the name “blockchain.”
Each block contains the cryptographic hash of the previous block and is time stamped with the date and time it was added to the chain. Since blocks are chained in a chronological order that can’t be altered, everything recorded in blockchains is irreversible and permanent.
1.2. Blockchain structure
What is blockchain? In short, it's cryptographic hashes that are bound together.
With blockchain technology, there’s a constantly growing list of encrypted transaction records. Dozens of computerized devices globally create peer-to-peer (P2P) networks that review each transaction independently, time-test them, and add them to an ever-expanding database.
As the name suggests, the core of blockchain technologies is a block with information on valid transactions. Every block binds its cryptographic hash with the cryptographic hash of the block preceding it. A hash is a fixed-length function that meets the encrypted demands that have to be solved for a blockchain computation.
Blocks are digitally dated, sealed, and grouped into chains that confirm the integrity of all the earlier blocks. This means that blockchain technology can easily track all the transactions that have occurred on the chain—from the most recent block to the very first one, which is also known as the genesis block.
Hash functions take certain input values, such as text, and transform them into hash values.
1.3. Mining
Mining is a process of creating new blocks. It’s done by miners, i.e. computers that participate in developing new cryptocurrencies and verifying transactions on the blockchain. Miners add new blocks to the existing chain and ensure that these additions are accurate.
Anyone can become a blockchain miner. All you need to do is install and run a special blockchain mining software that allows your computer to communicate securely with other mining computers in the network. When a computer installs the software and joins the network to begin mining cryptocurrencies, it becomes what’s called a “node.”
Mining isn’t easy. It requires the use of sophisticated hardware to solve complex computational mathematical problems. This hardware also uses a lot of computing power, which means mining isn’t environmentally friendly.
The first computer that finds the solution to the problem becomes the validator of a new block. In return, it receives a reward in the cryptocurrency that is being mined. The reward usually consists of the network fees that network participants have to pay when transferring money via the network.
Because mining is hard and costly, an alternative process known as staking was created. Staking digital assets involves locking up your coins in crypto pools to help pool operators validate transactions on the blockchain. In the end, if the pool becomes the validator of a new block, the blockchain system automatically pays out rewards to all pool participants.
1.4. Block time
Block time is the average time needed to produce a new block. It also means the time that crypto traders and investors have to wait until their transactions are confirmed. These days, blockchain technology can create blocks in as little as five seconds.
More popular blockchains require more time though. For example, the block duration for Ethereum is a minimum of 15 seconds, while the block time for Bitcoin might be 10 minutes.
1.5. How it all started
It took more than 10 years to develop blockchain technology. Stuart Haber and W. Scott Stornetta, two renowned American cryptographers, are the fathers of the blockchain. They first described a cryptographically secured chain of blocks in 1991, which laid the foundation for digital currencies.
In 1998, Nick Szabo, a computer scientist from the US, designed a mechanism for a decentralized digital currency that he named bit gold. Although his digital currency never saw the light of day, his ideas played a significant role in implementing the Bitcoin architecture.
Two years later, Stefan Konst published a unified theory of chains protected by encryption. He proposed a model that allows tracing back all the entries in the chain to the initial one to prove the authenticity. The same model exists in Bitcoin and other cryptocurrencies.
Finally, in October 2008, Satoshi Nakamoto accumulated all the ideas of a distributed blockchain ledger in the whitepaper of Bitcoin. He laid out the secure cryptographic functions and explained the real-world applications of blockchain.
Bitcoin became the first application of blockchain technology. Although the Bitcoin blockchain is just one example of many blockchains out there, people often associate the word “blockchain” with bitcoins.
2. Types of blockchains
There are four main types of blockchains: public, private, consortium, and hybrid. According to Earthweb, there are over 1,000 blockchains in the world. Public blockchain networks are the most common ones.
What unites all types of blockchains is that all blockchains consist of a group of nodes that work based on a peer-to-peer (P2P) system. All nodes in a network have a real-time copy of the shared ledger. They can verify, initiate, or receive transactions and create blocks.
2.1. Public blockchains
These are permissionless distributed ledger systems with no central authority. Anyone with access to the internet can sign in on a public blockchain platform and become an authorized node. Then, they will be able to see current and past records, verify transactions and do mining.
People mainly use public blockchains for mining and exchanging cryptocurrencies. The most popular ones are the Bitcoin, Ethereum, and Litecoin blockchains.
2.2. Private blockchains
Unlike a public blockchain, a private blockchain functions only in a closed network. For example, a large enterprise might create a blockchain where only selected members will be participants of that network.
Private blockchain networks are mainly used for things such as voting, managing supply chains and asset ownership, and verifying digital identity. Popular examples of private blockchains are Hyperledger Sawtooth and Corda.
2.3. Consortium blockchains
These are semi-decentralized blockchain networks that are managed by more than one organization. Here, several organizations can agree to act as a node and exchange information or do mining. Most often, banks and government organizations use consortium blockchains. Examples include R3 and Energy Web Foundation.
2.4. Hybrid blockchains
These are combinations of private and public blockchains. Only certain data or records from the blockchain are public, whereas the rest is confidential so it’s kept in the private network. Users can easily become part of a private blockchain network while maintaining access to multiple public blockchains. The most popular hybrid blockchain these days is Dragonchain, which was open-sourced by Disney in 2016.
3. Use cases
Blockchain technology proves particularly useful in preventing hackers from obtaining data from multiple sources across a network. Therefore, although blockchains are mainly associated with the financial industry, people apply the technology to a much broader range of products and services.
Below are described some of the areas that blockchains have revolutionized recently. However, the use of blockchain technology can have applications beyond those listed here.
3.1. Banking
Banks operate only during business hours, i.e. usually six to eight hours a day, five days a week. So if it’s 7 PM on Friday and you want to transfer money to your friend who uses another bank, they’ll have to wait until Monday morning for the money to reach their bank account.
This might be a problem even during business hours. If a bank has to deal with a lot of transactions simultaneously, your transfer is likely to be delayed. Blockchains, on the contrary, never fall asleep.
3.2. Currency
Blockchain technology is the basis of cryptocurrency, which is used as an alternative to traditional currencies such as the United States Dollar (USD) and the Euro (EUR). These currencies are also known as fiat money and they are issued and governed by banks or governments.
So if you live in a country where the government isn’t stable or if your bank is compromised and goes bankrupt, your currency will be at risk. As blockchain technology is not limited to a single currency or controlled by a single country, cryptocurrency becomes a better option, especially in developing countries.
3.3. Brokerage
People implement distributed ledger technology in brokerage services to buy and sell particular stocks. Real-world stocks can be transformed or tokenized into digital stocks which can be transferred using a decentralized network. Digital stocks are similar to digital money as their price is real-time and fluctuates.
Blockchains make stock trades more proficient through decentralization and automation. They can also help organize fundraising, manage assets, and control margin financing. On top of that, blockchains can help with monitoring systemic risk and tracking securities lending.
3.4. Supply chains
A supply chain is a network that a company shares with its suppliers to produce and distribute products to its customers, especially if the company operates globally. The network involves exchanging vast amounts of information so traditional data backup methods may not be useful in case of emergency.
There are situations where storing data in the usual way across different participants of the chain might require much more time. Let’s take the example of identifying which vendors manufacture low-quality products. To combat the lag in time and resources, IBM Food Trust implemented blockchain technology to provide the opportunity for suppliers to track their purchases throughout the entire farm-to-user journey. Walmart has also introduced blockchain technology to its food supply chain.
3.5. Art
A blockchain can be used to register and transfer ownership of various digital assets, including NFTs. A non-fungible token, or NFT, is a unique cryptographic asset that represents real-world objects, but exists on a blockchain and cannot be replicated.
Drawings, music, in-game items, videos—any form of art can be NFTs. These assets are encoded with the same software as cryptos. NFTs are typically held on the Ethereum blockchain, although other blockchains, such as the Bitcoin blockchain, support them as well.
When two parties agree to sell an NFT for an exchange of crypto, the blockchain is used first to verify the ownership. Then, the buyer would purchase the asset by completing necessary transactions on the blockchain.
3.6. Property records
Centers of registries and similar record offices often follow unnecessary bureaucracy. This means that if you want to register or re-register property, you need to see an official in a local record office who will manually enter your data in the county’s central record and public index.
This process is not only expensive or time consuming, but it also has a high chance of human error. Using blockchain technology for property records means that data will be accurate and up to date.
3.7. Voting
Blockchains could boost modern voting systems by preventing voter fraud and improving voter turnout. The blockchain protocol could help ensure more transparent elections by reducing the number of staff necessary to conduct elections. What’s more, government officials would have almost instant access to the results.
3.8. Signing contracts
Blockchains revolutionized contract signing procedures by introducing what are known as smart contracts. A smart contract is a computer code embedded in the blockchain for negotiating a contract agreement. Smart contracts operate under certain conditions.
For example, a potential tenant wants to rent a house using smart contracts. The landlord agrees to give the tenant the door code for the house only after the payment is made. If the tenant makes the payment via blockchain, they will automatically get the code without extra effort from the landlord.
3.9. Healthcare
Healthcare providers can easily leverage blockchain technology to keep patient information secure. When a medical report is created, it can be signed by a doctor and written on a blockchain to ensure patients’ records are visible and updated.
Because this information is highly private, using a blockchain network is ideal for addressing security concerns. Data would be encrypted by using a private key, so only the patient in question would be able to access their medical records.
4. Pros and cons
The possibilities of blockchain technology as an efficient decentralized record-keeping system are almost infinite. Certain aspects of blockchains should be taken with caution though. Let’s discuss the advantages and drawbacks of blockchain technology.
There are both pros and cons to crypto. The crypto community is continually creating solutions to address the disadvantages.
4.1. Advantages
-
Higher accuracy of transactions
Crypto transactions are recorded and confirmed by thousands of computers, which eliminates most human involvement in verification and results in fewer human errors.
-
Efficient transactions
Blockchains work 24/7 and transactions are completed within as little as 10 minutes. This is especially important for international trades that usually take a lot more time due to different time zones and the need for multiple parties when processing and confirming payments.
-
Transparency
Since most blockchains are decentralized, all transactions are transparently accessible and visible to anyone. Besides, there are no restrictions on who can become a blockchain miner.
-
Anonymity
Although crypto transactions are entirely transparent and transaction histories are publicly available, the owners associated with each crypto wallet have no recorded personal information.
-
No intermediaries needed
Blockchain technology doesn’t require work from intermediaries because it’s based on a peer-to-peer system. Each transaction needs confirmation from all the network nodes. This makes getting control of the entire network and manipulating or changing information extremely challenging. Besides, this also prohibits everyone from purchasing the same cryptocurrency twice.
-
Cost reductions
A typical consumer would pay financial institutions for checking transactions, or lawyers for signing a contract. The blockchain eliminates verification and associated costs.
-
Extra security
It’s not possible to steal digital currency with a public address because cryptocurrencies are kept offline in your hardware wallet. It cannot be taken during online attacks that steal or alter digital information.
4.2. Disadvantages
-
Volatility
With unpredictable prices, trading or investing in cryptocurrencies can be a rollercoaster. For example, in November 2021, Bitcoin (BTC) reached an all-time high of over USD 68,000. In May 2022, however, its value dropped twice that—around USD 30,000.
-
Risk of asset loss
Cryptocurrencies are secured in blockchain wallets that are protected by keys. If the private key to a wallet is lost, the amount of crypto under that key is unspendable. On top of that, there’s no way to recover cryptocurrencies that are lost.
-
Scalability issues
Because it takes a few minutes for blocks to be added to a blockchain, the speed of processing crypto transactions per second is limited. For instance, the Bitcoin blockchain can guarantee 4.6 transactions per second, while Visa does around 1,700.
-
High energy costs
Using multiple network nodes for verification is much easier, but this makes blockchain-backed transactions expensive. Bitcoin mining in particular requires a strong internet connection and a lot of computing power, which also significantly pollutes the environment.
-
Potential for illegal activity
Decentralized blockchains do add security. Unfortunately, this decentralization and anonymity also attract criminals’ attention. It’s much harder to identify illegal or omitted transactions using blockchains compared to bank transactions that are clearly associated with certain people’s names.
5. Wizardia and blockchain technology
Wizardia uses blockchain technology for its own token (WZRD) as well as the foundation of a play-to-earn online game with NFTs at its core. The game is based on role-playing and strategy-building, where players will be paid for the time and effort they invest in the game.
As the main incentive of the game, Wizardia has released innovative NFTs that hold real-world value. Wizardia’s products are built on the Binance Smart Chain (BSC) blockchain, whose network is specifically designed for running smart contract-based applications. For more information, visit the Wizardia Help Center.
FAQs
What is blockchain technology in simple terms?
A blockchain is an electronic database where crypto transactions are recorded. This database doesn’t have a central authority or a single location. On the contrary, it’s distributed among millions of computer systems globally, ensuring that the blockchain database is secure and up-to-date.
What is a blockchain used for?
The main blockchain implementation is in financial services. However, people use this technology for a much broader range of products and services, including managing food supply chains, creating art or music, and keeping property and medical records. Blockchain technology is also used for voting and signing contracts.
What are blockchain examples?
The largest blockchains are the Bitcoin and Ethereum blockchains. Other popular blockchain platforms include R3 Corda, Tezos, and Stellar. However, this is just a small list of examples. There are more than 1,000 blockchain companies around the globe.
Are blockchains different from bitcoins?
A blockchain is a form of technology that many cryptocurrencies, including bitcoin, use for secure and anonymous transactions. A blockchain is a big system, whereas bitcoins are just digital currencies. Therefore, blockchains have a much more extensive application, while bitcoins are only used for exchange on various crypto platforms.
What is Bitcoin Magazine?
Bitcoin Magazine is a news portal that provides news, analysis, commentary, and price information about the Bitcoin blockchain and other digital currencies through its website, podcasts, and events. It was first released in 2012.
Vytautas Kundrotas
Vytautas is a content manager whose fuel is curiosity. Fascinated by how modern technologies are rocketing the finance industry, he develops copy that targets present-day topics.
Further reading
All articles
Pay-to-Win in Web3: How Can It Help
Pay to Win is where a player can use additional funds outside the initial price of the game to gain an advantage against other players, usua...
What Is Tokenomics? [Understanding the Token Economy]
Many people new to Web3 believe that any crypto coin can become as big as bitcoin or Ethereum, even if nothing could be further from the tru...
6 Crypto Staking Misconceptions & Myths [2022]
Like most things in the crypto world, it can be hard to wade through all the information on staking. Your colleagues and friends likely have...