The “birth” of Bitcoin in 2008 gave rise to technological innovation. Blockchain technology, the infrastructure upon which Bitcoin and other cryptocurrencies operate, in a potentially-transformative technology, carrying the promise of social and economic change.  Although its roots go back beyond 2008, blockchain technology’s first application was Bitcoin.  

Bitcoin was introduced during the financial crisis of 2008 in an effort to  provide an alternative to traditional financial and electronic banking system. Its foundation lies in the fundamentals of blockchain technology. More than a decade later, blockchain technology is currently being utilized and explored across an array of industries. And prospects remain high for the technology: As reported by the World Economic Forum, around 10% of the global GDP will rest on the blockchain by 2025.

In this blockchain guide, we seek answer the following questions: What blockchain?  Why is it significant?  What are its key principles?  And how does it work?

Why Blockchain Matters?

Major banking institutions like JPMorgan Chase, automobile makers like BMW, technology players like Facebook, Amazon, Microsoft, retail corporations like Starbucks, Nestle, and Fintech firms like Visa, PayPal- are some of the many firms exploring blockchain applications.   Even governments across the globe are leveraging blockchain technology tools for applications in the public sector.

According to research, the global blockchain market size could grow at a CAGR of 67% from 2020-2025. A survey conducted by Deloitte among senior executives revealed that 53% of respondents stated that blockchain is a top priority for their organizations. Research institute Gartner estimates that blockchain will generate $3.1 trillion in new business value by 2030. Another study from PWC comprising 600 executives revealed that 84% of their organizations are actively involved in blockchain technology.

The remarkable growth of blockchain technology is attributable, in part, to its application across numerous industry sectors. While cryptocurrencies have certainly been one of the top innovations utlizing blockchain, blockchain has been explored and adopted in an array of fields including healthcare, supply chain, Internet of Things (IoT), governance, real estate, online gaming, voting, charity, and more.

So what is blockchain technology and how does it work?

Blockchain Explained: What is Blockchain Technology?

In simple terms, a blockchain is a ledger that records data, documents, and transactions. The data recorded on the ledger is stored on the blocks. The blocks are “chained” or linked to each other in a cryptographic sequence.

A blockchain protocol contains three fundamental elements: (1) Decentralization; (2) a peer-to-peer network; and (3) the distributed storage of data. Let’s look at these elements one by one.

A blockchain is a decentralized network made up of multiple nodes or members. It does not have a central authority. Instead, the control over the network is distributed among the participants. In a centralized structure, the entire system fails if the main node is compromised. The decentralized distribution ensures that the blockchain network continues to function even if one or more nodes fail or are compromised.

These members (the “nodes”) directly interact with each other on a peer-to-peer network. For instance, transactions on the Bitcoin blockchain are conducted directly between two unknown entities without any intermediary organization like a financial institution. Similarly, two entities can directly transact (i.e., peer-to-peer) without any intermediary organization. The blockchain’s distributed ledger provides a mechanism to ensure “trust” among the members of the network, thereby eliminating the need for an intermediary to perform the function of validating transactions any the system itself.  

The blockchain ledger stores data in a distributed network. Instead of a centralized structure, the data is stored by multiple nodes of the system. Under a centralized infrastructure, data is more vulnerable to hacks. The distributed-storage approach, however, provides a security element by distributing data across multiple locations. Because it enables a distributed database that does not require a central authority, blockchain is also known as Distributed Ledger Technology (DLT).

Features of Blockchain Technology

In addition to the fundamental elements of a blockchain’s protocol, the decentralized ledger incorporates several key features:

  • Shared Ledger – Unlike traditional infrastructure for data management, there is a single, shared version of the blockchain ledger. The ledger is shared among the participants (“nodes”) with all the nodes having access to the same information.
  • Transparent – The data stored on a blockchain ledger is transparent – it can be viewed by all the participants of the network. A blockchain’s nodes can easily access the data.
  • Accountability – As data is added and stored, a blockchain remains transparent across the network, increasing accountability for any activity.
  • Cryptography – The information or transactions memorialized on a blockchain are bundled into blocks and secured through cryptography. Cryptographic protocols are designed to ensure that the blockchain’s data is secure.
  • Traceability – Each piece of data can be traced back to its origin. Any document added to the blockchain as well as its subsequent actions taken can be traced.
  • Immutability – A public blockchain ledger stores information in an immutable manner. In other words, once added to and accepted on the blockchain, the data cannot be modified or deleted.
  • Real-time – The data on a blockchain ledger is updated in real time.
  • Time-stamp – Each piece of information or document is time-stamped, providing verification of when it was added to the ledger.

To better understand these key features, let’s consider the Bitcoin blockchain. The Bitcoin network facilitates peer-to-peer transactions on a decentralized network. The nodes of the Bitcoin blockchain are the millions of participants accessing its blockchain. All the transactions are recorded and stored on its shared ledger.

The Bitcoin ledger is transparent and any node can view the transactions recorded on it. Each transaction can be traced through its blockchain. All the transactions are conducted in real time and the data is updated on the blockchain ledger. Finally, a transaction recorded on the Bitcoin blockchain cannot be reversed, as the blockchain is immutable.

How Does a Blockchain Work?

While Bitcoin and cryptocurrencies have become a value-added application of blockchain technology, the scope of the decentralized ledger is far greater than cryptocurrencies. As discussed above, blockchain ledgers are utilized across numerous industries to record, manage, store, and access data.

So, how does a blockchain function? What are the different steps for blocks to be formed and connected in the form of a chain? Let’s take a step-by-step analysis and visualize a blockchain in action.

A participant of a blockchain network performs a transaction. This could be a transaction in money or it could simply be the uploading a document or a transaction involving data. Since a public blockchain is not administered by a centralized entity, the transaction is verified through a decentralized peer-to-peer network. Other nodes or members of the blockchain network begin and perform the process of verifying the authenticity of the data/ transaction.

The process of verification is conducted through a consensus mechanism. In other words, if the required members/ nodes agree that the transaction is authentic, it is approved. The approved transaction, along with other transactions within a specific timeframe, are bundled and recorded in a “block.” The newly-formed block is connected to the immediately-prior “block” of information through cryptographic hashing protocol. These blocks are connected in a sequential manner such that any modification of information in any one block results in incorrect sequencing of all the blocks succeeding it as well. The cryptographic sequencing guards against a bad actor’s efforts to tamper with the data on the blockchain network.

Each block is time-stamped with the time when it was added to the blockchain network. Once the transactional data is updated on a blockchain ledger, the blockchain copy of all the nodes are updated. At this point, the data cannot be reversed or modified. That is, a new piece of data can be entered but the previous transaction remains immutable.

The Bottom Line

While the first application of Bitcoin represented a revolution in the financial sector, blockchain’s applications have moved far beyond banking and finance. Fortune 500 companies, banking institutions, and governments are leveraging blockchain.

Nonetheless, the blockchain industry has challenges to overcome.  It will address and grapple with questions of scalability, security and vulnerability, and regulatory compliance. In the coming years, expect to see increasing investment in blockchain applications and a rise in the need for legal and regulatory compliance.