Crypto 101. What is...blockchain?

Your intro to the how, what and why of blockchain.
WRITTEN BY
Daniel Taylor
25/07/2022
4 min

Few buzzwords have been more used and abused than “blockchain.” The term is scarcely 12 years old, and yet in that time it’s been bandied about by everyone from tech imagineers to iced tea companies.

In this Crypto 101 guide, we’ll delve into the what, how, and why of blockchain. Along the way, we promise to go easy on the jargon and zero in on the features, benefits, and occasional misconceptions that surround that enigmatic term. Let’s go.

A block– what?

A blockchain is an increasing, time-ordered series of records, known as blocks, that are securely linked – or chained – together. There, now we’ve defined blockchain we can all go home.

…only it’s not quite so simple. In essence, that is exactly how a blockchain works: as a series of database records that are connected through cryptography. Each new block extends the length of the chain, and as the chain becomes longer, it becomes virtually impossible for anyone to go back and alter the data encoded into earlier blocks.

That’s because the data that makes up each block isn’t just stored on a single database: it’s stored on hundreds of computers known as nodes. Because all of the nodes communicate with one another to determine the current state of the blockchain, a fraudster would need to successfully overpower the rest of the honest network to change its history.

But why go to all the bother?

A blockchain sounds like an expensive and inefficient database since it’s using hundreds of nodes operated by hundreds of users to do a task that a single machine could handle. And it’s true: most of the time, you don’t need a blockchain for data storage purposes. A local bus timetable, for example, doesn’t need to be placed on a blockchain.

But there are some situations where storing information on a distributed network isn’t just beneficial – it’s vital. Specifically, blockchains are ideal for establishing trust in a trustless setting.

What does this mean exactly? Well, let’s consider Bitcoin, the decentralised monetary network that pioneered the use of blockchain. Because no single authority controls Bitcoin, it’s essential that all network users have faith in the accuracy of the records encoded into its blocks.

Let’s say you send 0.1 BTC to Bob over the Bitcoin network. For this transaction to be verified, every node on the network needs to update its records to debit 0.1 BTC from your wallet and credit the same amount to Bob’s:

  • You rely on the blockchain accurately recording this transaction so that you can pay Bob.
  • Bob relies on the the blockchain accurately recording this transaction because he wants paid.
  • And millions of other users, who couldn’t care less about you or Bob, are relying on the blockchain accurately recording this transaction, because if it doesn’t, the entire  network’s integrity would be called into question.

For people to have faith in a decentralised network, it needs to work as promised every single time. And that’s what blockchain does better than any other database: record transactions in a way that is virtually impossible to falsify or subsequently alter.

But what, there’s more…

There are a few other qualities that make a blockchain special. One of these is transparency. With blockchains like Bitcoin and Ethereum, every transaction that occurs can be viewed in real-time and independently verified. This is the marked opposite to conventional databases, which are closed systems or “black boxes.”

If you message Bob to tell him that his 0.1 BTC has been sent, he doesn’t have to take your word for it. Using a tool called a blockchain explorer he can view the transaction and verify it for himself. Bitcoin is sometimes referred to as a public blockchain because anyone can use it and everyone can view transactions that are recorded on it.

There is also such a thing as a private (or “permissioned”) blockchain, typically operated by a business solely for its clients. Private chains are much less common, however, and you are unlikely to encounter one when dealing with cryptocurrency.

What’s blockchain good for?

We’ve discussed how blockchain can be useful for recording financial transactions on a network that has no central point of control; bitcoin, basically, and other cryptocurrencies such as ether (ETH) and monero (XMR). But blockchains can do much more than move digital money. They are also widely used for sending, receiving, and storing:

  • NFTs representing artwork, virtual land, in-game items, and player characters
  • synthetic assets e.g. tokenised stocks and commodities
  • smart contracts i.e. segments of computer code stored on the blockchain and called on to automatically perform tasks such as swapping one token for another
  • proving ownership of an item or asset through cryptographic signatures

…and that’s just for starters. Because blockchain replaces trust with computer code, it allows all kinds of transactions to be conducted with both parties confident in the integrity of the outcome. For example, a blockchain escrow system enables two entities to exchange an asset without relying on a third party as an intermediary: a smart contract can verify that the buyer has paid the seller and then release the asset, such as an NFT, to the buyer.

What isn’t blockchain?

We’ve established that blockchains are a type of decentralised database used to store a record of cryptocurrency transactions. Does this mean that all cryptocurrencies use blockchains? Not always. Some blockchains use alternative systems such as a DAG (directed acyclic graph). These exceptions are rare, however, and such distributed databases are still derived from blockchain technology. Just know that where there’s a cryptocurrency, there’s invariably a blockchain powering it, even if each network works slightly differently.

What else is blockchain good for?

Since a blockchain is basically a distributed network, it can be used for virtually anything: tracking sustainable fishing; monitoring plastic in the oceans; trading rare metals. Enterprises are currently exploring hundreds of applications for blockchain technology, encompassing such industries as finance, insurance, IoT, supply chain, and automotive.

Of course, just because something can be put on a blockchain doesn’t mean that it should be. Some of the pilot projects exploring blockchain have concluded that the cost-benefit ratio simply doesn’t justify persevering, and that a conventional database will suffice.

At the same time, as more new assets and markets are being represented on-chain, the use cases for blockchain technology are proliferating. From obtaining an instant loan to paying company salaries, there are a lot of things you can now do with crypto that weren’t possible when blockchain was in its infancy.

It’s no coincidence that Bitcoin, the world’s first blockchain network, remains its most valuable in terms of market capitalisation, total value transacted, and other key metrics. Blockchain can do many things but its most popular application still lies in providing a trustless system for peer-to-peer cash. Just as Satoshi envisioned it in his famous whitepaper all those years ago.