What is Blockchain? And Why Does It Matter?

Blockchain is the technology cryptocurrency uses to securely record and track transactions using a decentralized system, but it also has other use cases.
Last updated March 30, 2022 | By Lance Cothern | Edited By Melinda Sineriz
Blockchain

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If you’ve purchased Bitcoin, you’ve used a blockchain, whether you know it or not. Blockchain is a technology that isn’t limited to cryptocurrencies. Companies have begun using blockchains in other ways to help optimize their businesses and improve security. Understanding how this critical technology works can give you insight into how it’s changing the world.

In this article

Blockchain explained

If you’ve looked into how to buy cryptocurrency, you’ve probably heard of the concept called the blockchain. Blockchain is the name of a technology that records transactions on a ledger.

Here’s how transactions work: First, a transaction is included in a block. Next, the block is validated by the nodes. If it’s successfully verified, the new block is added to the blockchain. Finally, the update is broadcasted across the peer-to-peer network. You can view previous transactions so you can trace the item’s entire history. New blocks will be added to the same chain as new transactions occur.

A blockchain may be accessible by anyone or by certain users, depending on how it is set up.

For example, Bitcoin uses a public blockchain network, so anyone can participate. A business might have a private blockchain network to maintain privacy.

Who invented blockchain?

In 1991, Stuart Haber and W. Scott Stornetta introduced blockchain as a concept when they discussed the benefits of a “chain” of timestamps for verifying digital document authenticity in a paper published in the Journal of Cryptology. Between 1991 and 2008, other people worked on ideas surrounding the blockchain, building on the work of those who published before them and contributing key concepts such as the term “smart contract,” coined by Nick Szabo in the 1990s.

A developer or developers using the pseudonym Satoshi Nakamoto wrote up the model for the current concept of blockchain technology in a white paper in 2008. Within the Bitcoin white paper, Nakamoto cited the foundational work of Haber and Stornetta and solved several of the roadblocks keeping blockchain theory from becoming a reality.

Nakamoto fulfilled the promise of the Bitcoin white paper by implementing the first blockchain for Bitcoin in 2009. In 2014, Blockchain 2.0 was formed, allowing other potential uses for blockchain technology beyond cryptocurrency, such as the Ethereum blockchain. Ethereum is a programmable blockchain launched in 2015 that has brought Szabo’s idea of the smart contract to life.

What can blockchain be used for?

You’ve likely heard of blockchain being used in conjunction with cryptocurrency, such as the Bitcoin blockchain, but the number of use cases far exceeds Bitcoin transactions. The technology can be used in many industries to efficiently record, track, and verify information. Here are examples of blockchain applications.

Cryptocurrency

The most obvious and popularly known use for blockchain technology is digital currency. Bitcoin was the first established use case of the technology, and today a huge number of other cryptocurrencies exist that also use the technology, such as Ethereum and Litecoin.

Blockchain is what allows cryptocurrencies to operate without a central authority. In the non-crypto world, financial transactions typically are approved by a middleman such as a bank or credit card issuer. With cryptocurrency, transactions aren’t approved or controlled by a central authority; instead, they’re verified by a network of computers.

Financial services

As you’d expect, blockchain can be used in the financial services industry. Rather than tracking a currency, financial services companies can use a blockchain to manage financial obligations such as bank guarantees and letters of credit.

The blockchain can be used to help prove compliance since records on the blockchain can’t be changed after they’re recorded. Blockchain technology can even be used to transfer funds between financial institutions more quickly.

It can also be used for contracts, such as leasing or selling real estate. Blockchain technology allows contracts to be executed more quickly and provides an unchangeable record of every transaction.

Healthcare

Blockchain has several uses in the healthcare industry. Blockchain can be used to confirm health status across several organizations to verify the information they have is correct. For example, it could be used by an insurance company to verify patient information rather than waiting for records to come in from a healthcare provider.

It can also facilitate tracking medical supplies or medications through the entire supply chain from production to the end-user in case a recall needs to be made or to verify authenticity.

Voting

In theory, voting could be conducted using blockchain technology. Private keys could be issued to individuals who then use them to vote. Then, you could verify your vote was counted correctly on the blockchain.

Despite the popularity of this idea, a study by MIT and Harvard exposes flaws in the concept of using blockchain for voting. Voters could lose private keys, making it impossible for them to vote. Similarly, someone could vote on behalf of the actual voter if they somehow gain access to private keys not stored securely.

Automotive industry

Blockchain technology could be used in the automotive industry, too. The technology could securely share data about a vehicle with owners and manufacturers. Auto insurers could use information recorded on the blockchain to help offer more accurate auto insurance rates based on data provided by your vehicle. Manufacturers could use the technology to track the parts that go into specific vehicles, allowing them to alert car owners of defective items.

Supply-chain management

The COVID-19 pandemic showed the challenges of managing a supply chain. Blockchain can help by creating an unchangeable record that multiple parties can share along the supply chain. For example, Walmart Canada uses blockchain to manage invoices across its 70 third-party freight carriers. IBM created the IBM Food Trust, which uses blockchain to improve the food supply chain.

What are the advantages of using blockchain?

The concept of a blockchain can provide many benefits depending on how it’s used. The blockchain allows you to start investing money in Bitcoin, a decentralized currency that wouldn’t exist without the blockchain.

The decentralization of a blockchain is an advantage as the blockchain data exists in many places at once. If any one of the devices fails, others exist with the same exact information.

The blockchain also allows for transparency. Every block recorded to the chain is permanent and cannot be changed once added. At any time, a user can verify the entire historical blockchain of a particular asset and see the entire record of transactions.

Blockchain security is another advantage of using the system. It’s secured by public-key cryptography, which encrypts information in a particular way to ensure confidentiality and ease of authentication.

Additionally, since the blockchain uses distributed ledger technology, tampering with the blockchain is basically impossible. The tampered or incorrect block would be flagged as false as it does not conform with the other instances of that block in the blockchain that exist in other locations. It would fail the required verification.

What are the disadvantages of using blockchain?

A blockchain isn’t a perfect technological solution. Like many concepts, it has some serious downsides you must deal with.

First, blockchain technology can be highly complex for those that don’t take the time to learn how it works on a conceptual basis. Even those that understand the concepts may not understand the technical computing involved for blockchain to work. That said, many don’t understand how several other everyday technologies work (computers, smartphones) and can still successfully use them.

Blockchain records are permanent once recorded. If a wrong transaction is made, the only course of action is to create a new transaction to fix it. While fixing a single transaction isn’t a problem (if all parties agree), someone may end up with the assets and not want to fix the wrong transaction.

Managing private keys to assets on the blockchain is another issue. If private keys are lost, access to the asset on the blockchain is permanently disabled. This can result in the loss of valuable cryptocurrency or other information forever.

While security using blockchain technology is well developed, security issues exist. If one entity controls over 51% of the network power, it can influence how transactions are validated. This could present problems for new transactions recorded onto the blockchain in the future.

FAQs

What is blockchain used for?

Most people associate blockchain with cryptocurrencies, such as Bitcoin. Cryptocurrencies use blockchain to verify transactions and track the transaction history of a particular Bitcoin. However, the technology can be used for many other purposes, including smart contracts, verifiable voting, tracing pharmaceuticals, and more.

What is a node in blockchain?

Nodes are the devices, such as computers, used to store, record, and verify information on a blockchain. Two different types of nodes exist. Some nodes, called full nodes, store and enforce the rules of the blockchain’s history. Lightweight nodes are users who wish to connect to the blockchain to make transactions or verify the information on the blockchain.

What is proof of work in blockchain?

Proof of work is the concept that allows transactions to be recorded and confirmed on the blockchain. This happens when a miner discovers a new block’s target hash through the process of solving a complex mathematical problem. In exchange for discovering the hash and recording the block, the miner is rewarded with cryptocurrency and transaction fees.

Bottom line

Now that you understand the basis for how blockchain technology works, you have an idea of how the technology could be for more than just cryptocurrency. If you are interested in how to buy cryptocurrency, though, you’ll want to use an exchange. Here’s our list of the best cryptocurrency exchanges.

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Author Details

Lance Cothern Lance Cothern, CPA is a personal finance writer and founder of MoneyManifesto.com. Lance's work covering several personal finance topics has been published in U.S. News & World Report, Business Insider, Credit Karma, Investopedia, and several other publications.