What Is Blockchain? Meaning, Working, Types, and Uses

Blockchain is defined as cutting-edge database technology that drives transparent data-sharing over a network. Blockchain databases retain chronological consistency, preventing data from being deleted or modified without network consensus. Developers can use this feature to create a secure, immutable ledger for tracking values such as payments, orders, and user accounts. This article covers the meaning, working, types, and uses of blockchain.

What Is Blockchain Technology?

Blockchain is a cutting-edge database technology that drives transparent data-sharing over a network. Blockchain databases retain chronological consistency, preventing data from being deleted or modified without network consensus. Developers can use this feature to create a secure, immutable ledger for tracking values such as payments, orders, and user accounts.

Blockchain gets its name due to its architecture: data is stored in ‘blocks’ connected in a ‘chain’. The block is the structure that records transactions, while the chain consists of numerous databases connected over a network using peer-to-peer nodes. Such a configuration, also known as a ‘digital ledger’, allows the system to support built-in mechanisms for preventing unauthorized entries. Users can access a consistent ‘shared view’ of data with it.

Despite its recent popularity, blockchain originated in the late 1970s. Ralph Merkle, a computer scientist, created the base for modern-day blockchain by patenting Hash trees. Also known as Merkle trees, these computer science structures store data using cryptography to link blocks.

Just before the turn of the millennium, W. Scott Stornetta and Stuart Haber created a system that used Hash trees to prevent document timestamps from being modified arbitrarily. And thus, the first instance of blockchain came into existence.

Today, blockchain is leveraged to record data securely. Making unauthorized changes to the information stored in a blockchain database is challenging. This is possible because the ‘distributed ledger’ created by blockchain duplicates and transmits the records of every transaction across the computers that are a part of the blockchain network.

Additionally, all ledger transactions in a blockchain-powered database are authorized by the user’s digital signature. This ensures the authenticity of every transaction and minimizes the risk of manipulation. In a way, a blockchain database can be thought of as a collaborative online spreadsheet. While everyone can see the information in the sheets and who added it, nobody can modify the existing entries.

Blockchain helps boost user efficiency through improved transparency, reduced risk of regulatory non-compliance, and smart contracts. Its chronological immutability is also leveraged by organizations to securely create, exchange, store, and retrieve digital transactions in an auditable format, making it ideal for audit processing.

However, this technology is not free from shortcomings. For instance, blockchain and cryptography leverage public and private keys, and users losing access to their private keys will face operational challenges. Scalability is another challenge, as each node can support only a limited number of transactions. This can lead to heavy transaction loads taking several hours to be completed. Finally, while its non-editability is a strength, it might be an obstacle when non-malicious information needs to be added or edited after a record is created.

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How Does Blockchain Work?

The critical function of blockchain is to enable the recording and transmission of data but restrict modifications. Let’s first understand how blockchain creates immutable ledgers and power transaction records that cannot be changed or destroyed easily.

1. Decentralization

Traditionally, modern-day databases are formed when numerous servers are connected and stored in a secure location. The organization that owns these servers also has considerable control over all the data stored within them.

While this centralized setup works effectively for numerous applications, it can also provide a single point of failure. For instance, the owner organization can modify, erase, or block access to the data. The data may also be rendered inaccessible if there is a power failure, the internet goes down, or a disaster occurs where the servers are stored.

Blockchain is immune to these threats. In principle, it is a widely distributed database. Data is transmitted among numerous network nodes generally spread over a wide geographical area. This bolsters redundancy and cements data fidelity. The latter is ensured because users cannot simply change the data.

2. Immutability

How are unauthorized changes thwarted? Let’s say a user attempts to modify an existing record within the database. While they may successfully edit the data in one node, the data remains unaltered in the other nodes. The other nodes then run cross-references among one another and swiftly highlight and discard the modified data on the one node. Thus, no node on the blockchain network can edit the database unilaterally.

This feature makes records permanent and creates an unmodifiable chronological history of all transactions. The most popular application of such records is the storage of cryptocurrency transactions. However, blockchain is also used to store other critical data, such as user information, legal contracts, and product inventories.

3. Consensus

The validation of new entries to any block must occur through majority network consensus. This simply means that most computers on the decentralized blockchain network have to agree to every change. The validation of bad faith modifications or transaction errors is prevented by consensus mechanisms such as proof of work (PoW) and proof of stake (PoS).

• Proof of work is a consensus mechanism that was first seen in use for Bitcoin. Closely related to the concept of ‘mining’, this method requires a lot of processing power to be completed. Virtual miners authenticate blockchains secured by proof of work worldwide as each miner attempts to solve a math puzzle before the others. The miner who solves the puzzle first is granted the right to update the blockchain with the newest authenticated records. In return, the miner receives cryptocurrency from the network.
• Proof of stake grants consensus through a system known as ‘staking’, which functions similarly to mining. The underlying process remains the same: the network chooses a participating user to insert the most recent records into the blockchain and is granted cryptocurrency in return. However, the exact process can vary from project to project. In general, blockchains that operate using proof of stake rely on a ‘validator network’ that temporarily contributes (or stakes) already-owned cryptocurrency for an opportunity to validate new records, add them to the blockchain, and earn more cryptocurrency.

Both, proof of work and proof of stake have economic penalties against network disruptions to thwart bad faith actors. In the former, miners are penalized for inputting invalid data (or blocks) by energy, time, and computing power loss. In the latter, a percentage of the cryptocurrency staked by the validators is deducted should they accept a bad block. The slashed amount can vary by network.

Both consensus mechanisms enable the seamless verification of transactions without requiring a specific node to be in charge. However, one stark difference between them is energy consumption. Blockchains driven by proof of stake do not need miners to expend motive power on the duplicative undertaking of competing against each other to solve the same puzzle. Thus, proof of stake minimizes resource consumption during network operations.

4. Transparency

The decentralized nature of blockchain enables all transactions to be viewed transparently–either by users accessing a personal node or through blockchain explorers that allow users to view live transactions as they occur. A copy of the chain is present on every network node and is updated once new blocks are validated and recorded. Anyone with access to the database can track transactions. 

Blockchain databases are encrypted to prevent the identity of stakeholders and other critical information from being revealed to all users. This allows users to stay anonymous without the transactions being hidden. Database owners can use a public-private key pair to decrypt the database.

Here’s an example of how blockchain transparency works. In the past, Bitcoin exchanges have been targeted by cybercriminals who managed to steal users’ cryptocurrency. While the identity of the bad actors was not immediately apparent in these cases, one could still trace the stolen Bitcoins as they were moved or exchanged.

5. Security

Despite being a decentralized database solution, blockchain does not compromise security and trust. Blockchain’s robust network security encourages users to participate in its functioning while heavily disincentivizing malicious behavior.

The most straightforward measure to preserve security levels is the new blocks’ linear and chronological storage. Each new record is unfailingly inserted at the ‘end’ of the blockchain. Once the record is made, the only way to modify it is through majority network consensus.

Blocks are further secured as they contain their hash value and timestamp, as well as the block’s hash value chronologically before them. These hash values are generated using a mathematical function to transform data into an alphanumeric string. Any modifications made to the data of a block lead to a change in the hash value.

For instance, a malicious user who has access to a node on a blockchain network manipulates the database to add cryptocurrency to their wallet illegitimately. The updated record will reflect on that user’s node; however, this data will no longer align with the information on the other nodes. Once all the nodes cross-reference the collective database, this manipulated entry will be highlighted and singled out as illegitimate.

For the security and integrity of a blockchain database to be compromised, the malicious parties must collectively control a majority of the nodes. This would allow the manipulated copy to become the one accepted by most of the nodes. However, this can be a tall order, as nodes are heavily decentralized and often spread over a wide geographical area.

The other, much larger, consideration would be to modify every block before the one being manipulated because the hash values and timestamps would need to be updated. These security measures make such an attack resource-intensive and minimize the probability of success.

Finally, other network members would easily spot any such actions. These users would likely have the option to execute a ‘hard fork off’ to a new, unaffected iteration of the chain. In the case of cryptocurrency, such a hard fork would lead to the attacked token version losing all its value, thus leaving the attackers in control of a worthless asset and defeating the very purpose of the attack.

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Types of Blockchain

The two main types of blockchain are permissioned and permissionless. All other types of blockchain fall under one (or sometimes, both) of these two primary types.

Permissioned blockchain can restrict nodes from accessing the network and control the network rights of nodes that are a part of the blockchain. All users on a permissioned blockchain network share their identities.

As this type of blockchain is restricted in access, the network hosts fewer nodes than permissionless blockchain networks. A key advantage of access restrictions is improved efficiency, as fewer nodes mean decreased processing time for every transaction.

On the other hand, permissionless blockchain gives all users pseudo-anonymous access to the blockchain network. Any user can become a node and enjoy unrestricted network rights.

Due to the nature of blockchain, permissionless networks are (perhaps counterintuitively) more secure than permissioned ones. This is because they have more nodes to validate every transaction, reducing the chances of bad faith manipulation by colluding users. However, such networks often feature longer transaction processing durations.

Let’s look at the four key subtypes of blockchain networks:

1. Private

Also known as a managed blockchain, a private blockchain is a permissioned blockchain managed by a central authority, usually an organization. This central authority has the power to grant or deny access for nodes to join the network. It can also grant varying rights to different nodes for performing various functions.

The general public does not necessarily have access to a private blockchain network, making it only partially decentralized. Due to the limited number of nodes and the relatively high degree of control in the hands of the central authority, a private blockchain might be susceptible to fraud and other malicious operations.

Examples of managed blockchain networks include Hyperledger, a collective project of open-source blockchain solutions, and Ripple, a virtual B2B currency exchange.

2. Public

Permissionless in nature, public blockchain networks are open to everyone and are thus ‘truly’ decentralized. Public blockchain networks also give all nodes equal access rights and allow them to create and validate blocks freely.

Public blockchains are widely used for cryptocurrency mining and exchange. These networks usually feature longer validation times than private blockchains but are more secure.

Examples of public blockchain networks include Bitcoin, Litecoin, and Ethereum.

3. Hybrid

Hybrid blockchains are an interesting amalgamation of private and public blockchains. Like a private blockchain, a single controlling authority manages this type of blockchain. However, there exists within it a level of public oversight: Public blockchains must undertake specific transaction validations within a hybrid blockchain network.

IBM Food Trust is a prominent example of a hybrid blockchain. This solution has been developed to enhance efficiency across the global food supply ecosystem.

4. Consortium

Another attempt at addressing the limitations of public and private blockchains, a consortium blockchain is collectively managed by numerous organizations instead of just one. Permissioned in nature, consortium blockchains are more decentralized than private blockchain networks.

Creating a consortium blockchain calls for cooperation among numerous organizations, usually from within the same industry. While this enhances the security of the network due to an increased number of nodes, it introduces logistical obstacles and the risk of antitrust accusations.

Examples of consortium blockchains include R3 for the finance domain and other regulated industries and the non-profit CargoSmart Global Shipping Business Network for the shipping and supply chain spaces.

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Top 5 Blockchain Applications

Blockchain is an ideal solution for the security and trust required by modern-day databases. It is highly resistant to unauthorized manipulation of records due to a well-balanced combination of transparency, consensus, and decentralization. It also lacks a single point of failure, making it robust and reliable.

These are the top industry applications of blockchain:

1. Finance

In the finance domain, blockchain has revolutionized money transfers. Traditional money transfer technologies can be cumbersome and resource-intensive, especially internationally. Where contemporary international money transfers can take up to a few days, the same transaction undertaken over a blockchain network takes only minutes while also being less expensive.

Lenders can also rely on blockchain-powered smart contracts to reliably disburse collateralized loans. Smart contracts enable the automatic execution of events in response to specific triggers. For instance, once a loan is fully repaid, a smart contract can be set to issue the release of the collateral automatically. This makes all facets of loan processing swifter and more cost-effective, allowing lenders to offer better rates and attract more borrowers.

Smart contracts also boost transparency between insurance providers and their customers. For instance, a permanent record of all claims maintained on a blockchain network can benefit insurance personnel such as claims adjusters. On the other hand, claimants can receive payments much more quickly.

Finally, one can use blockchain technology to create decentralized financial exchanges. As evidenced by cryptocurrency exchanges, such systems would enable faster and more cost-effective transactions. Moreover, such a financial platform would remove the need for investors to transfer assets to a central authority, giving them greater security and control.

2. Data storage

Storing data on a blockchain network enhances its integrity and security. Their decentralized nature makes it very difficult to modify or wipe blockchain databases without authorization. Additionally, the data is thoroughly redundant, making business continuity hassle-free. With the proper configuration and use case, a blockchain database might even be less expensive over the long term.

3. Governance

One of the most revolutionary applications of blockchain is voting. While no significant national election has been decided based on blockchain-powered voting so far, it is being explored worldwide. A blockchain-driven ballot system has the potential to prevent double voting, ensure only eligible members cast their votes and thwart vote tampering.

Such a voting system would also remove obstacles such as voter suppression and allow all eligible voters to vote with a few simple taps on their smartphones. Additionally, it would significantly reduce the time and effort associated with organizing elections and declaring results without compromising ballot security.

Apart from voting, blockchain could potentially improve the efficiency of welfare programs. By uploading all data related to welfare schemes and their applicants and claimants onto a blockchain network, governments can minimize fraud while decreasing operational costs. Funds would also reach beneficiaries in a much more streamlined manner.

4. Non-fungible tokens

While opinions on digital art can be sharply divided at times, there is no denying that non-fungible tokens (NFTs) have far-reaching applications. Simply put, an NFT leverages the blockchain’s ability to ensure that data exists only in one place simultaneously. Putting an NFT on a blockchain ensures that only one immutable copy of it exists anywhere on the internet. An NFT does not have to be digital art. It can be a property deed, media rights, or even a movie ticket! If it’s unique, it can be captured as an NFT.

5. Internet of Things (IoT)

IoT has numerous applications across industries, but cybersecurity issues prevent widespread adoption. Their security posture can be enhanced by migrating IoT systems to a blockchain network. For instance, storing sensitive business data on a decentralized network close to the data collection devices, instead of on a central server, can make data associated with freight transportation, machine maintenance, and other applications more accessible and more secure to store and use.

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Takeaway

Blockchain is more than cryptocurrency or digital art. It is a cutting-edge technology that has the potential to revolutionize business and governance as we know it. Enterprises today are experimenting with blockchain in many facets of day-to-day operations. As the digital frontier is pushed further and further, blockchain could offer us the access control, transparency, and data security that we need to unlock the future.

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