Cryptocurrencies have garnered the attention of the masses in 2021 and if you have been following along you have probably come across the term “blockchain”. Blockchain has almost been synonymous with the crypto revolution and rightfully so, as this is the technology that is at the core of most cryptocurrencies.
The technical concept of blockchain dates back to the early 1980s when David Chaum, a computer scientist and cryptographer wrote his dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups”. This is known to be the first proposal for a blockchain protocol and David is regarded as the inventor of digital currency.
David Chaum’s work was followed by numerous developments in the digital payments domain which included, Wei Dai’s white paper on b-money that outlined many concepts that modern cryptocurrencies are based on. B-money was never deployed for public use.
In 2008, a white paper with the name “Bitcoin: A Peer-to-Peer Electronic Cash System” was released by Satoshi Nakamoto, which is a pseudonym used by the person or persons behind Bitcoin. This document contains a technical description of a peer-to-peer payment network for electronic transactions without relying on trust from a third party. Bitcoin is widely recognized as the first cryptocurrency of its kind utilizing blockchain technology.
How Does Blockchain Work?
On a basic level, a blockchain can be defined as a specialized database. A database, essentially, is information structured in the form of tables and stored digitally on computer servers to provide easy access to multiple users. A database is typically owned by a single entity or corporation which has the privilege to update and modify the information within it. However, blockchains are decentralized which means no one party controls the blockchain, unlike a database.
The data inside a blockchain is ordered chronologically and connected to create a “chain”. This chain consists of “blocks” of information that are added to the network as new information becomes available. The data stored on the blockchain is immutable and cannot be modified without consensus. A secured copy of this data is distributed to all the participating members of the blockchain network. This results in a system that is essentially tamper-proof as any change in the information can be quickly recognized by the blockchain and corrected. Blockchain presents a “trustless” solution to many activities that would typically require the intervention of a third party. Any change or modification to the blockchain can be verified automatically, in turn, ensuring that the data present on the blockchain is reliable.
The Bitcoin protocol, among others, uses blockchain technology to maintain decentralized, public ledgers for all the transactions that occur on the network. This data is used by the network to calculate the amount of bitcoin owned by different addresses and verify the ownership of the coins.
Speculators and doubters have painted cryptocurrencies and blockchain in a negative light. Bitcoin and other cryptocurrencies have been linked to many hacks in the past but typically, these hacks occur at the storage and the exchange levels and not on the blockchain these cryptocurrencies are based on.
Blockchain networks are decentralized, i.e. distributed among a large number of computers all across the globe. Hence, they do not operate with a single point of failure that could be attacked by hackers. However, institutions like banks require their clients to provide personal information. Banks in the past have suffered from data breaches that have resulted in client data being stolen by hackers for various nefarious purposes. Cryptocurrencies on the other hand protect their users from such threats using their peer to peer nature and anonymity.
Blockchain provides a tamper-proof and secure way of storing publicly accessible information, and this property has been utilized by many cryptocurrencies. A blockchain acts as a public ledger that can operate without being overlooked by a third party, such as banks. Blockchain technology ensures that the transactional information that is recorded on the blockchain can be relied upon.
Cryptocurrencies and blockchain have gone hand in hand over the years. However, many other applications of blockchains have come forth recently. One such example of this is the DeFi or Decentralized Finance industry. Programmable blockchains like Ethereum allow developers to create decentralized applications on top of the blockchain. Numerous projects aiming to provide financial services such as derivates trading, lending & borrowing, risk insuring, etc have been built on blockchains. These projects do so without interference from a middleman and are collectively dubbed as DeFi.
The applications of blockchain technology, however, extend beyond finance. The recent NFT boom has seen the digital art market being revolutionized within a very short amount of time. Other applications include identity verification, supply chain tracking, voting mechanisms, music royalty tracking and many more. The technology has the potential to revolutionize almost every industry out there and there is a chance that with time, it will.
New projects are being built on blockchains every day, targeting different sectors like finance, entertainment, consumer goods, etc. Many big players in the tech industry and even governments around the world are investing in and exploring the technology.
This industry is still in its early stages but has shown enormous potential to improve many processes around the world. Blockchain technology has many advantages when it comes to the security and reliable data that blockchain networks can provide. These qualities are being leveraged by several projects to provide unique and improved solutions to various legacy systems that are currently in use.
The recent media attention and the rally in the prices of cryptocurrencies have brought many new eyes to the crypto and blockchain space. The masses are paying attention to other utilizations of blockchain beyond bitcoin and institutions are pouring more and more money into the technology.