What Is Blockchain? A Simple Explanation

What is blockchain technology, how does it work, and why is it so important? We provide simple answers to your questions.

Blockchains underpin Bitcoin and other cryptocurrencies. But they also have lots of uses outside of payment services.

So, what is a blockchain? How do they work? And what can you use a blockchain for? Keep reading to find out.

What Is a Blockchain?

Blockchains are “distributed ledgers” that store digital data. Each participant gets a copy of the existing data and the opportunity to confirm new data.

Let’s illustrate by contrasting a blockchain with a bank.

Your bank maintains a central database (a “ledger”) of all their customer details. This may store account numbers, balances, transactions, and more. Whenever you interact with your account (such as by withdrawing money or making a transfer), your bank updates its records.

Only the bank has access to the ledger, so if they decide to make a change (even one that’s wrong), there’s not much you can do to change it, short of making a complaint.

How Do Blockchains Work?

Distributed ledgers are much smarter than centralized ledgers. Rather than having one person or company with the sole responsibility of the data, many people have copies of a distributed ledger, and there are few restrictions on who can join.

Each user (known as a “node”) stores a copy of the complete ledger. For every transaction, several nodes verify it, and then all nodes update their records so that everything stays up to date and in sync.

Each new transaction gets bundled up with many other operations from the same time period into a “block,” with each new block being stored in a continuous chain—a blockchain!

When sending crypto, your wallet presents a public key along with a digital signature. The digital signature is unique and is generated with the private key. By using the signature and public key, other nodes can verify that this is a legitimate transaction without revealing the private key. Read through our crypto wallet resources to learn more.

How Secure Are Blockchains?

There’s no centralized authority that can manipulate a blockchain. If a hacker started changing records in one ledger, all the other nodes would reject it since the new records would not match the data stored by everyone else.

The only way to manipulate data is for every single node to conspire together, which is unlikely. In the case of Bitcoin, there are roughly 10,000 different Bitcoin nodes spread across the world.

Some blockchains are susceptible to 51 percent attacks, whereby a group of attackers controls more than half of a blockchain’s computing power. For large networks, like Bitcoin’s blockchain, that’s very unlikely happen—but it remains a threat for smaller blockchains with fewer miners.

(Note: None of the worst crypto hacks of all-time arose from corrupted blockchains.)

Crypto Theft

Your public key isn’t sensitive, but the private key is. Only the genuine account holder should have access to the private key. If anyone gets hold of it, your account could get emptied. If you want to keep your coins safe, you should look into the best cryptocurrency cold wallets.

Are Blockchains Used in the Real World?

While many blockchains only store transaction details, blockchain technology is playing an ever more prominent role in the world around us in ways that have nothing to do with finance and payments. It’s possible to store all kinds of data on a blockchain: medical records, secure messages, smart contracts, and more. Thats why some of the top cryptocurrencies in the world came into existence.

Some of the more curious use cases for blockchains include protecting endangered species, fighting fine art forgery, and enforcing food safety standards. Even Facebook’s seemingly doomed Libra project relies on a blockchain.

Smart Contracts on the Blockchain

One of the most compelling use cases is for issuing smart contracts on the blockchain.

A smart contract is a piece of code that lives on the blockchain and can enforce (rather than merely outline) the terms of a particular agreement. Smart contracts could be used in house purchases, elections, and even identity management and protection.

The most commonly used blockchain for smart contracts is Ethereum.

Blockchains for End-Users

Smart contracts and the protection of endangered species are all well-and-good. But are there any ways you can use a blockchain in your day-to-day life?

Well, yes. For example, you can now stream music on the blockchain using services like Audius and BitSong. Or you can sign up for blockchain-based Twitter alternatives such as Mastodon and Peepeth.

People who spend a lot of time online should check out the Brave browser and the BAT token (it pays you for browsing sites with ads).

And what about Reddit alternatives on the blockchain? You can use them to earn crypto in exchange for your high-quality content. Some people manage to make several hundred dollars per month. The most popular Reddit alternative on a blockchain is Steemit.

You can even find blockchain-based Wikipedia alternatives and decentralized instant messaging apps.

If you’re a real blockchain aficionado, you could go out and buy a blockchain smartphone or play games on the blockchain, and there’s even talk about a new “decentralized internet.” Watch this space.

The Cons of Using Blockchains

So far, we have painted a rosy picture of the benefits of blockchains. But like anything, there are also some drawbacks.

Some of the most notable issues facing blockchains are legal in nature:

Which country’s laws take precedent on a decentralized network?
Who enforces smart contracts in the case of a dispute?
What happens to your personal data when you leave a blockchain (for example, a blockchain used in the healthcare sector)?
Who is responsible for blockchain regulation?

Right now, no one has the answers.

You might also hear examples of private blockchains. Private blockchains differ from public blockchains due to their increased centralization. Some people would argue that a private blockchain doesn’t even meet the requirements of being called a blockchain in the first place. They can leave you more exposed to bad actors and the whims of developers.



What Is Blockchain? A Simple Explanation
Scroll to top