What Is Blockchain Technology & How Does It Work in 2023?
Blockchain technology is supposed to be the future of payments, data storage and more, but what is blockchain? How does it work? Is it really as useful as advertised, or are there some serious issues with the use of blockchain networks?
In the past few years, you can’t have read more than a few articles on technology without coming across the term blockchain. It’s the technology that powers Bitcoin and other cryptocurrencies, for one. What is blockchain, though, and how does it work?
Key Takeaways: Understanding Blockchain
- Blockchain is what it says on the tin: a chain of blocks, with each block containing a small amount of data.
- The data in a block is immutable; it can’t be tampered with in any way. This is great for informational security.
- Blockchain is a relatively new technology that has a lot of potential uses, but for now is almost exclusively used in cryptocurrency.
- While blockchain could be groundbreaking, there are some serious issues with it that stand in the way of widespread adoption.
As with all heavily hyped technologies, there’s a lot more to blockchain than you’d think at first. It’s not just the engine that makes crypto possible; it could also be used in all kinds of projects that need to secure their data. However, due to the way the technology works, there are some nasty downsides its proponents aren’t too quick to advertise.
A block is a piece of data, like a transaction or a smart contract. The data in a block cannot be changed once it is created.
Cryptocurrency is a digital currency secured by cryptography. Blockchain is the technology that makes sure these tokens are secure.
The digital ledger that keeps track of Bitcoin is the longest running blockchain.
Blockchain Basics: What Is Blockchain Technology?
Blockchain technology — also known as “distributed ledger technology” — is a pretty complicated concept, but in essence it’s a new kind of database.
In most cases, data is stored in tables: massive spreadsheets where a computer can find what it needs. If you need to find a transaction from a certain day, you feed your parameters to the computer and it goes to find the data.
Distributed ledger technology doesn’t store data this way. As you can guess from the term, the way it works is much more akin to a ledger, those tall books used by bookkeepers. In a ledger, transactions are written down in chronological order, and can usually only be retrieved the same way: by going back through time and finding the transaction you need.
Blockchain takes this concept and runs with it. Each entry in its ledger is a so-called block, a unit of data. A block can be just about anything that happened on a blockchain: a cryptocurrency transaction, the details of a smart contract, you name it. They’re usually quite small — Bitcoin limits its blocks to 1MB, for example.
Block to Block
Each time a block is written, it’s sealed off and encrypted so it can’t be altered in any way. As a result, all data written to a blockchain is immutable, and can’t be changed or tampered with. This is what makes blockchain so attractive: theoretically, data can’t be messed with after the fact. It adds a lot of security to whatever data is stored there.
That’s the “block” part of blockchain; the chain is the way in which data is stored. Rather than place each block in a table, like regular data, each block instead is attached to the next one, creating a chain of blocks. Each block is a link in the chain, and there is no theoretical limit to how long one can be.
The reason why blocks are chained like this gets incredibly technical, but the short version is that it adds a layer of security. The link between blocks acts like a kind of seal that shows when a block was closed off, as well as adding an extra layer of encryption. This is an added guarantee that the block has not been tampered with in any way.
Distributing Data Across Blockchain Networks
This method of securing data isn’t the only trick blockchain has up its sleeve, though. Another key ingredient is where blockchain data is stored, or rather where it isn’t. Unlike traditional data, a blockchain isn’t stored in a single place, but rather across a decentralized network.
So in a way, each blockchain exists in several places at once.
If you’re familiar with the concept of syncing cloud storage, where one change in a file will instantly be reflected across all other instances of that file, this is where the blocks come back in. Since a block can’t be altered after it’s written, an attempt to do so will alert the other instances of the blockchain and prevent the change from going through.
Blocks and the distributed database are what keeps a blockchain safe. For example, when you record transactions, the data is locked away safely, while the blockchain network makes sure there isn’t any funny business going on.
Transparency & Accountability
As a result, blockchain technology is highly transparent. Any transaction that has been made reflects across the entire blockchain network, so anybody who has access can see what’s going on. For example, Blockchain Explorer is one of many sites where you can see what’s happening on the Bitcoin blockchain at any time.
Of course, not all blockchains let just anybody check. The Bitcoin network is an example of a public blockchain, but there are plenty of private blockchains out there.
However, the difference is based on who has access, not on the data available. Any participant can validate transactions, check on what’s going on and see everything that ever happened with that particular blockchain.
What Can You Use a Blockchain Ledger For?
As you can imagine, this type of technology is perfect for any industry that already uses ledgers. For example, many financial institutions are eyeing the technology to keep track of data in a transparent yet secure way. There are plenty of other fields that could see use of this tech, though.
For example, one company wants to store our digital identities on a blockchain, making it so anybody can see exactly who we are and what we’ve been up to.
Blockchain has also been proposed as a way to protect copyright. Some proponents even claim it could improve government services, like allowing voting via blockchain, or following the authorities’ procurement process step by step.
In each of these cases, putting this data in a ledger could provide greater security for the users, while also adding transparency for anybody needing to access the information on the (hopefully private) blockchain. That said, practically all of these projects are still in the development stage.
Blockchain & Cryptocurrency
If we want to see blockchain technologies in practice, the only real place to go is the wonderful world of crypto and related Web3 applications. In fact, the two are conflated so often that they have nearly become synonyms.
This isn’t really surprising, since crypto is how people have become acquainted with the blockchain — and so far it’s been the only place where we could see its full potential.
In fact, without blockchain, there’d be no crypto. The idea of digital currency is far from new, but usually ran into the same simple problem: there was no way to prevent anybody from simply creating more of it. Plenty of projects came and went, but all eventually failed, simply because there was no good way to secure payments.
Securing Bitcoin and Other Cryptocurrencies
Enter Satoshi Nakamoto and the famous 2007 whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System. In this document, Nakamoto — whose identity is unknown to this day — laid out how blockchain technology could be used to secure their currency, Bitcoin. It should be noted that Nakamoto isn’t the inventor of blockchain, though; they’re just one of the first people to find a good use for it.
As a result, Bitcoin is often seen as a kind of blueprint for blockchains, even though some of the things it does are unique to Bitcoin and not necessarily to all blockchains. A good example is Bitcoin mining, in which a new block of currency is unlocked by completing a complex equation. While many other cryptocurrencies follow this model, it’s not necessary to do so.
Another example is the Ethereum blockchain, which is a home for its own currency, Ether, but also lets you host applications, execute smart contracts and much more. Where Bitcoin proved that blockchain can work, Ethereum really shows the breadth of its potential.
Downsides of Blockchain Platforms
Most of the news surrounding this technology and the blockchain system of securing data is positive. However, not all that glitters is gold, and there are some serious issues with blockchain that cast doubt on its viability.
The least technical issue, but one that may be the most important for many people, is where the line between transparency and invasion of privacy will be drawn. Blockchain makes data transparent, which in the case of cryptocurrency is very much a good thing. For example, it prevents people with ill will from duplicating coins at random or claiming payment never arrived.
However, if we start using a blockchain to store personal details, like in some of the projects mentioned above, whether we really want everybody to be able to access all of our data becomes a huge question.
While it may seem cool to have your driver’s license stored online, not everybody who wants that information has good intentions. A transparent information source like the blockchain would be a stalker’s dream.
That’s very much the worst-case scenario, but there are others too. When you make lots and lots of data accessible in this manner, you open it all up to data mining. If we were to use blockchains for everything, marketers would have a field day getting their hands on all that data, not to mention even less savory characters like identity thieves.
Blockchain Security Issues
However, there are also more concrete problems with blockchain technology. A big issue is that while the actual chain is secure, its points of access — passwords and apps that interact with the blockchain — increasingly come under attack. Encryption and other tricks may protect against brute-force attacks, but are no match for social engineering.
Many of the biggest security issues from the crypto space are glorified phishing attacks, where hackers somehow got somebody’s passwords or spoofed their credentials. You could argue that this is the weak point of any technology — and you’d be right — but it does make a strong case against saving anything truly important on the blockchain.
Of course, the interior security of blockchains may also not be all it’s cracked up to be. For example, if you somehow controlled enough of the nodes where a blockchain was stored, you could theoretically gain access over a network and negate its ability to validate transactions.
Another major issue is something called a 51% attack. It’s a pretty complicated type of attack, but in short, a malicious participant can fool a blockchain into thinking the attacker is still owed the money from a block that he already mined. It’s happened a few times, with an attack in May 2018 scoring roughly $1 million worth of Bitcoin Gold.
Of course, many security issues are only a problem until they’re patched: for example, 51% attacks have been made a lot harder to pull off since 2018. However, there’s one issue with blockchain that won’t have an easy fix, and that’s the fact that it’s slow to write and retrieve data.
The tech is explained in this Hacker Noon article, but the upshot is that all this encryption and decentralized validation eats up time. As a result, to process a transaction simply takes longer than it would using old-fashioned methods. Sure, the difference is measured in nanoseconds, but even those add up.
To get an idea, this article on transaction speeds gives us some numbers. Bitcoin can process seven server transactions per second, while Ethereum can handle 20. The Ripple cryptocurrency can manage as many as 1,500, which may seem respectable until you realize that Visa, the world’s biggest payment processor, can handle 24,000 transactions per second — 15 times as many.
In a world where people need access to data and money fast, this is likely to be blockchain’s biggest issue. Security and immutability are important, but if you can’t get what you need when you need it, that may be a massive hurdle to any technology being adopted.
As interesting as blockchain is, it’s hard to envision a world where it makes it out of its small crypto niche. The practical concerns just make it too big a liability. That said, if there was some way to speed it up and somehow protect users’ data better, it could very well be the technology of the future.
What do you think of blockchain? Is it the answer to our data security issues, or do you also see practical issues standing in the way? Will we use it for other purposes, or is crypto all it will ever be used for? Let us know in the comments below and, as always, thank you for reading.