Blockchain: What Is It and How Does It Work?

Updated: Jan 3

What is Blockchain Technology

A blockchain is a digital, immutable ledger that acts as the foundation in a business network for tracking assets and recording transactions. The technology is specific to recording digital information in a process resistant to alteration, hacking, and corruption.

Within a blockchain, each transaction is recorded as a “block” of data as it occurs. Each of these individual records is recorded a single time and distributed across a shared ledger made available to every computer system with that blockchain’s network. The transaction is time-stamped and verified using peer-to-peer computer networks as it’s added to the network’s chain of data. The assets these transactions refer to can be tangible or intangible, and the data block records specific information such as the what, when, where, the quantity, and the condition of the asset.

These blocks form a chain as they’re directly connected to both the blocks before and after, each confirming the exact sequence and time a transaction takes place to prevent alterations. The continuous addition of blocks strengthens the verification process of previous transactions, compounding to reinforce the blockchain as a whole. Blockchains like Bitcoin and Ethereum are kept secure in their constant growth as transactions are recorded and consistently added to the ledger. This tight organization and transparency remove the potential for any drastic alterations and the chance of them going unnoticed, setting the foundation for a tamper-evident, immutable ledger.

The concept of technology that protected individual transactions from tampering made its initial appearance as part of a dissertation by David Chaum in 1982 titled "Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups." In 1991, Stuart Haber and W. Scott Stornetta extrapolated this idea into a cryptographically secure chain of blocks, or what we know today as blockchain. Nearly twenty years later, a paper published by Satoshi Nakamoto in 2008, titled “Bitcoin: A Peer-to-Peer Electronic Cash System” bridged the academic with the practical, and Bitcoin was launched less than a year later in 2009. The explosive growth of Bitcoin and other cryptocurrencies popularized the use of blockchain technology, which shows promise as a security measure for other industries in need of tighter control over records and transactions, such as in the development of legal contracts, sale of property, or the maintenance of medical records.

Want to learn more? Check out IBM's comprehensive guide to blockchain.

Benefits of Blockchain

  • By removing human involvement in the verification process, a slimmer margin for error and drastically improved accuracy is characteristic of blockchain networks.

  • The elimination of third-party involvement removes associated costs of operating through banks and other payment processing companies.

  • Blockchain takes a decentralized approach and stores information across a network rather than in a central location, making individual records difficult to tamper with.

  • Blockchain operates constantly rather than during specific operating hours, as is the case for banks and other third parties, making transactions secure and efficient.

  • Blockchain acts as a banking alternative and an extra form of security in protecting personal information, particularly for participants living in cash economies and/or developing countries.

Learn more: Blockchain Principle

Future of Blockchain

As blockchain approaches its thirtieth year, practical uses beyond bitcoin and cryptocurrency are in the process of being explored and implemented as a cross-industry technology. With cyber and communications security more important than ever and projected to only increase in value, blockchain stands to improve the accuracy, efficiency, safety, and cost-effectiveness of both business and government operations. It’s in this way that blockchain technology is no longer a matter of if, but when, in the future of cyber security.

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