What is Blockchain Technology?

2021/04/15 11:01:01

Words like Bitcoin, Ethereum, DeFi, and NFTs are flooding the media space, and chances are that you’ve heard about any of these. Bitcoin, in particular, has received a lot of attention from institutional investors, celebrities, and even governments.

What you may not know though is that Bitcoin and other digital assets are being powered by blockchain technology. By the end of this article, you will know what a blockchain is, how it works, where it is being used, and how to invest in it.

What is Blockchain Technology?

First, we would like to clear the air that Bitcoin is not the same as blockchain. A lot of new users tend to use both words interchangeably. However, you can think of it this way. If Bitcoin was Instagram, then blockchain would be the internet. Simply put, Bitcoin is built on a blockchain, and would not exist without a blockchain.

That being said, blockchain is a decentralized, distributed, and sometimes public network that enables the transfer of valuable assets from one person to another without using a middleman. Unlike traditional businesses such as banks, no one person or group of persons controls the network.

Speaking of valuable assets, an asset could be tangible or intangible. While tangible assets include items such as money, house, land, or car, intangible assets can be anything from a patent to intellectual property or copyright.

Blockchain can also be referred to as Distributed Ledger Technology (DLT). Since the network is not controlled by any centralized body, it makes data on a blockchain immutable and transparent.

How Does Blockchain Work?

According to an MIT Technology Review, “the whole point of using a blockchain is to let people — in particular, people who don't trust one another — share valuable data in a secure, tamperproof way.”

To understand how a blockchain works, you will need to familiarize yourself with three important concepts – blocks, nodes, and miners.

Blocks

Every blockchain is made up of several interconnected blocks, hence the name “blockchain.” And every block has three basic elements – the data in the block, a randomly-generated 32-bit whole number called a nonce, and a 256-bit number known as the hash.

A nonce generates the cryptographic hash of the first block to be created in a chain. Subsequent blocks typically reference the previous block. What this means is that to falsify the data of a block, you must change the data of all the previous blocks before it. Considering the computational power required to execute this, it becomes practically impossible to alter information on a blockchain.

Nodes

A blockchain comprises several users known as nodes. No one computer can own or control the chain. Each node is connected to another in a peer-to-peer manner. There can be hundreds or even thousands of nodes in a blockchain network. At the time this article was published, the Bitcoin network had over 10,000 nodes scattered across the globe.

A node is responsible for confirming blockchain transactions. Moreover, every node has a copy of the entire blockchain.

Take for instance someone who tries to send 1 BTC to another user. The details of the said transaction will be sent to the nodes on the network to validate its authenticity. If the majority of the nodes on the network agree that the block of transactions is valid, then it is added to the chain. Consequently, every node on the network automatically adds the new block to their chain to have the same version of the chain.

Miners

Miners create new blocks on a chain by solving complex mathematical problems. They attempt to find the nonce that generates an accepted hash. Mining is not an easy task. To paint a clearer picture, a nonce is just 32 bits and the hash is 256. This brings the total possible nonce-hash combinations to roughly four billion. When the right combination is found, the block of that miner gets added to the chain and he is rewarded financially.

Mining requires enormous time and computational power. This algorithm has often been criticized by environmentalists. According to Digiconomist, a site that keeps track of Bitcoin’s Energy Consumption Index, Bitcoin mining activities gulps about 84.96 terawatt-hour annually, equivalent to the power consumption of Finland.

Instead of using the Proof-of-Work (PoW) consensus algorithm that requires mining, several new blockchains use Proof-of-Stake (PoS). In this case, we have “Validators” and not “Miners.”

Private Vs. Public Blockchain

There are primarily two types of blockchains – private blockchains and public blockchains. Popular cryptocurrencies such as Bitcoin and Ethereum are built on public blockchains.

In a public blockchain, anyone can join the network whenever they want. There are no restrictions on participation, and anyone can view the ledger or take part in consensus. Some of the features of public blockchains include full decentralization, high security, zero regulations, open environments, and anonymity.

A private blockchain, on the other hand, is a special type of blockchain whereby a single organization controls the network. It is not open for just anyone to join. These types of blockchains are mainly developed for the internal networking system of a company. Unlike public blockchains, private blockchains are not fully decentralized.

What is Blockchain Used For?

A blockchain can be used wherever data or value is being exchanged. From paying for goods and services to tracking farm produce, online gambling, election voting, and copyright and royalty protection, blockchain tech has found use cases in several industries.

The bottom line is that the potential of this relatively nascent industry is limitless.

How to Invest in Blockchain?

Investors usually invest in cryptocurrencies to support the blockchain technology which they think hold high growth potential in the future. Kucoin currently offers users around 300 tokens powered by blockchain technology. Moreover, the recent crypto craze around NFTs motivated us to have roll out a dedidated trading zone to make users trade NFTs with ease.