What is blockchain?
Blockchain technology is a type of distributed database that records transactions in a ledger of chronological “blocks'' of information. These transactions can describe the movement of physical or intangible assets — from currency to food to intellectual property. The blocks are stored on a network of nodes that each contain a copy of the ledger. (In networking, a node is typically some type of a connected computer.) Transactions are recorded and secured with a cryptographic signature, which uses mathematical equations to verify the authenticity of data.
Blockchain technology is an application of distributed ledger technology (DLT), which uses cryptography to store and secure transaction data across a decentralized network.
An alternative to traditional centralized databases, blockchain is designed to offer safeguards against data tampering. The first application of blockchain technology was the invention of the cryptocurrency Bitcoin in 2008. However, the underlying technology has been traced back to earlier inventions such as a timestamping system outlined in the 1990s by researchers Stuart Haber and W. Scott Stornetta.
Blockchain vs Bitcoin
Blockchain and Bitcoin are closely related concepts, but they are not the same thing. Bitcoin and other cryptocurrencies are instead some of the most well-known uses of blockchain technology. (For instance, one of the Ethereum blockchain’s primary functions is recording transactions of the cryptocurrency Ether.)
Blockchain technology can record transactions about all kinds of assets, not just cryptocurrency.
How do blockchains work?
To understand how blockchain works, there are a few things to know: the components of a block and the key features of blockchains.
What is in a block?
As mentioned, a blockchain is a long series of “blocks,” which record various types of information. Each block has several components.
**Data:**The transaction information the blockchain stores. It includes details about how the assets it tracks change hands.
Hash: A cryptographic signature that uniquely identifies each block.
The hash of the previous block: Which is used to tie the blocks together chronologically.
Key features of blockchains
Blockchains can have a number of real-world functions, including recording cryptocurrency transactions, storing information, or even hosting code. They accomplish these tasks using several key features:
Decentralization and peer-to-peer network
Blockchains are composed of geographically distant nodes in a peer-to-peer (P2P) network. Each node stores a copy of the blockchain, and new blocks must be accepted by a majority of the nodes to be considered valid. With this design, blockchain networks do not rely on a centralized authority.
Distributing the network data across these nodes helps protect the data from being lost or destroyed.
Consensus
“Consensus” is the process by which different nodes in a distributed network validate whether the latest updates to a blockchain are accurate. Blockchains can use a variety of consensus mechanisms to validate new blocks, but the two most common are Proof-of-Work (PoW) and Proof-of-Stake (PoS).
PoW was first pioneered by Bitcoin. It is a resource-intensive, competitive process that involves nodes “mining” new blocks by solving complex cryptographic equations. Because PoW is a long and resource-intensive process, it also slows down the creation of new blocks. Miners also receive coins for their work, incentivizing them to continue validating transactions.
PoS blockchains, on the other hand, have nodes that are dedicated to validating transactions, but the validation process does not require mining and is therefore less resource-intensive and time-consuming.
Immutability
Blockchains are also designed to prevent users from tampering with the data they store. The unique, cryptographic nature of hashes ties them to the data within blocks, making it difficult for attackers to manipulate a blockchain. In addition to this, decentralization and consensus mechanisms also play a role in making blockchains immutable.
If a user were to tamper with a block, its hash would change and the other nodes would not accept the rogue block. To successfully tamper with a blockchain, a user would need to alter the hashes of 51% of the blocks in the chain. This is particularly difficult to accomplish within large, public blockchains, which contain millions of blocks.
Blockchains work similarly to puzzles. Puzzle pieces are designed to fit with the larger network of pieces. If someone were to cut off the edge of a puzzle piece or try to swap a piece out with a new one, the puzzle would no longer fit together as it was designed to. Similarly, if someone alters a block of data within a blockchain, it no longer works with the rest of the chain. By design, the components of the chain must all fit together or the whole does not work.
What are the different types of blockchains?
Not all blockchains function the same way. Different types of blockchains can generally be thought of as permissioned or permissionless.
In a permissionless blockchain, there are no restrictions on who can join and become a node within the network. Permissioned blockchains, on the other hand, restrict who is able to join the network and what they can do once they are part of the network.
There are four main types of blockchains:
Public blockchain (permissionless): As their name suggests, public blockchains are open to anyone. Public blockchains also do not require users to reveal identifying information in order to join. They benefit from having a large network of nodes to validate transactions. But the downside of having so many nodes is that validation can take a long time.
Private blockchain (permissioned): A private blockchain is one that is permissioned, owned by an organization, and closed to the public. Because private blockchains restrict access, they have less nodes working to validate transactions, but they are able to verify transactions more quickly.
Consortium blockchain (permissioned): This is a private blockchain that multiple entities co-run. This type of blockchain offers more nodes to validate transactions while maintaining a permissioned structure. That said, collaborating across multiple organizations can be difficult because each organization has its own technology stack and requirements.
Hybrid blockchain (combination of permissioned and permissionless): Hybrid blockchains incorporate elements of public and private blockchains. They are controlled by one entity, but they can use public blockchains to validate their transactions, while still maintaining a greater sense of security.
Blockchain use cases
Because blockchain technology is a type of distributed ledger, it has many potential use cases. The following is a non-exhaustive list of blockchain use cases.
Cryptocurrencies are the most well-known applications of blockchain technology. Common cryptocurrencies built on blockchain technology include Bitcoin, Ether, Tether, and Binance.
Supply chains often use blockchain technology to track the movement of goods. For example, IBM Blockchain is used to track the movement of agricultural goods, vaccines, and shipping containers.
Voting in elections is a use case blockchain proponents have advocated for. For example, counties in Utah, Colorado, and other states have used blockchain voting platform Voatz in elections. (That said, there are concerns about the security of these voting mechanisms. Researchers from MIT reported that attackers could not only detect how a voter using Voatz was going to vote but also tamper with the connection.)
Benefits of blockchain technology
In certain use cases, blockchain offers a number of benefits:
Data immutability: Blockchain technology makes it extremely difficult for people to tamper with transaction records, making blockchain data it stores more secure in this sense.
Transparency: The distributed nature of public blockchains makes them more transparent. This means it is easier for members of the network to understand what transactions are taking place.
Decentralization: Thanks to blockchain’s distributed nature, data is stored in multiple places, meaning there is no centralized authority responsible for managing it. This makes the data more available, and less suceptible to accidental or intentional deletion.
Ease of verification and auditing: Because blockchain networks consist of immutable, time-stamped transactions that the network has reached consensus on, they make auditing transactions easier.
Risks and challenges of blockchain technology
Blockchain technology also presents certain challenges to organizations wishing to implement it:
High computing demands: The environmental impact of blockchain technology has been the subject of much debate. This is largely because consensus mechanisms like PoW require large amounts of computing power — and thus large amoungts of energy — to validate transactions. That said, not all blockchains use PoW, and alternative consensus mechanisms like PoS aim to be less resource-intensive.
Scalability: The benefits that large blockchains offer in terms of mass-validation can also make them slower to process transactions. It takes time for a majority of the nodes to build consensus, making it difficult to quickly add new blocks.
Privacy concerns: The inherent transparency of most blockchain data may be a concern for organization who wish to keep certain data and transactions private.
Expensive to implement: Both the high implementation costs and longer-term data storage expenses are barriers to entry for organizations looking to build blockchain-based solutions. Because of this, blockchain technology does not make sense for all business needs.
How secure is blockchain technology?
Internet security in general is a broad, diverse concept which depends significantly on a user or organization's specific aims. The same is true of blockchain technology.
In terms of data being resistant to tampering, blockchain technology is considered secure. Because transactions cannot be tampered with easily, the data and transactions recorded on a blockchain are more secure.
However, blockchain technology is not as secure in other ways. For example, like all types of technology, blockchains are not immune to vulnerabilities. Even some of the most widely-used blockchains have been attacked. And in many circumstances, an attacker could tamper with blockchain data if they were able to control a majority (51%) of nodes. While gaining control of 51% of nodes may not be easy, it would require less work than gaining control over the entire network.
Blockchains are also built in different ways, so there are some security benefits and tradeoffs related to different types of blockchains. For instance, transactions on a large, public blockchain could be considered very secure in the sense that they must go through a rigorous validation process. But at the same time, anyone can join a public blockchain, which means its members have access to the transaction data from within that blockchain. While the transparency of blockchains is one of the biggest draws for some use cases, it may not be ideal for someone seeking more privacy about their activity.
Private blockchains suffer from the opposite issue, where fewer nodes mean less validation but more restricted access.
Overall, blockchains share some key defining features but security, along with other benefits and drawbacks, may vary based on the individual use case.
Learn more about applications of blockchain technology and Web3:
Does Cloudflare support blockchain technology?
The Cloudflare network offers an Ethereum Gateway, a secure, highly performant way for websites to interact with the Ethereum blockchain. Cloudflare also offers a gateway to the Interplanetary File System, a distributed peer-to-peer file storage system with some similarities to blockchain technology.