What is a Blockchain?

A Simple Diagram of a Blockchain

Short Answer

A blockchain is a distributed ledger, or database, shared across a system of computers (called nodes) that support the network by storing, verifying, and adding new transactions to the chain.

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Note: For the purposes of simplicity, we’ll use the Bitcoin network as the model blockchain we describe in this article. Keep in mind, though, that faster, more functionally diverse blockchains (like Ethereum) exist, vary in how they work, have unique advantages and disadvantages, etc.

Blockchain, in its simplest form, is defined as a source of verifiable data (transactions) that can be accessed by anyone participating in the network. It’s a type of Distributed Ledger Technology (DLT), which refers to infrastructure and protocols that allow a network of systems (computers) to access, validate, and update records at the same time.

One of the key features of this type of system is that it’s censorship resistant and immutable; virtually impossible to change. Older, more decentralized blockchains like the Bitcoin network are nearly impossible to corrupt due to the large scale of nodes (computer systems that store a copy of the ledger) supporting and strengthening the network. To attack and corrupt the bitcoin network would take an overwhelmingly large amount of computational power (and monetary cost).

Some Simple Visuals

Picture a physical chain. Each link in the chain is a “block”, where previous transaction data is stored. The further back in the chain you look, the older the transaction.

Another way to think of a blockchain is to picture a printed accounting sheet or bank ledger. Essentially, a table or chart used for storing transactions. The blockchain is essentially a digital version of a ledger; it stores data related to transactional values, sender and recipient data, timestamps, fees, among other informational elements.

A third way? Just think of a blockchain as a database.

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Blockchain Data is Accessible

The great thing about blockchain is that the data is stored across all network participants; everyone supporting the blockchain stores a copy of the transactional data, which keeps it safe, verified, and more secure.

Anyone can look up transactional data on the blockchain via a block explorer. Some popular explorers include BTCScan (https://btcscan.org/) MemPool (https://mempool.space/) Blockchain.com (https://www.blockchain.com/explorer/assets/btc) and Etherscan (https://etherscan.io/). There are many block explorers dedicated to tracking activity on their respective network.

The computing power of all network participants is dedicated to ensuring the ongoing support and accuracy of the blockchain. For networks like Bitcoin, these computers (known as “miners”) are rewarded in Bitcoin for their computing power. More specifically, miners are rewarded when they create the next block on the blockchain. This incentivizes network participation and, subsequently, a higher level of decentralization.

Generally, the more computing power supporting the network, the more decentralized it is considered to be. This is because more computing power is associated with more independent providers (nodes) contributing to the network.

Fun Fact: Each block on the Bitcoin network is limited to a maximum size of 1 megabyte (1MB). New blocks are created about every ten minutes.

How Do Blocks Connect?

In the Bitcoin blockchain, for example, blocks contain data (transactions, etc.), a hash, the hash of a previous block, and some other data. We can think of a hash like a fingerprint for that individual block. The fact that each block holds the hash of a previous block is part of what keeps the “chain” in-tact and secure.

Blocks use a complex cryptographic hash function to connect newest blocks to the chain. In the context of Bitcoin, the hashing includes recent transaction data and the previous block header and generates a specific output. Essentially, nodes (or groups of nodes working together) guess random numbers in an attempt to solve the difficult mathematic equation as quickly as possible.

The only way to create (mine) the next block is to guess the correct number that, when combined with the previous block, answers the equation. If a miner answers the question correctly, the new block is broadcast to the rest of the network to verify the answer is correct.

Once a majority of nodes (51%) confirm the solution, the miner can add the block to the chain. This is known as consensus. To incentivize network participation, miners are rewarded in Bitcoin for answering the equation and, thus, adding a block to the chain. This system is known as Proof of Work (PoW). We’ll cover Proof of Work and Proof of Stake in a future article.

While two nodes could produce the answer at the same time, it’s extremely unlikely, and protections are in place to handle an event like that. The video below explains this in detail.

Fun Fact: The first block of a blockchain is called the Genesis Block.

Want Additional Reading?

Cryptopedia, a library of excellent resources created by Gemini, offers a great look at how blocks work on the Bitcoin blockchain.

The Peer-To-Peer Network

As we’ve learned, the more computing power stabilizing the network, the more decentralized and, subsequently, secure it can be. This system of individual computers (nodes) supporting the network is known as a peer-to-peer network.

We can visualize the difference between a centralized network and a decentralized network by thinking of decentralization like a woven web between equal users, whereas a centralized network relies on one central authority or single point of failure.

A simple diagram of centralized and decentralized systems.

In a decentralized blockchain network, all participants store a copy of the blockchain themselves. This makes everyone in the network equal and the network more decentralized and secure. If someone (a node) leaves the network, the network remains in-tact as no one participant acts as a single point of failure. Anyone can join a public blockchain, like the Bitcoin network, offer computing power, and begin earning the network’s native asset (like BTC) for their network participation.

It’s also worth noting that, while there are public blockchains that enjoy the majority of our attention, there are private blockchains uses by private organizations and companies to achieve their own goals. Private blockchains require nodes to be approved in some fashion before they are added to the network.

Prefer Watching Videos?

YouTube channel 3Blue1Brown created this video about Bitcoin that offers a digestible intro to the network, blocks, and the design of the network.

The Functionality of Blockchains

Tokenized assets and cryptocurrencies like Bitcoin, Ethereum, and thousands of others are able to be sent between users or across protocols via blockchain technology and smart contracts. The creating, verifying, listing, and storing of these transactions is what makes blockchain so important.

The concept and use of blockchain technology is exciting for a number of reasons. One of the most important, though, is the idea that anyone with an internet connection can leverage blockchain to send and store value without the need for a bank or other institutional middleman. There’s no barrier to entry, so anyone can participate in the network.

Additionally, today’s typical financial infrastructure involves multi-step processes that can put user identification at various levels of risk. With blockchain, users do not need to display or share personally identifiable information (PII); making the transactions easier, more secure, and – in many cases – faster and less expensive to execute.

Aside from financial transactions, blockchain technology has other emerging use cases, like:

  • storing medical (etc.) records
  • supply chain management
  • gaming and entertainment
  • voting and governance
  • identity verification
  • housing and ownership

Deploying Smart Contracts

Many of the exciting use cases for blockchain technology include the use of smart contracts. Essentially, a smart contract is code written to interact with a blockchain. As the name implies, it’s a contract; an agreement of pre-written conditions that, when met, execute whatever the terms of the code dictate.

A simple way to consider smart contracts: “if ____ happens, then ____ happens” written in code. We’ll look at smart contracts in more detail in a future article.

It’s important to keep in mind that blockchains range in size, use case(s), level of centralization/decentralization, functionality, and complexity. Generally, the Bitcoin blockchain is considered useful as a transactional chain for sending value (Bitcoin), although there are projects working on creating much more layered functionality and toolkits for developers to build and expand upon.

Other blockchains, like Ethereum, have created a larger suite of tools and opportunities for developers to create applications using blockchain technology. As the industry evolves, a bigger – and wider – range of tools are being conceptualized and created.

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