With Bitcoin and other cryptocurrencies coming into the mainstream in 2017, industries ranging from finance to healthcare have been exploring possible uses for the blockchain technology that makes these currencies possible. To most people outside of the tech sector, though, blockchain is still an enigmatic and little-understood technology whose actual workings are vague at best. Here’s what you should know about the basics of blockchain and how it could be used by businesses in the near future.
The Decentralized Nature of Blockchain
The first key concept that you need to grasp about the basics of blockchain is how its structure differs from traditional data storage methods, such as standard databases. Blockchain ledgers are distributed throughout a network of users, meaning that a definitive version of the data they store is never accumulated in a single central location. Instead, each user in a blockchain network has access to a complete record of the data that the blockchain stores. In addition, each device that is connected to a blockchain network is used to verify new data that are being added to the blockchain ledger. In this way, blockchains create a data storage system that is run without the centralized hardware, software or database administrators that come with traditional data storage methods.
Understanding Blocks and Hashing
Though the decentralized nature of blockchain is certainly one of its unique aspects, the real nuts and bolts of how blockchain works has more to do with two concepts known as blocks and hashing. As the name suggests, a block is a smaller unit of data within the blockchain itself. Each block contains a certain amount of data, which in the case of cryptocurrency ledgers is expressed as a certain number of transactions. Every time a new datum is introduced into the blockchain, it is combined together with enough other data to create a new block, which is then added onto the existing chain. In this way, the blockchain gradually expands as new blocks of data are added to its existing records.
Hashing, in its simplest terms, is a cryptographic operation in which an algorithm is given a data input, such as a series of cryptocurrency transactions, and returns a specific output of a set and predetermined length. Hashing produces a number that is known as a hash, which is a key component of blockchain’s structure. In blockchains, each block is assigned a unique hash when it is constructed. That hash, however, is created based on the hash of the previous block. Using hashing in the construction of each individual block, blockchains create a series of data units that are each dependent on the previous unit.
What Blockchain Really Achieves
The decentralization of blockchain networks, as well as the concepts of blocks and hashing, may seem fairly academic when described in the abstract. When applied in reality, however, these characteristics are what give blockchain its enormous potential. Decentralization makes it very difficult for hackers to attack or manipulate the data stored in a blockchain. The technology also provides network-wide verification for new data that is added to blocks, limiting the risk of both fraud and, to a certain extent, human error.
Potential Uses for Blockchain Outside of Cryptocurrency Transactions
Though blockchain technology saw its first use in the world of cryptocurrency, the decentralized data storage structure has many potential applications. Traditional financial institutions, for instance, have explored blockchain systems as a means of reducing financial fraud risks. In the healthcare sector, experts believe that blockchain-based systems may one day allow for more reliable and accurate medical records for patients. Even the manufacturing sector has looked into blockchain as a possible solution for maintaining transparency and accurate transaction records across long, globalized supply chains.
Though blockchain is still in its infancy, it has the potential to change the face of business across many different industries.
Whether cryptocurrencies ultimately succeed or fail in becoming a functional alternative to national currencies, the blockchain technology behind them will almost certainly take on a role of its own in the future of economic development.