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Cryptocurrency, NFTs, and more.
Bitcoin. NFTs. Cryptocurrency. You can’t flip the channel or the page to any kind of news lately without encountering these terms—and often with little explanation of what any of them mean. It leaves you wondering, Did I miss the boat? Does everyone else know something I don’t? Don’t worry. You’re not alone. These fast-growing phenomena are infiltrating our lives more quickly than most of us can keep up with them, and they’re all thanks to one fledgling technology: Blockchain.
In this guide, we’ll answer all the questions you’re afraid to ask about blockchain technology—and hopefully help you understand a little more about those headlines you’re seeing everywhere.
What Is Blockchain?
Blockchain is a kind of database that organizes and stores information in collections called “blocks” and strings them together in a “chain” chronologically.
Blockchain is decentralized, which means no single party owns or controls the database. Instead, it’s distributed and shared among a computer network and written by its users. That decentralization is what makes this type of database attractive for cryptocurrencies—it allows money to be minted and moved without the control of a central bank or government.
Blockchain is best known to most people for facilitating cryptocurrencies, but its uses are far broader than finances. Anything that involves a journey or set of transactions can benefit from using a blockchain to keep a secure and irreversible record of information.
For example, food suppliers around the world use blockchain to keep a clear and close record of the journey food products take between farmers, manufacturers, and retailers.
When someone discovers a food is contaminated, for example with E. coli, its journey can be traced through every point of production and pinpoint where it might have been contaminated and what else it might have contaminated along the way.
Ravinder Deol explains in the Skillshare class A Guide to the Blockchain Ecosystem that blockchain is also used for recordkeeping in traditional banking and finance, health care, supply chains, cybersecurity, and even weather forecasting. Blockchain enthusiasts envision its value in tracing property ownership—especially in unstable regions—as well as recording contracts, voting, and more.
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A Guide to the Blockchain Ecosystem | PART 1 | Helping You to Understand the Blockchain
How Blockchain Works
To the layperson, blockchain technology—less commonly called distributed ledger technology (DLT)—is elusive.
But, like anything that’s transformed the world before it, from the steam engine to the telephone to the internet, blockchain is simply made up of a few elements that are relatively easy to comprehend when you take the time to dig past the headlines.
What’s in a Block?
Jitesh Khurkhuriya explains in his Skillshare class Blockchain Technology that the blocks of a blockchain contain three primary elements:
- Data: Block data is a set of transactions, such as payment information. It usually includes information about who initiates the transaction, the recipient or beneficiary of the transaction (both parties generally anonymized with an identifier like a wallet address, rather than your name), and what occurred in the transaction, like a cryptocurrency transfer, property ownership, or contract agreement.
- Hash: The hash is the unique identifier of a particular block, generated through complex cryptography.
- Previous hash of the block: If any information of the block is changed, a new hash is generated, creating a new block. This is how the “chain” is formed. When a new transaction occurs, a new block is formed. And, because you can’t change the data of a block without creating a new record, it’s impossible to tamper with data on a blockchain.
Blockchain is a type of database, but it’s different from a typical database, which stores information in a table format (picture a spreadsheet). Blockchain uses the block format described above.
Another key difference is the lack of central authority. A typical database, Khurkhuriya explains, is controlled by a single authority, like an administrator. That administrator has the sole authority to grant various levels of access to others. Blockchain instead exists on a publicly accessible network and isn’t owned by any single authority.
The final difference between blockchain and typical databases is the ability to change the data. In a typical database, you can edit, move, and delete data from the master database, and there may be no record of the change.
In contrast, a blockchain is what’s known as a “right-only” data structure, meaning you can only create new entries. You can’t modify or remove existing entries, so the record of transactions is always accurate.
Because a blockchain has no central authority to maintain the database, the technology requires some way to ensure fairness and accuracy as transactions are added to the ledger.
This function is called a “consensus mechanism,” basically an algorithm built into a blockchain that uses a set of rules to verify transactions.
We won’t get into the details of how each consensus mechanism operates here, but you should be familiar with their names, because these come up often in discussions of the merits of various types of blockchain.
The most common consensus mechanisms in blockchain by far are proof of work (PoW) and proof of stake (PoS). Other common algorithms include proof of capacity (PoC), proof of activity (PoA), proof of burn (PoB), and proof of elapsed time (PoET).
A less popular but notable algorithm is the Delegated Byzantine Fault Tolerance (dBFT) consensus mechanism. It’s criticized for relying on a few nodes for consensus (going against the blockchain modus of decentralization). But it manages to use significantly less energy than other mechanisms, answering to a significant criticism of blockchain technology.
The fact that a blockchain lives on a public network and that every transaction is recorded for all to see might sound counter to the popular image of a blockchain as a conduit for transactions on the dark web and other secretive, anonymous behavior.
A blockchain is a public ledger. So when you make a transaction—like trading Bitcoin—you, the person you traded with, and the transaction information are recorded.
But the record doesn’t have to include your name—and, in practice, it doesn’t. It includes another identifier that represents you as the party in the transaction.
In the case of cryptocurrency trading, that identifier is your wallet address, which is like a bank account number. Unlike a bank account, nothing necessarily ties you to your wallet address. That effectively makes your blockchain activity anonymous, even though it’s public.
However, any leak of information could link you to your blockchain activity. If someone connects your IP address or email address with your wallet address, for example, they could identify your transactions. You might also connect your bank account or debit card to your wallet to transfer funds.
Using an anonymous email and a VPN to mask your IP address make these connections less likely, but they aren’t foolproof. Legal authorities in some countries might be able to compel platforms to share information that could link you to your activity. Because blockchain is a relatively new technology and not yet widespread, legal implications like this are still being tested.
What Is Blockchain Used For?
Currently, blockchain is most commonly used to develop and trade cryptocurrencies. But its applications are quickly expanding to include a variety of data management.
NFTs—non-fungible tokens—are a trendy application of blockchain technology, where the technology is used to create a record of ownership for digital creations that could become investable assets akin to fine art or wine.
Blockchain also holds promise in fields as diverse as health care, cybersecurity, supply chain management, and banking.
What Is an Example of a Blockchain?
The most popular example of a blockchain is Bitcoin. This original blockchain is the backbone for the currency of the same name that kicked off the development of tens of thousands of cryptocurrencies on the market today.
Blockchain vs. Bitcoin
Because Bitcoin was the original, many people conflate the name with blockchain in general, but they aren’t the same thing.
Bitcoin is one example of a blockchain (as well as the name of that blockchain’s native cryptocurrency, a coin whose transactions are recorded through the blockchain). At least hundreds of others exist, and more are regularly created to tackle new ways of using the technology.
For now, the blockchain application most people are familiar with is cryptocurrency trading. To throw your hat in that ring, you need a place to store crypto—called, simply, a cryptocurrency wallet.
A wallet on a blockchain is effectively similar to a bank account.
It comes with a unique identifier called a wallet address, which is a set of numbers just like a bank account number. It stores your digital currency holdings in the same way a bank account holds your regular currency (called “fiat,” by the way).
The key differences are:
- Blockchain wallets aren’t ruled by a regulatory authority. Banks are regulated by a central authority, such as the government of a country. Blockchain platforms aren’t associated with geographical borders, so individual governments don’t oversee them.
- Blockchain wallets and currencies aren’t tied to a central bank. The value of currency in the United States, for example, is manipulated by the actions of the Federal Reserve. Blockchain-based currencies can’t be manipulated in the same way by any central figure; their values are solely driven by demand (and supply, which is finite and set at their creation).
- Your identity doesn’t have to be associated with a blockchain wallet. Banks in the U.S. are required by law to know their customers. (We call these “Know Your Customer” or “KYC” regulations.) Your name and Social Security number and often other identifying information, like a driver’s license number, are connected to your bank account number. None of that is required of a blockchain wallet.
- Cryptocurrency holdings have no physical representation. Cryptocurrency wallets aren’t connected to a bank vault filled with cash or bars of gold. With digital banking and transactions so prolific, real-world bank vaults aren’t what they used to be, either, but you could stop by a bank branch and withdraw the value of your account in paper bills if you wanted to. There’s no “cash” equivalent for blockchain data.
Hot vs. Cold Wallets
A cryptocurrency wallet is basically a collection of digital data on a blockchain. As such, they’re stored as information on hard drives.
Your wallet could be what’s called “hot,” which means it’s connected to the internet. This is the most common type of wallet, because it’s the most convenient. Your wallet information is on a hard drive stored somewhere remote—just like any other information you access on the internet—and you connect to the internet to access it.
The drawback to hot wallets is their vulnerability to hacking. They’re accessible to hackers because they’re stored online. And they don’t come with the kinds of protections you get with a traditional bank account—if someone accesses your funds in a crypto wallet, they’re lost.
The other option is a “cold” storage wallet, which isn’t connected to the internet. Your wallet is stored on a hard drive or computer, and transactions take place offline. These are nearly theft-proof, but much less convenient compared to hot wallets because they take time to connect to the internet for trading.
Popular Blockchain Wallets
As cryptocurrency investing grows in popularity, companies are springing up to offer a range of platforms to facilitate it.
To invest, you need a wallet, plus access to a cryptocurrency exchange where you can buy, sell, and trade the digital coins.
You can access those separately—by signing up for a crypto wallet and then using the address to trade on an exchange—or as part of a single platform that gives you both, similar to investing apps that let you open an investment account and trade on the U.S. stock market.
Popular standalone hot and cold wallets include:
Popular full-service crypto platforms include:
Blockchain and NFTs
If you were confounded by talk of Bitcoin and blockchain in the media already, the surge of headlines flashing news about “NFTs” is probably enough to push you right over the edge. This new kind of digital asset is taking the art and content world by storm.
NFT stands for “non-fungible token,” an asset (“token”) that lives on the Ethereum blockchain and isn’t interchangeable for other things (“non-fungible”).
People tend to get caught up on the “non-fungible” part, because this is probably the first time they’re hearing it. But non-fungible is just an economic term that means something has unique properties, so it can’t be evenly exchanged for something else. NFTs are non-fungible for the same reasons physical paintings and furniture are. Fungible items, on the other hand, have a defined value that’s easily exchangeable—like a U.S. Dollar or a nickel.
In case the passing gossip and headlines have confused you, NFTs are not cryptocurrency or even necessarily related to cryptocurrencies. They use the same blockchain technology as crypto, but they’re a different kind of investment.
NFTs, as Ethereum defines them, are “a way to represent anything unique as an Ethereum-based asset.” They use Ethereum-based smart contracts to create ownership over something that previously may have been difficult to tangibly own, like digital art, music, and compositions.
Other Blockchain Apps
Using blockchain technology for anything other than cryptocurrency or NFT investing is much less common for most people than the investing option. But experts in the field see the possibilities of blockchain technology and have started to apply it across industries.
These apps show some of the ways blockchain can be used outside of crypto and NFTs.
Developed by the blockchain technology company AID:Tech, TraceDonate is a blockchain-powered donation platform that lets donors trace precisely how their donations are used.
Individuals and organizations can make requests for donations on the platform, and users can make donations. When a beneficiary uses your donation, you get an email or text message letting you know how it’s been used.
The platform is built on blockchain, but it doesn’t deal in cryptocurrency. Donations are all in local fiat currencies through the payment processor Stripe.
Though it’s not being widely applied in real elections yet, Voatz promises to make voting more accessible while maintaining security. The company imagines smartphone voting secured with fingerprint or face recognition and blockchain.
Several municipalities are testing mobile voting, and Voatz was used in West Virginia during the 2018 midterm, in Denver County in Colorado for 2019 municipal elections, and in Utah County in Utah for the 2020 U.S. presidential election.
Burst IQ is a data management platform for health care data. Its LifeGraph Network is specifically designed for managing health and identity data securely.
Burst IQ is designed to help software developers integrate blockchain into health care technology systems. Its network facilitates secure data sharing from system to system to simplify infrastructure headaches and free up developers to focus on innovation.
The BurstChain developer kit lets software developers deploy blockchain-enabled apps and software through the Burst IQ platform.
For banks and other institutions required to comply with Know Your Customer regulations, KYC-Chain is a full-service solution. It offers standard identity verification and background checks like you can probably get with traditional compliance software. But it also offers an option to store data on a blockchain through its sister company, SelfKey.
As Deol notes, “the blockchain” isn’t just one thing—even though many people (inaccurately) talk about it as if it was. Many types of blockchain exist, and each of them has some functions, rules, or applications that make it distinct from others.
As it’s a rapidly growing technology, the number in existence is hard to pin down at any given time. We do know that around 10,000 or more cryptocurrencies exist using blockchain technology (though not all on their own blockchain), in addition to hundreds of non-crypto blockchain systems. You can explore types of blockchain and cryptocurrencies through the Blockchain Explorer.
These are some of the top blockchain systems in use.
Bitcoin is the first decentralized blockchain ever developed, and it was implemented in 2009. The blockchain is the basis for the cryptocurrency of the same name, as well as Bitcoin Cash, a spinoff of the original currency that follows a different path in the blockchain.
Unlike many of the blockchain systems that followed, the Bitcoin blockchain’s only function is to support the currency. It doesn’t support developers using its protocol to develop decentralized applications (dApps).
Despite that missing functionality, it remains the most well-known name in blockchain technology, and Bitcoin remains the most popular and highest value cryptocurrency in the world. The Bitcoin blockchain is the original model for others in use.
The Ethereum blockchain is home to the popular cryptocurrency Ether (also often called Ethereum) as well as the first blockchain that facilitates the development of decentralized applications. Thousands of cryptocurrencies run on Ethereum, as do NFTs.
Deol explains the Ethereum blockchain runs on a different algorithm from Bitcoin, and it processes transactions faster. Because of its improvements over the original blockchain, he sees Ethereum as the leader in the advancement of blockchain technology.
Blockchain experts are most excited about Ethereum’s ability to create smart contracts, programmable agreements set in blockchain code (rather than documents written in a spoken language). This technology could revolutionize the way contracts are created, though organizations are still working to create smart contracts that’ll hold up in court.
Neo is the first blockchain developed in China. It’s leapfrogged past a focus on cryptocurrency and is squarely focused on a futuristic “smart economy,” with an eye on dApps and digitizing assets on the blockchain.
NEO does have a native crypto coin of the same name, whose technology requires less energy in mining than other currencies and can facilitate more transactions per second.
Waves takes the opposite approach of Ethereum and Neo, doubling down on crypto (while still facilitating dApp development). It’s designed to make it easy for users to create new coins, launch initial coin offerings (ICOs), and crowdfund their projects.
EOS is a platform designed with a focus on developing enterprise-level decentralized apps and smart contracts. It’s designed specifically for scalability, speed, and flexibility.
Stellar is a blockchain designed to serve as an open payment network. Its native cryptocurrency, XLM, functions to facilitate multi-currency transactions, so it’s a great bridge for cross-border business.
Ready for the Future?
The frenzy around cryptocurrencies and NFTs might give the impression that blockchain is an exciting but fleeting trend. But don’t forget that many folks thought the same about the internet around the early 1990s.
Look past the headlines about soaring and diving Bitcoin values, and you can recognize the world-changing potential of blockchain.
Crypto might not unseat government-regulated currencies. NFTs might not be the stand out get-rich-quick scheme that actually works. But the far more boring applications of blockchain—for database management and information security—have the potential to solve many of the problems the last wave of technological advances have wrought.
Want to Dive Deeper?
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This article is not intended to be financial advice.