What, exactly, is blockchain and why does it matter?

One of the big reasons we need to know a little bit more about blockchain and how it function is that having a better understanding will help us evaluate different kinds of cryptocurrencies.

Being able to comprehend how the underlying technology is functioning gives another data point to evaluate how innovative a cryptocurrency is, which is a good indication of future adoption and potential value.

There are a lot of shady and scammy alt coins out there, so having a good sense about how they function will be useful, like looking under the hood of a used car before you buy it.

So what is blockchain?

This video (displayed above) from the World Economic Forum gives a good, simple overview.

To put it simply, blockchain is a database for recording transactions. It’s also commonly referred to as a digital ledger.

What makes blockchain innovative is that it can be maintained by a distributed network of many computers that are all working to keep the database updated. As new information is added to the database, it becomes verified by the network in “blocks.”

In some instances, like Bitcoin, this verification system is where the value for cryptocurrencies is derived. Network members, or miners, are paid in the currency system of the network for lending their computing power to the network in a system known as “proof-of-work.”

So blockchain is a database the functions as a ledger, and lives on a network of computers that are running an application specific to a cryptocurrency system. (What I mean is that participants in the Bitcoin network download that blockchain, Ethereum blockchain participants download Ethereum nodes, etc.)

Blockchain uses cryptography to mask the identity of a user, but maintain enough unique details about transactions, so that users can securely conduct business without the need for a third party intermediary (which historically has been a bank or some kind of payment service).

Cryptography also offers users a degree of privacy (contrary to what people think, not all cryptocurrency transactions are anonymous or completely private) and a degree of security.

A blockchain builds a digital version of trust, allowing users to conduct business or engage in transactions without little detail or background about one another.

A blockchain revolution?

Not all blockchains are created equal, and this is what is important to understand when evaluating new cryptocurrencies. Blockchains can be public (or permissionless, like Bitcoin, which means anyone can become part of the network), or they can be private. They can be developed open source, or they can be the property of an entity or company.

Currently, all kinds of organizations, from traditional banks to government agencies, and large corporations to NGOs are investigating ways that blockchains can improve operations.

Blockchains can be used to automate the execution of complex contracts, they can be used for voting, and they can be used as a way to protect data that is used to manage and run critical infrastructure, as just a few examples.

I plan on revisiting this topic regularly, especially as my own understanding of blockchain increases.

If for no other reason than blockchains are so significant to understanding how cryptocurrencies function, and because being able to evaluate how a specific blockchain is functioning — even in very broad terms — which is significant for our purposes of evaluating the value and potential of cryptocurrencies.