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What is blockchain: a quick introduction to the buzzword

Vidhu Bajaj avatar
Vidhu Bajaj
- 5 min read
What is blockchain: a quick introduction to the buzzword

The term "Blockchain" gets thrown around a lot these days, often when used with cryptocurrencies, but that doesn't mean Blockchain is exactly that. Blockchain technology is the leading option for securing digital transactions. 

People often use the words blockchain and Bitcoin synonymously, but it is important to remember that Bitcoin is a digital currency and blockchain is a technology that enables the existence of Bitcoin. 

An anonymous person or group named "Satoshi Nakamoto" invented blockchain while creating the mathematical foundation of Bitcoin. Inspired by the application of blockchain in cryptocurrencies such as Bitcoin, many are trying to use blockchain to add safety and functionality to several other fields, including financial services, video games, energy trading, supply chain, anti-counterfeiting, and healthcare.

So what is blockchain technology, and how does it work?

Blockchain, as the name suggests, is a chain of digital "blocks". Imagine a block that stores information about a number of transactions. Once the block is full and no more information can be added, you begin storing transaction information in a new block. However, as you add a new block you also add a cryptographic link, a "chain", between the old block and the new one. This link ensures that the new block contains enough information about the old block that if any malicious user modifies transactions in the old block, the old block would no longer match the new block and so wouldn’t fit into the chain. 

So a blockchain is a growing chain of blocks, with each new block securing the previous blocks. This is an important feature of the blockchain, also known as immutability. It means any transaction recorded on a blockchain cannot be altered or deleted, making it a tamper-proof ledger for recording transactions. 

Imagine a bank that has a list of transactions securely stored in its database. A malicious user who can modify the records in the bank’s database could cause havoc. However, when blockchain is used, even if a malicious user manages to modify transactions in a blockchain, the modifications would only be made locally at one node. Such a modification wouldn’t be accepted by the hundreds of other nodes storing the blockchain because the modification would have changed the information which links each new block to the preceding blocks.

Another key feature of the blockchain is decentralisation. In a decentralised system, no central authority or intermediary controls the system. Instead, the network is run by a distributed group of nodes (or network stakeholders) that participate in the system. This ensures no single person or entity can control the blockchain, or tamper with the data stored on it. 

To maintain the decentralised nature of the blockchain, each node must independently verify and validate the transactions and blocks that are added to the chain. This is typically achieved through a consensus mechanism, such as the proof-of-work (PoW) or proof-of-stake (PoS), that ensures that no single node (or user) can make changes to the blockchain without the agreement of the majority of the nodes in the network. Decentralisation thus enables peer-to-peer transactions by eliminating the control of any central authority.

Blockchain and cryptocurrency are two independent but interrelated concepts. Cryptocurrencies are digital assets that use cryptography to secure transactions and control the creation of new units. They are built on top of blockchain technology that is used to keep track of the transactions and verify them. Simply put, while cryptocurrency is a type of digital money, blockchain is the technology that supports the existence of cryptocurrency.

Incidentally, blockchain technology was developed to support the existence of Bitcoin, the first cryptocurrency launched in 2009. Over time, blockchain technology has found application in various fields, such as managing supply chains, building efficient polling systems, creating transparent gaming environments, and securely storing electronic health records.

How can you invest in blockchain technology?

There are several ways to invest in blockchain technology, such as investing in stocks of companies involved in blockchain technology, purchasing Exchange-Traded Funds (ETFs) that focus on companies involved in blockchain technology, or buying cryptocurrencies based on blockchain technology. 

You could also consider investing in Initial Coin Offerings (ICO). An ICO is similar to an Initial Public Offering or IPO, but it is used by startups to raise capital by issuing their own cryptocurrency. 

Depending on your financial goals and risk appetite, you may choose one or more of these options to invest in blockchain technology. However, remember that every investment carries some amount of risk and it’s important to do your due diligence before putting your money in any asset class.

If you choose to invest in cryptocurrencies or other crypto-based assets, such as cryptoart or NFTs, the risk involved might be higher than other conventional investment options, owing to the high price volatility associated with crypto. Make sure to understand the risks of investing in crypto and consider limiting your investment to an amount you can afford to lose. You may also want to read about other investment options to build a well-diversified investment portfolio.

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Product database updated 14 Jul, 2024

This article was reviewed by Personal Finance Editor Peter Terlato before it was published as part of RateCity's Fact Check process.