What is Blockchain?

Bitcoin is a household name however the technology that underpins it still has lots of people confused or they simply have not heard of it. Blockchain technology is the fundamental reason that Bitcoin has hit the heights it has and why more and more tech companies see this as a revolutionary piece of technology.

At their core, blockchains are about storing data and digital applications without relying on centralised servers like those operated by Google and Facebook. Critics of these powerful corporations argue that they are the ones who truly own the data (not the user from whom the data originated), which is not ideal. In fact, many data breaches have seen sensitive consumer data lost or stolen from companies like Facebook.

What is blockchain and how it works
Production Perig / Shutterstock.com

Why is Blockchain so important?

Blockchain projects are going up by the hour. They promise to transform anything from banking to music to even agriculture. Cryptocurrencies as many of these projects invariably lead us to are just but one manifestation of the blockchain technology. There is no doubt that a good number of these are outright scams seeking to capitalise on the current craze. The number is now placed at more than 1500, the majority of them launched within the space of one year.

It is no longer surprising to find people talking about cryptocurrencies or for that matter blockchain at your local restaurant. Anything that can rocket a whole 36,000% in the space of 365 days, as Ripple did in 2017 is sure to get a lot of attention.

What is blockchain?

But back to basics, what blockchain? How is it that it could attract so much attention and hook so many people within such a short time.

For one, blockchain is no mere computer code.  Anything that can give birth to a currency of sorts without central control must have something very unique about it. Think about your ordinary banknote. What makes it function as the almost indisputable means of exchange? One of its acceptance across the board. You can go anywhere and buy almost anything with it.

But how can you trust that the note you are holding is the very one issued by the central bank? Easy, just check a few security features and you can tell –  in most cases at least. Bitcoin and other digital currencies have a feature that ensures that tokens cannot be duplicated. Every transaction is verified by several computers making it impossible to create replicas. If you have this and a critical mass of people willing to accept it as payment, it can begin to function as some sort of currency. But there is much more to it than this.

Blockchain Blocks

In a blockchain, data can be stored in decentralised digital “blocks”. These blocks are stored universally, on a network made up of many thousands of computers and other devices. To use a common phrase, data stored this way is “everywhere and nowhere”. With no centralised storage mechanism, the data isn’t prone to physical attack or other unipolar hack vectors.

Blockchain Security

Blockchain technology and security
Blockchain data is kept safe in a number of ways [Immersion Imagery/Shutterstock.com]
Blockchains are secured by several mechanisms. One of the most important is the “distributed ledger system”. Every computer that comprises the network has a copy of “the ledger”. The ledger is a record of every transaction that has ever taken place on the network. If someone tries to input a fraudulent transaction record, all other computers will notice it at once, because it does not match every other copy of the ledger.

Another way blockchain data is kept safe is found in the structure of the blockchain itself. A blockchain is so-called because it’s a series of data blocks stored end-to-end, just like a chain. When a block is added to the chain, it is secured with a long code called a “hash”. When another block is added to this block, it too is secured by a hash code. Blockchains like Bitcoin have many hundreds of thousands of blocks stored this way. Each new block adds security to every other block on the chain. Imagine a hallway that is miles long, with a locked door every few feet. Someone trying to steal a treasure stored at the end of the hallway would have to break the lock of each door in succession. The thief’s problem would be

compounded because a new door is added to the end of the hallway every few minutes, forcing anyone trying to sneak in to start again from the beginning.


The origins of blockchain go back to one mysterious character or characters going by the name Satoshi Nakamoto. We meet him in 2009 when he wrote a paper that essentially created Bitcoin and inspired the current movement.


One of the most outstanding features about the blockchain technology is decentralisation. It is sometimes referred to as a decentralised ledger. This is the ability for the network to record transactions and distribute across thousands of computers. Every other transaction is compared to several copies distributed across the internet.

This has several implications. One, you do not need third parties like banks to do the clearing and forwarding.

Double Spend Problem

Now, there is the double-spend problem, especially with digital currencies. What if a holder simply makes a copy of his digital token and uses it to make several other payments?

Bitcoin and other digital currencies have a unique way of solving this. Bitcoin, for example, requires that all transactions be recorded in a public log. The public log is essentially the blockchain. You, therefore, have to really own the tokens to spend them. This not only prevents double counting; it is an ingenious way to countering fraud.

Blockchain Mining

Keyboard button with mine on
Mining requires digital labour [Morrowind/Shutterstock.com]
This system works well, but it requires digital labour (and the energy expenses involved with putting forth that labour) of powerful computers and their human users. These operators are called “miners” and they constantly expend energy searching for the secret hash codes that will secure each new block, thereby adding it to the chain. Blockchain miners also work to make sure that all transactions in any given block are authentic, by verifying the coin balance of both sides of each financial transaction.

This is essentially what we call mining. It all started with Bitcoin Mining back in 2009. Miners get rewarded with tokens. For a miner, blockchain presents an opportunity to earn tokens by solving complex mathematical puzzles.

Breaking Down Blockchain

Back to Blockchain. The technology has since exploded since 2009. We do not think even Satoshi himself would have imagined the success it is enjoying right now. And we are not just talking about cryptocurrencies. Digital currencies are just part of the story about blockchain.

Distributed Database

One useful way to understand the blockchain technology is to think of it as a database. Think of it as a company spreadsheet spread across thousands of computers. This information is stored in blocks. The ledger keeps getting updates and the changes are recorded in all the computers simultaneously. There is no central authority like a bank to verify entries. The whole business happens on a peer to peer basis.

There is no centralised version so any attempt to attack it is bound to fail. The blockchain is almost impregnable so to speak. To be successful, one would have to hack the thousands of computers containing the information at the same time.

Blockchain specialist William Mougayar likens it to a Google sheet. Instead of the back and forth revisions to a document, Google sheets allow users to make see changes in real time. This is more or less the same case with blockchain.

Except for the fact that these are distributed in several computers. It is like keeping several copies of a register is different locations connected and secured through a robust validation mechanism.


By its nature, blockchain is incorruptible. Every exchange is done with the consent of the parties involved and there is a track record to back it up. No one can, therefore, make an excuse for human errors. Because of this, blockchain can be a powerful tool to hold people to account.

Every transaction is visible to the public and the system reconciles itself every few seconds. Compromising it would require an immense amount of power, a feat that is practically impossible.

In its more than 9 years of existence, no one has managed to impregnate it. What is normally the case when we hear about hacking is people and exchanges failing to secure their tokens.

Permissioned vs Permissionless Networks

With that understanding of decentralised networks, we can now delve into permissioned and permissionless networks.

Permissioned Blockchains

You can consider permissioned networks as closed or private. This means that only a few people can access and read the data contained on the blockchain. They may also have different levels of access. Banks, for example, might need to share some information between themselves while keeping certain information private. This can include sensitive information such as transaction volumes.

In such a network only selected validators verify transactions. A good example is the Ripple network. There is debate whether networks that do not use proof-of-work algorithms should be considered blockchains. Some view them simply as shared ledgers.

Permissionless Blockchains

Permissionless networks, on the other hand, have some level of control and can suffer from the problems of centralised networks.

With permissionless networks like bitcoin, anyone can be a validator. Virtually anyone can read the blockchain and help verify transactions and create smart contracts. They just have to follow the rules of the network. All you have to do is avail your processing power. Bitcoin has maintained its integrity for about ten years. That’s mostly because of its decentralised nature. Having no one controlling the network is a major advantage. Ethereum is another example of a permissionless network although there are plans to make it a proof-of-stake network.


Permissionless networks use proof of work algorithms. This means you only need your hashing power to build trust. For Proof of Stake systems, you actually have to own a certain amount of coins to gain trust.

Because of this, permissioned networks do not require a lot of computing power that makes bitcoin mining extremely power hungry.

Proof of Stake networks often uses consensus algorithms such as Paxos.

Advantages of Permissioned and Permissionless Networks

Permissioned and permissionless networks have their own unique strengths.

As mentioned before, permissioned networks are strong on privacy because only the actors can view the transactions. Permissionless networks are however ideal as a common shared database.

One of the major problems facing bitcoin is scalability. Permissioned networks do not have this problem as consensus can easily be built.

Hybrid networks that bring the best of both worlds, however, do exist.

Blockchain Financial Incentives

Doing work like this costs time and money, and miners aren’t going to do it out of the goodness of their hearts. Therefore, miners are rewarded for adding blocks to the chain by unlocking new coins. In the Bitcoin blockchain, authenticating a block unlocks Bitcoin for a single miner worth the going price of Bitcoin at the time. These miners can either keep this Bitcoin as an investment or sell it for fiat money (dollars, pounds etc.).

Alternative Blockchain Models

Not all blockchains work in this exact way, but all involve some sort of method for authenticating transaction data, securing new blocks on the blockchain, and financially incentivising people and machines that do this work.

Blockchains can store data other than financial data. Blockchains like Ethereum store “decentralised applications” or “dApps”. DApps can be mobile applications, websites, games, etc. These blockchains can also securely store “smart contracts”, which are autonomous algorithms that perform specific functions in larger applications and systems. The creators of smart contract blockchains hope that this blockchain structure will create a more robust and free internet, one that is immune to censorship and fraud.

Potential and Current Blockchain Use Cases

Blockchain use
Tech industry giants are currently using Blockchain technology to develop decentralised solutions.

Having gained some basic understanding about blockchain, we can have a look at some of the industries that could potentially be disrupted.


Any middleman right now has a reason to worry. As we have seen, the blockchain can more or less do everything a bank does more efficiently and at a much cheaper cost too.

With blockchain, you can easily send digital currencies like Bitcoin within seconds more securely and at a very minimal or no cost. Ripple, for instance, is a project with its sights on this industry.

Used with the XRP token, the platform can cut transfer costs by as much as 60%. The stock market is another industry to think about.

Blockchain and Security

One other major benefit of the blockchain technology is security. The technology eliminates the risks that come with holding information centrally. It is a flaw that has allowed hackers to thrive.

With blockchain, there will simply be no point of even trying. As long as you can secure your private key which is more or less your password, you are safe.

Smart Contracts

Ethereum is really one of the projects that have leveraged on the blockchain technology. One of its main innovation is the smart contract functionality where transactions self-execute only when certain conditions are met.

Sharing economy

Blockchain technology can power the sharing economy more efficiently. E-commerce could all happen in the blockchain eliminating intermediaries like Amazon.

Prediction Markets

A number of applications in the predictions markets have been found. The blockchain is the best way to harness the “wisdom of the crowd” by eliminating biases. What’s more, you can earn some tokens for buying in.


The sheer computing power that is possible with blockchain is already helping researchers crunch huge chunks of data to help understand diseases like cancer.


The implications of blockchain are too many to even begin enumerating here. The technology is no silver bullet but it can help the world run in a better, transparent and more efficient manner.

Blockchain’s Future

blockchain links
Blockchain has already been successfully implemented in a number of ways [phive/Shutterstock.com]
There are many smart people out there working hard to make blockchain perform just about any digital function you can think of. It’s inevitable that blockchain will prove not to be the ideal solution for each of these applications. However, blockchain has already been successfully implemented in cross-border remittances, decentralised voting applications, supply chain management networks, and (of course) decentralised cryptocurrency networks.

It’s likely that several years will be required before blockchain is mature and useful on a truly grand scale. It’s also a possibility that blockchain will be a flash in the pan, though this seems unlikely given the remarkable growth of this sector.

Did you enjoy reading this guide? Share your feedback in the comments below.


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