Blockchain 101: What Is It, How It Works, and Why It Matters

Blockchain technology is one of the most revolutionary and disruptive innovations of the 21st century. It has the potential to transform various aspects of our lives and businesses, from finance to healthcare, from supply chain to identity, and more. However, blockchain technology is also complex and challenging, as it involves technical, social, economic, legal, and ethical issues that need to be understood and addressed. In this article, we will provide a comprehensive introduction to blockchain technology, its features, how it works, how it differs from Bitcoin, how it impacts the banking industry, how it can be applied in various sectors and industries, and what are its pros and cons. We hope that this article will help you gain a better understanding of blockchain technology and why you should care about it.

What Is Blockchain and Why You Should Care

Blockchain is a buzzword that you may have heard a lot in recent years, but do you really know what it is and why it matters? In this article, we will explain the basics of blockchain technology, its key features, how it works, and how it differs from Bitcoin. We will also explore some of the applications and benefits of blockchain in various sectors, as well as some of the challenges and limitations of this emerging technology.

Blockchain Explained: A Chain of Blocks

A blockchain is a system of storing and transferring data in a distributed and decentralized way. It consists of a network of nodes (computers) that communicate and validate transactions using cryptography and consensus algorithms. Each node has a copy of the entire database, which is updated every time a new transaction is added. The database is organized into blocks, which are linked together by cryptographic hashes. Each block contains a set of transactions, a timestamp, and a reference to the previous block. This creates a chain of blocks that is immutable and transparent.

Key Features of a Blockchain Network

There are four main features that define a blockchain network:

• Decentralization: There is no central authority or intermediary that controls or validates the data on the blockchain. Each node participates in the network as an equal peer and can verify the transactions independently.
• Transparency: All the transactions on the blockchain are visible to anyone who has access to the network. Anyone can trace the history and origin of any data on the blockchain.
• Security: The data on the blockchain is protected by cryptography and consensus algorithms. Cryptography ensures that only authorized parties can access or modify the data, while consensus algorithms ensure that all the nodes agree on the validity of the transactions.
• Immutability: Once a transaction is recorded on the blockchain, it cannot be altered or deleted. This ensures that the data is accurate and consistent across the network.

How Blockchain Works: The Basics of Cryptography and Consensus

To understand how blockchain works, we need to understand two concepts: cryptography and consensus.

Cryptography is the science of encrypting and decrypting information using mathematical techniques. It enables secure communication and authentication between parties. There are two types of cryptography used in blockchain:

• Hashing: A hashing function is a mathematical function that converts any input into a fixed-length output, called a hash or a digest. The output is unique for each input, meaning that no two inputs can produce the same hash. Hashing is used to link blocks together and to verify the integrity of the data.
• Digital signatures: A digital signature is a way of proving one’s identity and ownership of data using public-key cryptography. Public-key cryptography involves two keys: a public key and a private key. The public key can be shared with anyone, while the private key is kept secret by its owner. The owner can use their private key to sign any message or transaction, which can then be verified by anyone using their public key.

Consensus is the process of reaching agreement among multiple parties on a shared state of affairs. It is essential for maintaining the consistency and validity of the data on the blockchain. There are different types of consensus algorithms used in blockchain, such as:

• Proof-of-work (PoW): PoW is a mechanism that requires nodes to perform a difficult computational task, called mining, to create new blocks and validate transactions. The node that solves the task first gets to add the block to the chain and receive a reward. PoW ensures that no one can tamper with or forge blocks, but it also consumes a lot of energy and resources.
• Proof-of-stake (PoS): PoS is a mechanism that requires nodes to stake some amount of their own tokens or coins to participate in creating new blocks and validating transactions. The node with the highest stake has the highest chance of being selected to add the block to the chain and receive a reward. PoS reduces the energy consumption and resource wastage of PoW, but it also introduces some risks such as centralization and attacks.
• Other consensus mechanisms: There are other consensus mechanisms that aim to improve or combine aspects of PoW and PoS, such as proof-of-authority (PoA), proof-of-space (PoSpace), proof-of-burn (PoB), proof-of-capacity (PoC), proof-of-elapsed-time (PoET), etc.

Decentralization: The Core Feature of Blockchain

Decentralization is one of the most important features of blockchain technology. It means that there is no single entity or organization that controls or governs the network or the data on it. Instead, each node operates independently and cooperatively with other nodes to maintain and update the database.

Decentralization has several advantages over centralized systems, such as:

• Resilience: A decentralized system can withstand failures or attacks better than a centralized system, because there is no single point of failure or vulnerability. If one node goes offline or is compromised, the rest of the network can continue to function normally.
• Censorship-resistance: A decentralized system can resist censorship or manipulation by any authority or intermediary, because there is no one who can block or alter the transactions or data on the network. Anyone can participate in the network and access the information freely and openly.
• Innovation: A decentralized system can foster innovation and creativity, because there is no one who can impose rules or restrictions on the network. Anyone can create new applications or services on top of the network and benefit from its features.

Transparency: How Blockchain Makes Everything Visible

Transparency is another key feature of blockchain technology. It means that all the transactions and data on the network are visible and verifiable by anyone who has access to the network. Anyone can trace the history and origin of any data on the network and audit its validity and accuracy.

Transparency has several benefits for different stakeholders, such as:

• Users: Users can trust the data and transactions on the network, because they can see and verify them for themselves. They can also protect their privacy and identity, because they can use pseudonyms or encryption to hide their personal information.
• Businesses: Businesses can improve their efficiency and accountability, because they can eliminate intermediaries and reduce costs and errors. They can also enhance their reputation and customer loyalty, because they can provide more transparency and security to their clients and partners.
• Regulators: Regulators can monitor and enforce compliance and regulations, because they can access and audit the data and transactions on the network. They can also promote fair competition and innovation, because they can prevent fraud and corruption.

Security: How Blockchain Protects Your Data and Transactions

Security is another essential feature of blockchain technology. It means that the data and transactions on the network are protected from unauthorized access or modification by cryptography and consensus algorithms. No one can tamper with or forge the data or transactions on the network without being detected or rejected by the network.

Security has several implications for various scenarios, such as:

• Data storage: Data storage on blockchain is more secure than traditional databases, because it is distributed across multiple nodes and encrypted by hashes. No one can access or modify the data without having the correct keys or permissions.
• Data transfer: Data transfer on blockchain is more secure than conventional methods, because it is validated by digital signatures and consensus algorithms. No one can intercept or alter the data during transmission without breaking the cryptography or consensus.
• Smart contracts: Smart contracts are self-executing agreements that are encoded on blockchain. They are more secure than legal contracts, because they are executed automatically and transparently by the network. No one can breach or manipulate the contracts without violating the code or consensus.

Bitcoin and Blockchain: What’s the Difference?

Bitcoin is a cryptocurrency that uses blockchain technology as its underlying infrastructure. It is a digital currency that can be used to send and receive payments online without intermediaries or central authorities. It was created in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto.

Blockchain is a technology that can be used for more than just cryptocurrencies. It is a general-purpose platform that can support various applications and services in different domains, such as finance, healthcare, supply chain, identity, etc. It was inspired by Bitcoin, but it has evolved beyond it.

Bitcoin and blockchain are related but distinct concepts. Bitcoin is an application of blockchain, while blockchain is a technology that enables Bitcoin. Bitcoin is one example of blockchain, while blockchain is a category of technologies that includes Bitcoin.

Blockchain and Banks: Friends or Foes?

Blockchain technology has a significant impact on the banking industry, as it offers new opportunities and challenges for both banks and customers. Blockchain technology can enable faster, cheaper, safer, and more transparent transactions and services for both parties, but it also poses some threats and risks for them.

Criteria	Blockchain	Banks
Speed	Blockchain transactions can be processed in minutes or seconds, depending on the network congestion and the consensus algorithm. For example, Bitcoin transactions can take anywhere from 15 minutes to an hour, while Ethereum transactions can take about 15 seconds.1	Bank transactions can take hours or days, depending on the type of transaction, the intermediary institutions, and the regulatory requirements. For example, international wire transfers can take up to five business days, while domestic transfers can take up to 24 hours.
Cost	Blockchain transactions can be cheaper than bank transactions, as they eliminate intermediaries and fees. The cost of a blockchain transaction depends on the network congestion and the transaction size. For example, the average fee for a Bitcoin transaction was about $0.5 in January 2021, while the average fee for an Ethereum transaction was about $1.5.	Bank transactions can be expensive, as they involve intermediaries and fees. The cost of a bank transaction depends on the type of transaction, the intermediary institutions, and the currency exchange rates. For example, the average fee for an international wire transfer was about $25 in 2019, while the average fee for a domestic transfer was about $5.
Security	Blockchain transactions are secured by cryptography and consensus algorithms, which prevent fraud, hacking, corruption, or human error. No one can tamper with or forge the transactions or data on the blockchain without being detected or rejected by the network. For example, Bitcoin uses a proof-of-work algorithm that requires nodes to solve a difficult computational puzzle to create new blocks and validate transactions.	Bank transactions are secured by centralized databases and verification systems, which are vulnerable to fraud, hacking, corruption, or human error. There have been many cases of data breaches, identity thefts, money laundering, and cyberattacks on banks and financial institutions. For example, in 2019, Capital One suffered a data breach that exposed the personal information of over 100 million customers.
Transparency	Blockchain transactions are transparent and verifiable by anyone who has access to the network. Anyone can trace the history and origin of any transaction or data on the blockchain. For example, Bitcoin uses a public ledger that records all the transactions that ever occurred on the network.	Bank transactions are opaque and private, as they are stored in closed and isolated databases. Only authorized parties can access or audit the transactions or data on the banks’ systems. For example, banks use a private ledger that records only their own transactions and balances.
Decentralization	Blockchain transactions are decentralized and peer-to-peer, as they do not require a central authority or intermediary to control or validate them. Each node participates in the network as an equal peer and can verify the transactions independently. For example, Bitcoin is a decentralized network that operates without any central entity or organization.	Bank transactions are centralized and intermediated, as they require a central authority or intermediary to control or validate them. Each bank acts as a gatekeeper and a middleman for the transactions that involve its customers or partners. For example, banks are regulated by central banks and governments that oversee their activities and policies.

Some of the advantages of blockchain technology for banks and customers are:

• Faster transactions: Blockchain technology can reduce the time needed to process transactions from days to minutes or seconds, as it eliminates intermediaries and verification delays.
• Cheaper transactions: Blockchain technology can lower the costs associated with transactions, as it reduces fees and overheads charged by intermediaries and third parties.
• Safer transactions: Blockchain technology can increase the security of transactions, as it protects them from fraud, hacking, corruption, or human error.
• More transparent transactions: Blockchain technology can enhance the transparency of transactions, as it makes them visible and verifiable by anyone on the network.

Some of the disadvantages of blockchain technology for banks and customers are:

• Regulatory uncertainty: Blockchain technology faces regulatory uncertainty in many jurisdictions, as it challenges existing laws and regulations regarding money laundering, taxation, consumer protection, etc.
• Technical complexity: Blockchain technology requires technical expertise and infrastructure to operate and maintain, which may be difficult or costly for some banks and customers to acquire or access.
• Cultural resistance: Blockchain technology may encounter cultural resistance from some banks and customers who are used to traditional systems and practices, which may hinder its adoption or acceptance.

Blockchain technology is neither a friend nor a foe for the banking industry, as it offers both advantages and disadvantages for them. It depends on how they adapt and respond to the changes and challenges brought by this technology. Blockchain technology can be a powerful tool for innovation and transformation, but it also requires careful regulation and education. Banks and customers need to collaborate and cooperate to leverage the benefits and overcome the drawbacks of blockchain technology.

Blockchain Applications: From Finance to Healthcare

Blockchain technology has a wide range of applications and use cases in various sectors and industries, such as finance, healthcare, supply chain, identity, etc. Blockchain technology can provide solutions and benefits for many problems and challenges faced by these sectors and industries, such as inefficiency, fraud, corruption, privacy, etc.

Some of the examples of blockchain applications are:

• Finance: Blockchain technology can enable peer-to-peer transactions and payments without intermediaries or central authorities, such as banks or governments. It can also support digital currencies, such as Bitcoin, and other financial services, such as remittances, lending, crowdfunding, etc.
• Healthcare: Blockchain technology can improve the management and sharing of health records and data among patients, providers, and insurers. It can also enable secure and transparent tracking of medical supplies and drugs, as well as verification of credentials and qualifications of medical professionals.
• Supply chain: Blockchain technology can enhance the efficiency and transparency of supply chain management and logistics. It can also enable traceability and provenance of products and materials, as well as verification of quality and authenticity.
• Identity: Blockchain technology can provide a decentralized and self-sovereign identity system that can empower individuals to control their own identity and data. It can also enable secure and verifiable identity verification and authentication for various purposes, such as voting, travel, education, etc.

Blockchain Pros and Cons: The Advantages and Disadvantages of Blockchain Technology

Blockchain technology has many advantages and disadvantages that need to be considered before adopting or implementing it. Blockchain technology is not a panacea or a silver bullet that can solve all problems or suit all needs. It has its strengths and weaknesses that depend on the context and the objectives of its use.

Some of the pros of blockchain technology are:

• Trustless: Blockchain technology eliminates the need for trust or intermediaries in transactions or data exchange. It relies on cryptography and consensus to ensure the validity and integrity of the data.
• Immutable: Blockchain technology ensures that the data is permanent and unchangeable. It prevents any alteration or deletion of the data once it is recorded on the network.
• Transparent: Blockchain technology ensures that the data is visible and verifiable by anyone on the network. It enables accountability and auditability of the data.
• Secure: Blockchain technology ensures that the data is protected from unauthorized access or modification. It uses encryption and consensus to safeguard the data from attacks or breaches.

Some of the cons of blockchain technology are:

• Scalability: Blockchain technology faces scalability issues in terms of speed, capacity, and performance. It has limitations on how fast it can process transactions, how much data it can store, and how well it can handle high demand or traffic.
• Complexity: Blockchain technology involves complexity in terms of technicality, usability, and interoperability. It requires technical expertise and infrastructure to operate and maintain. It also poses challenges for users to understand and use. It also faces difficulties in integrating with existing systems or platforms.
• Regulation: Blockchain technology faces regulation issues in terms of legality, compliance, and governance. It challenges existing laws and regulations regarding money laundering, taxation, consumer protection, etc. It also lacks clear standards or frameworks for its governance or oversight.

Benefits of Blockchains: How They Can Improve Your Life and Business

Blockchain technology has many benefits that can improve your life and business in various ways, such as:

• Empowerment: Blockchain technology can empower you to have more control and ownership over your own data and assets. You can decide how to use, share, or monetize them without relying on intermediaries or third parties.
• Inclusion: Blockchain technology can enable you to access and participate in the global economy and society, regardless of your location, identity, or status. You can benefit from the opportunities and services offered by blockchain platforms and networks, such as financial inclusion, social impact, education, etc.
• Innovation: Blockchain technology can inspire you to create and explore new ideas and solutions for various problems and challenges. You can leverage the features and capabilities of blockchain technology to develop innovative applications and services in different domains, such as art, gaming, entertainment, etc.

Drawbacks of Blockchains: The Challenges and Limitations of Blockchain Technology

Blockchain technology also has some drawbacks that need to be addressed and overcome, such as:

• Education: Blockchain technology requires education and awareness among users and stakeholders to understand its potential and implications. It also requires training and skills development among developers and professionals to design and implement blockchain solutions effectively and efficiently.
• Adoption: Blockchain technology faces adoption barriers and resistance from some users and stakeholders who are reluctant or skeptical to use or accept it. It also faces competition and rivalry from existing or alternative systems or platforms that may offer better or more convenient solutions or services.
• Regulation: Blockchain technology needs regulation and governance that can balance the interests and rights of users and stakeholders, as well as ensure the security and stability of the network. It also needs collaboration and coordination among different actors and entities that are involved or affected by blockchain technology, such as governments, regulators, industry players, civil society, etc.

Bottom Line

Blockchain technology is a powerful tool that can offer many benefits and opportunities for individuals, businesses, organizations, and society at large. It can enable faster, cheaper, safer, more transparent, more decentralized, more trustless transactions and services. It can also empower users to have more control and ownership over their own data and assets. It can also foster innovation and creativity in various domains. However, blockchain technology also has some drawbacks and challenges that need to be overcome, such as scalability, complexity, regulation, education, and adoption. Blockchain technology is not a perfect or universal solution that can suit all needs or scenarios. It has its strengths and weaknesses that depend on the context and the objectives of its use. Blockchain technology is still evolving and improving, as it faces new developments and innovations, as well as new problems and issues. Blockchain technology is a fascinating and promising technology that deserves our attention and care.

1. Harvard Blockchain in the Banking Sector: A Review of the Landscape and Opportunities. ↩︎