Blockchain (technology)

Blockchains are a form of decentralized recordkeeping popularized by cryptocurrency. The first blockchain was created alongside the cryptocurrency Bitcoin in 2009. Shortly after that, blockchain technology began to be utilized for additional cryptocurrencies and other applications.

Blockchains function on a peer-to-peer network. Computers connecting to the network serve as nodes. Nodes are responsible for validating modifications to data. These modifications are called transactions. Once validated, transactions are converted to blocks and permanently attached to the end of the chain. The collective record of all transactions is called the blockchain. Because prior blocks on the blockchain cannot usually be modified, the blockchain itself serves as a permanent record of all information altered on a blockchain network.

The peer-to-peer nature of a blockchain provides several advantages. It makes the network difficult to disable or modify in an unintended manner and improves its stability. However, it is also extremely inefficient in terms of computing power and electricity usage.

Background

The white paper detailing the first blockchain was posted by an anonymous individual or group under the alias of Satoshi Nakamoto. It was released in 2009 alongside Bitcoin, the first cryptocurrency. Nakamoto stepped away from the project in 2010.

Bitcoin used the blockchain to function. Marketed as an anonymous form of online currency, Bitcoin quickly became popular. Consumers, businesses, and computer experts found the idea of a functioning currency independent of any organization, bank, or government attractive. As Bitcoin grew in popularity, so did the idea of blockchains. Soon, other cryptocurrencies based on blockchains were developed and marketed as competitors to Bitcoin.

One of these competitors, Ethereum, pioneered the next advancement to blockchains. It developed the smart contract, which allowed blockchains to be generated with computer programs working within and alongside them. This allowed financial institutions to create tools within the blockchain that represented loans and bonds. Prior to the smart contract, only transactions were represented in cryptocurrency software.

The next major innovation in blockchain technology was called "proof of stake." Early blockchains used "proof of work" systems. In such systems, the contributor who commits the most computing power is rewarded with influence, control, and currency. In a proof of stake system, individuals are granted more power and rewards based on the amount of cryptocurrency they already hold. The more cryptocurrency an individual holds, the greater his or her rewards. This approach levels the playing field by reducing the influence of those who own the most powerful computers.

Overview

In a traditional database, only one individual can modify a set of data at a time. This slows data editing procedures that need to be updated from multiple sources in rapid succession. Blockchains are a form of decentralized record keeping. Although it could only be utilized for cryptocurrency at first, blockchain technology can now be used for contracts and other forms of data.

Blockchain work begins with a transaction. In this case, a transaction refers to any requested change in the data values of the blockchain. With cryptocurrency, this could refer to a transfer of funds from one individual to another. In contracts, database editing, or other forms of record keeping, it may mean modifying the text or numbers in a document.

The requested transaction is then broadcast on a peer-to-peer network. On a peer-to-peer network, each computer that can transmit and receive data is called a node. Information can be uploaded to one node, which will then send the data to all other connected nodes. Each of these nodes will also subsequently transmit the information, thus allowing it to spread throughout the entire network. In a blockchain, nodes are used to verify the validity of transactions through the use of specialized algorithms.

Once the transaction is verified, a new block of data is created. This data is added to the blockchain, which is then updated on every computer in the network through peer-to-peer nodes. In most cases, nodes are not capable of removing blocks from the block chain. This means that once a block is attached, the change in data is permanent. It also means that a permanent record of all data modifications is inherent in the blockchain system.

Blockchain systems have several advantages over traditional database systems. They do not require a central server with which users must connect to access data. Instead, they run on a peer-to-peer network. Because blockchains are not controlled by a single entity, they are incredibly resistant to attacks or attempts to unethically manipulate data. Decentralized networks also lack a singular fail point. If part of the network goes down, validations will be completed by other nodes. As a result, the blockchain itself should remain undamaged.

Blockchains also allow individuals to complete independent transactions without the involvement of any mitigating third party. For example, money can be transferred without the use of a bank. Blockchains are also entirely transparent. The software to create a blockchain is usually open source, meaning that the code itself is available for anyone to inspect.

Blockchains also have several disadvantages. In order to maintain total consensus across an incredibly large peer-to-peer network, most of the nodes on the network must remain running at all times. Often, many more nodes are involved in a calculation than would be required by a traditional system. This is wasteful in terms of processing power and electricity. It also makes processing slower and more expensive than traditional computing.

As blockchains become longer and more complex, it becomes more difficult for them to store information. Every node in the blockchain has to maintain the full chain, which continuously grows as more transactions are conducted. This increases the processing power required to maintain the chain and makes it more difficult for each node to run efficiently.

By the late 2010s, companies had increasingly begun to experiment with using blockchain technology to improve business practices. In 2018 it was announced that International Business Machines Corporation (IBM) had partnered with blockchain conuslting firm Chainyard as well as other top businesses, such as Cisco and Nokia, to create a blockchain network to manage suppliers more efficiently.

Innovations in blockchain technology continued into the early 2020s. For example, 2022 saw what many experts considered a watershed moment in the technology's developmental history. That year, Ethereum, one of the world's leading cryptocurrency platforms, successfully completed a highly complex upgrade of its blockchain from a proof of work system to a proof of stake system, which is considered more egalitarian and energy-efficient. Amid increasing awareness of the high levels of energy consumed by cryptocurrency mining and other related activities, many observers viewed this as a highly positive development. According to professional services firm Deloitte, 76 percent of respondents surveyed in 2021 indicated that blockchain technology had become a critical priority for their company, a sign that the business world had taken an increased interest in the technology.

Around that time, non-fungible tokens (NFTs), unique digital assets recorded on blockchain, also attracted increased attention. NFTs, often used to buy and sell digital artwork, became more popular with investors in the early 2020s and reached a market value of $41 billion by 2021 and $59.45 billion by 2024. Some individual NFTs sold for millions of dollars at that time; as a result, some investors and financial experts considered NFTs to be a bubble and argued that many individual NFTs were extremely overvalued. By 2023 the price of many NFTs ranged from $5 to $100, and a study found that 95 percent of NFT collections surveyed had a value of 0 Ethereum (a type of cryptocurrency), making them essentially worthless. Still, others considered NFTs a major development in the world of investing.

While the early 2020s were marked by a number of problems with cryptocurrency, including crashes in value, illegal hacks of cryptocurrency exchanges, and scams such as the one carried out by fraudulent cryptocurrency exchange FTX, many businesses and individuals remained optimistic about the potential benefits of blockchain technology.

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