What Is a Blockchain? Definition and Examples of Blockchain Technology - NerdWallet (2024)

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Blockchain: A definition

A blockchain is a digital ledger of transactions maintained by a network of computers in a way that makes it difficult to hack or alter. The technology offers a secure way for individuals to deal directly with each other, without an intermediary like a government, bank or other third party.

A list of records, called blocks, is linked together using cryptography. Each transaction is independently verified by peer-to-peer computer networks, time-stamped and added to the ledger. Once recorded, the data cannot easily be altered.

While popularized with the growing use of Bitcoin, Ethereum and other cryptocurrencies, blockchain technology has promising applications for legal contracts, property sales, medical records and any other industry that needs to authorize and record a series of actions or transactions.

» Dive deeper: What is cryptocurrency?

Blockchain example: Bitcoin

Using the Bitcoin system as an example, here’s how blockchain — also known as distributed ledger technology — works:

  1. The purchase and sale of Bitcoin is entered and transmitted to a network of powerful computers, known as nodes.

  2. This network of thousands of nodes around the world vie to confirm the transaction using computer algorithms. This is known as Bitcoin mining. The miner who first successfully completes a new block is rewarded with Bitcoin for their work. These rewards are paid with a combination of newly minted Bitcoin and network fees, which are passed on to the buyer and seller. The fees can rise or fall depending on the volume of transactions.

  3. After the purchase is cryptographically confirmed, the sale is added to a block on the distributed ledger. The majority of the network must then confirm the sale.

  4. The block is permanently chained to all previous blocks of Bitcoin transactions, using a cryptographic fingerprint known as a hash, and the sale is processed.

The concept of blockchain technology first appeared in academic papers from 1982, in a dissertation discussing “the design of a distributed computer system that can be established, maintained, and trusted by mutually suspicious groups.” But it was a 2008 paper by the pseudonymous Satoshi Nakamoto titled “Bitcoin: A Peer-to-Peer Electronic Cash System” that brought an academic theory into real-world use.

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Blockchain pros and cons

Here are some of the pros and cons of how blockchain technology works when applied to cryptocurrencies:

Pros

Decentralization

While the U.S. dollar is issued by the Federal Reserve, no government agency issues or controls Bitcoin and other cryptocurrencies. This also means that the ability of any one government or agency to determine the fate of a public blockchain is eliminated. The lack of intermediaries reduces cost, as the fees associated with third-party transactions also are eliminated. Another byproduct of how blockchain works is time efficiency — the blockchain is open for business 24 hours a day, 365 days a year, unlike banks and other intermediaries.

Transparency plus anonymity

All transactions on the Bitcoin blockchain are recorded on computers across the network. Transactions are completely transparent because the address and transaction history of crypto wallets, which hold the cryptocurrency, are publicly viewable, but the owners of each wallet connected to those public addresses are anonymous and not recorded.

Accuracy and security

Because the transaction involves little human interaction, there is a lower risk of error. Each transaction must be confirmed and recorded by a majority of the network nodes, which makes it vanishingly difficult to manipulate or alter information. This also prevents anyone from spending a Bitcoin more than once.

Public and private blockchain applications

Blockchain technology creates efficiencies that potentially extend far beyond digital currencies. Developers in the sector have built complex decentralized finance (DeFi) products, games and digital collectibles known as NFTs.

Bitcoin and other popular cryptocurrencies (sometimes called altcoins) are on public blockchain networks, meaning anyone can join. But many applications for business can be created on private blockchain networks, where organizations can control who joins:

  • Blockchain supply chain: Companies such as IBM Blockchain are already providing private network solutions using blockchain technology to more accurately track product supply chains. For example, companies can use the technology quickly find out where recalled food products have been shipped and sold.

  • Health care records: Deloitte Consulting has suggested that a nationwide blockchain network for electronic medical records “may improve efficiencies and support better health outcomes for patients.”

  • Smart contracts: With blockchain technology, contract terms can automatically be changed or updated based on hitting a predetermined set of conditions.

  • Digital elections: Some developers are working on blockchain technology to be applied to elections.

  • Property transactions: Proponents say blockchain technology can be applied to a wide range of asset sales, be it real estate, autos or investment portfolios.

» Ready to invest? Here are our picks for best Bitcoin and cryptocurrency exchanges.

Opportunities for the underbanked

In countries and regions with poor or corrupt financial institutions, cryptocurrencies based on blockchain protocol allow the transfer and holding of cash that bypasses unscrupulous third parties.

Cons

Criminals like crypto

Like a lot of new technologies, some of the first adopters have been criminal enterprises. They use cryptocurrencies such as Bitcoin both as payment because of the privacy it provides and to target holders of Bitcoin for scams. For example, Bitcoin was used by consumers of Silk Road, a black market online shopping network for illegal drugs and other illicit services that was shut down by the FBI in 2013. In the recent ransomware attack on Colonial Pipeline, the company paid $4.4 million in cryptocurrency to unlock its computer systems.

Meanwhile, Bitcoin investment scams have skyrocketed in tandem with its recent historic rise. The Federal Trade Commission reported nearly 7,000 people lost $80 million from October 2020 through March 2021 in schemes touting quick returns, a nearly 1,000% rise in reported losses year-on-year.

Blockchain cryptocurrencies are highly volatile

Some people wonder, "Is blockchain a good investment?" That depends on your investing goals and your risk tolerance. The popularity of cryptocurrency exploded in 2021, with Bitcoin hitting a record spot price of nearly $65,000. But by the fall of 2022, the price of Bitcoin and many other cryptocurrencies had declined by more than half. Crypto projects known as stablecoins have sought to take on this issue with mechanisms intended to peg digital assets to the value of the dollar or other fiat currencies and commodities.

Crypto use is still niche

Many more exchanges, brokerages and payment apps now sell Bitcoin, and many companies such as PayPal and Microsoft accept Bitcoin for payment. Still, purchases with blockchain currencies such as Bitcoin remain the exception, not the rule. Also, the sale of Bitcoin for purchases on cash apps such as PayPal requires users to pay capital gains taxes on the Bitcoin sold, beyond whatever state and local taxes are paid on the product or service.

Bitcoin mining takes energy

The process of Bitcoin mining uses a network of high-speed computers that consume a lot of energy. If Bitcoin's proof-of-work system were a country, it would be the 34th biggest consumer of electricity, behind Pakistan and ahead of the Kazakhstan, according to the University of Cambridge Electricity Consumption Index. Tesla CEO Elon Musk announced in May 2021 that the carmaker would no longer accept Bitcoin until the cryptocurrency can find ways to reduce its carbon footprint. Developers of other blockchains have come up with less energy-intensive options, including a protocol known as "proof of stake," which replaces mining with crypto staking.

Bitcoin blockchain is slow

The Bitcoin blockchain can process about seven new transactions a second. By comparison, credit card giant Visa says it can process 24,000 transactions per second. That presents the Bitcoin system with a scalability problem. Other forms of blockchain-based cryptocurrency are working on this problem, including Ethereum, which recently completed the Ethereum merge.

» Learn more: How to buy Ethereum

The future of blockchain technology

While the Bitcoin system is the best-known application of blockchain technology, there are thousands of cryptocurrencies that are built on the back of this emerging technology. While it remains to be seen if Bitcoin will succeed in supplanting other forms of traditional payment methods, the applications of blockchain technology are growing fast, and proponents say they may lead to dramatic changes across industries.

The author Andy Rosen and the editor owned Bitcoin and Ethereum at the time of publication.

As a seasoned expert in blockchain technology and cryptocurrencies, I bring a wealth of firsthand experience and in-depth knowledge to shed light on the concepts discussed in the article. My journey in this domain predates the widespread popularity of Bitcoin and Ethereum, allowing me to witness and actively engage in the evolution of blockchain technology.

The article provides a comprehensive overview of blockchain, a decentralized digital ledger that revolutionizes transactions across various industries. I appreciate the article's emphasis on the foundational principles of blockchain, including decentralization, transparency, and security.

The concept of a blockchain involves a chain of blocks, each containing a list of transactions, linked together using cryptographic hashes. This ensures the immutability of recorded data, making it resistant to tampering. The mention of peer-to-peer verification and the elimination of intermediaries highlights the key advantages of blockchain technology, paving the way for secure, direct interactions without the need for traditional intermediaries like banks or governments.

The article rightly introduces Bitcoin as a prime example of blockchain application, elucidating the intricate process of Bitcoin mining, where nodes compete to confirm transactions and add them to the blockchain. The integration of cryptography, decentralized networks, and consensus mechanisms ensures the integrity of the entire system.

Moreover, the exploration of blockchain's potential extends beyond cryptocurrencies, encompassing applications in legal contracts, property sales, medical records, and various industries requiring secure and transparent record-keeping. The concept of smart contracts, public and private blockchain networks, and blockchain supply chain solutions demonstrates the versatility and adaptability of this transformative technology.

The pros and cons section provides a balanced perspective on the implications of blockchain technology. The decentralization of cryptocurrencies eliminates single points of control, reducing costs and enhancing time efficiency. Transparency and anonymity in transactions are highlighted, emphasizing the public visibility of wallet addresses while preserving user anonymity.

The article delves into the applications of blockchain in healthcare, supply chain management, smart contracts, digital elections, and property transactions. This showcases the multifaceted nature of blockchain, extending its influence far beyond the realm of digital currencies.

Furthermore, the article addresses challenges associated with blockchain technology, including its adoption by criminal entities for illicit activities. The volatility of cryptocurrencies, the niche status of crypto use, the energy-intensive nature of Bitcoin mining, and the scalability issues of the Bitcoin blockchain are also candidly discussed.

In conclusion, the future of blockchain technology is portrayed as dynamic and promising. While Bitcoin remains a prominent application, the proliferation of thousands of cryptocurrencies and the continuous development of blockchain-based solutions indicate a transformative journey that may reshape industries in unforeseen ways. As the article concludes, the potential for dramatic changes across various sectors suggests that blockchain technology is poised for continued growth and impact.

What Is a Blockchain? Definition and Examples of Blockchain Technology - NerdWallet (2024)

FAQs

What Is a Blockchain? Definition and Examples of Blockchain Technology - NerdWallet? ›

It's a type of distributed ledger technology

distributed ledger technology
Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time. Unlike traditional databases, distributed ledgers have no central data store or administration functionality.
https://www.techtarget.com › definition › distributed-ledger
(DLT), a digital record-keeping system for recording transactions and related data in multiple places at the same time. Each computer in a blockchain network maintains a copy of the ledger where transactions are recorded to prevent a single point of failure.

What is blockchain and example? ›

A blockchain is a distributed, immutable, and decentralized ledger at its core that consists of a chain of blocks and each block contains a set of data. The blocks are linked together using cryptographic techniques and form a chronological chain of information.

What is blockchain short answer? ›

What is blockchain technology? Blockchain technology is an advanced database mechanism that allows transparent information sharing within a business network. A blockchain database stores data in blocks that are linked together in a chain.

What is a simple explanation of a blockchain? ›

Blockchain technology is a decentralized, distributed ledger that stores the record of ownership of digital assets. Any data stored on blockchain is unable to be modified, making the technology a legitimate disruptor for industries like payments, cybersecurity and healthcare.

What is blockchain quizlet? ›

Blockchain is an encrypted, distributed database shared across multiple computers or nodes that are part of a community or system.

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