Blockchain

Think about a time when you were working on a group project in Google Docs. Did you find it hard to agree on and communicate changes to the document so that everyone was happy? Every edit matters, so that each group member is proud of the final deliverable, yet we all know the experience of working with a rogue or lazy member who could potentially sabotage the whole thing. Though accountability is built into the platform through the editing history, some unauthorized edits might slip by. How could you ensure that each addition is verified by the group, and sneaky changes don’t make it into the final product? 

Imagine a version of Google Docs that requires asking permission for individual additions, akin to a super-secure suggestion mode, and if a group member tries to submit an unofficial version of the project, the submission can be cross-referenced with the other group members’ copies and automatically rejected. This way, everyone trusts that the final draft is what they expected, and is hopefully content with the resulting grade.

These features resemble the technology behind blockchain, a decentralized digital ledger that securely records and links transactions in a transparent, shared computer network.¹ Though the analogy of a shared document system, which we might call Google Docs+, is simplified compared to blockchains, they are similar in how they track records in a publicly visible history to boost transparency and prevent fraudulent activity. While blockchains are well-known for their essential use in cryptocurrencies like Bitcoin, they are applicable to a variety of industries due to their security and ability to make data immutable. With each “block” having the characteristic of being unchangeable, data reliability is maintained right from the point of data entry.¹ Blockchain helps mitigate worries by circumventing third parties like humans or banks, who are prone to biases and errors.²

Blocks are connected through cryptography, which lets blockchains retain data that is collectively controlled by all users in a peer-to-peer fashion.¹ These networks are typically used for transaction-based ledgers, but are capable of featuring all types of information in the chain.² When blocks of data are linked together, a secure and open ledger is maintained. This may sound confusing at first due to the abstract, digital nature of blockchains, but the name gives us some insight: information is openly shared with integrity through blocks, so that everyone can see what transactions or other actions are chained together across public networks, preventing unauthorized changes from occurring. 

How does a blockchain work?

Still feeling lost? It’s not uncommon. An intuitive way to think about blockchains is when you are using Google Docs: you share your project with your group members, with easy access to the same version of a document with real-time updates. When someone makes a change, everyone can see additions, with a visible editing history—yet crucially, our fictitious Google Docs+ helps us appreciate the ability of blockchains to resist changes and save only authorized additions onto the digital ledger. This keeps data changes honest via time-stamps, just like the transparency of actions in blockchains, and Google Docs+ has the added feature of requiring you to ask permission first to validate these changes amongst group members, further enhancing security.

With each transaction or any other piece of information, a record is made into a new “block” separate from other historical transactions. Blocks are then permanently “chained” together so changes are visible, and each block has key information about an asset or data values and the ensuing process.³ Instead of relying on a central authority like a bank, blockchain networks validate and store transactions through distributed consensus mechanisms.² The step-by-step process is as follows:

At a finer level, we can understand the functionality of blockchains by looking at programs, or “scripts,” that run tasks you otherwise would in a database, like inputting or retrieving information, and organizing it in a given digital location. For example, Bitcoin gathers transaction data and puts it into a 4MB-sized file as a block. When storage is full, the data goes through a cryptographic hash function and generates a unique number called the block header hash.¹ Because the hash is generated from the data contained within the block, any alterations will cause the hash to change, and the links in the chain to break, contributing to the immutability of a blockchain.

Key features of blockchain

Blockchain technology is inherently a distributed ledger, where everyone taking part in the network has access to a record of unique shared transactions.² With other core features like decentralization, immutability, transparency, and public key cryptography, blockchain builds trust between participants without the need for intermediaries.³ Let’s spell out these features with concrete uses: ^{1, 2} 

Arriving at a consensus: proof of work versus proof of stake 

Due to their collaborative nature, blockchains and their nodes must arrive at a mutually agreed upon consensus in one of two ways: using private blockchains that have secure corporations that review any amendments or additions to a given blockchain, or via public blockchains that use larger markets. When it comes to these public blockchains, there are two common ways to find a consensus:³

1. Proof-of-work: The first node, or user, that validates an initial transaction or data point in the digital ledger gets a reward called a “token.” Also called a “miner,” the user has to find a solution to a cryptographic question to get the tokens. This can be lucrative, but energy-consuming.
2. Proof-of-stake: Instead of a race to mine first, users put cryptocurrencies in a shared account to enter for their chance to win tokens as a reward while saving energy too. These miners earn “scores” relative to their unique coins in their digital wallets—and how long their wallet holds them, increasing their chances of validating a transaction for rewards.

Something we’ll investigate further is concerns about energy usage linked to blockchains and their risks to the environment. Using proof-of-stake, as Ethereum began to do in September 2022 during “the Merge” as a transition away from proof-of-work, is an effective way that cryptocurrency companies can be more sustainable.³, ⁴ To put this into perspective: one transaction of an Ethereum blockchain before this switch used nearly 110 kg of CO2—equivalent to a week’s worth of American household energy use.4 Non-crypto organizations can follow suit to create blockchains that don’t overconsume energy.

Blockchain network types

By now, we are aware of at least two types of networks: public versus private ones. It is worth taking a closer look at these two network types, and alternative foundations to making blockchains through permissioned or consortium-built options:²

Bitcoin versus banks: The blockchain difference

Blockchain has greater versatility beyond its applications in financial products and digital assets, though it is most famous for Bitcoin.⁵ With the ubiquity of such cryptocurrencies, it is important to distinguish blockchain from Bitcoin itself. Bitcoin is rooted in blockchain technology, as the first real-world use of blockchain that transparently keeps track of transactions amongst peers, rivaling conventional financial institutions like banks. When it comes to the bank, there are some other key differences:¹

Outside of crypto: real-world blockchains 

It isn’t all about crypto. Beyond digital currencies like Bitcoin, blockchain is used in industries like finance, healthcare, and supply chain management to increase traceability, efficiency, and data integrity.⁵ And yes, AI finds its place within the blockchain, too, making data more transparent and secure in settings like healthcare to assess patient data for tailored treatment plans.² These implementations underscore the potential of blockchains, which may make it even easier to understand their broad applications. Next time you travel, you might think about how companies could work with airlines to track your flight attendant’s travels using blockchains to reduce intermediary contacts for less noisy communication.