What Is a Blockchain? How Blockchains Work

A blockchain is a database that uses distributed ledger technology (DLT) to keep a record of cryptocurrency totals and transactions using interconnected data blocks. These "blocks" are linked or "chained" together in chronological order.

The most common applications for blockchain systems are digital currency and record-keeping for transactions. Unlike traditional currency, there is no central authority overseeing blockchain. It is a distributed ledger that all cryptocurrency users can view. “Proof of work” or “proof of stake” processes in this system help create new blocks and validate transactions.

In 2008, Satoshi Nakamoto founded Bitcoin (BTC), the first cryptocurrency, and introduced blockchain technology to the world. Bitcoin remains the largest cryptocurrency, but thousands of different cryptocurrencies are on the market today, including the currencies Ethereum and Litecoin.

The cryptocurrency market has inspired the rise of online brokers, such as Coinbase, which allow you to purchase different types of cryptocurrencies. Now, there are many different types of blockchains, which people use for everything from storing health care records to monitoring the entire network of a company’s supply chain.

A blockchain functions as a type of ledger dispersed between the nodes of a peer-to-peer network. The decentralized network stores information in the blockchain, such as cryptocurrency transactions, digitally. The groups, or “blocks,” of information connect to form chains of records.

Cryptographic codes, or “hashes,” link the blocks together, making them impenetrable to hackers. These hashes are a lot like a secure password—it's easy for a user to create one but nearly impossible for a stranger to guess it. Each block will record transactions until it has reached its data capacity, and then a new block will form and attach itself to the previous block.

There are many different ways to use a blockchain. For example, you could host a private blockchain or permissioned blockchain with a private key for use by only your employees or investors. You might also create a public blockchain anyone can join to contribute to an ecosystem or participate in the exchange of currency or assets.

Blockchain applications include those in the worlds of:

• Cryptocurrency: A blockchain-based currency allows users to trade digital currencies and spend it like they would a real-world currency. Creating currency on the bitcoin blockchain requires significant computing power and involves solving advanced algorithms. The blockchain platform records new transactions with a timestamp to prevent bad actors from double-spending currency or tampering with the currency, which users store in secure digital wallets. Many financial services providers and financial institutions have adopted the blockchain to secure bitcoin transactions in favor of using credit cards or the US dollar.
• Non-fungible tokens (NFTs): A type of digital asset (for example, a digital work of art), an NFT is an asset on the blockchain a user can record as their property. A person can purchase a digital asset using cryptocurrency and claim ownership.
• Decentralized autonomous organizations (DAO): A decentralized autonomous organization is a member-owned corporation that is a democracy with no central leadership. A DAO’s code is a smart contract, a type of blockchain technology that autonomously enforces a predetermined set of rules. Unlike a traditional organization, a DAO has no intermediaries, is entirely anonymous, and has decentralized finances no single person controls. Instead, members invest in the business using crypto tokens that also give them voting power to make decisions for the organization.

Some advantages of a blockchain include:

1. 1. Scalability: The blockchain is infinitely scalable as a storage center for record-keeping.
2. 2. Security: The decentralized nature of the blockchain network and the use of cryptography keep the blockchain secure as a digital ledger.
3. 3. Transparency: Since every action on the blockchain is public record, anyone can access these records to learn who has done what. The open-source nature of blockchains makes them less susceptible to manipulation.

Disadvantages of a blockchain include:

1. 1. Regulation: Because blockchains are decentralized, it is difficult to govern or regulate them. In time, governments and organizations might try to place more restrictions on blockchain activity.
2. 2. Speed: The blockchain is infinitely scalable; however, it does have limitations when it comes to speed. Adding a new block to the blockchain can take up to ten minutes, and the blockchain can’t manage a high load of transactions simultaneously.
3. 3. Technology requirements: The hardware and software required to maintain a blockchain is expensive and complex. Validating a transaction can be costly for companies or individuals who want to invest in the technology.

From the rise of blockchain technology to the dawning of NFTs and Web3, the world of cryptocurrency has undergone dynamic changes and continues to innovate. With the MasterClass Annual Membership, get access to exclusive lessons from Hunch cofounder Chris Dixon, Binance cofounder Changpeng Zhao, Coinbase’s Emilie Choi, and economist Paul Krugman to learn about the ever-changing landscape of cryptocurrency and its place in the global economy.