What Is Blockchain? Simply Explained

Blockchain.

You hear it when you read about Bitcoin. If you follow the NFT boom, it’s also part of it. It’s everywhere, whether you invest in finance, games, or stable coins.

Even outside of crypto, software companies keep talking of this technology. Healthcare, real estate, IT, law, banking. From financial services to everyday problems, blockchain shows no signs of slowing down.

So what is blockchain, what is it used for?

What Is Blockchain?

Before you understand blockchain, here’s its formal definition:

Blockchain is a digital database type secured by distributed ledger technology (DLT).

In the crypto context, blockchain is the security system used to verify transactions. (more on how it works later)

Let’s break it down to make it clear:

The block contains all the information about a transaction (e.g., the amount, date, sender). It creates a unique “hash” (like a transaction ID) from this data.

The chain means that every block has its hash AND the hash from the last block. Hashing is automatic, and so you don’t need to know anything about the previous transaction.

What about DLT?

A ledger is a financial database to record transactions. Distributed means that all users (AKA the network) have an updated copy of the database. So you don’t rely on a single entity to verify the records.

In practice, it means:

• Blockchain accepts new data and doesn’t allow changing previous blocks
• Blockchain creates consensus among users who don’t need to trust each other
• No one can force the blockchain to accept an entry if the (P2P) network disagrees

Blockchain and Cryptocurrency

Not only can blockchain be complex to explain, but it’s easy to confuse with its no.1 use case: crypto. It’s like comparing a digital database with digital money. So what’s the difference?

From the blockchain perspective, crypto tokens are just a type of data. From the crypto perspective, blockchain is the payment method. So while blockchain has unlimited applications, you can’t trade crypto without this technology.

If crypto never existed, you would still hear about the blockchain “revolution.”

When Did Blockchain Come Out?

It may first seem like blockchain changed the world overnight. But now you know the difference between blockchain and crypto. Before Bitcoin, this tech probably had years of development already.

So while it’s been popular for the last five years, it’s really been 30. 1991 was when Stuart Haber and W.S. Stornetta theorized about cryptographic security. Seventeen years later, after further discoveries, “Satoshi Nakamoto” registered bitcoin.org and published this whitepaper (2008).

As the most popular blockchain, Bitcoin wasn’t tradeable until it launched on BitcoinMarket.com in July 2010 ($0.08). For the next seven years, it would continue to gain adoption, inspiring the creation of countless blockchains.

Types of Blockchain

But not all blockchain is decentralized.

Organizations find different uses for blockchain based on permission. In other words, they choose who to trust to verify the blocks (AKA validating nodes).

Now, blockchain isn’t always decentralized. Do we want everyone to apply as a node, or should do we want an organization instead? Because of this question, blockchain leads to the following variations:

• Permission-less blockchains. Which allows anyone to join the network and get paid as a node. Like this.
• Permissioned blockchains. Where only authorized organizations can validate blocks.

Cryptocurrencies are all permissionless, while permissioned blockchains could be supply chains, banking groups, and vendors.

It’s not all black and white though. Here are four types along with their cost, security, and network speed:

• Public (Permission-less): Anyone can validate. It’s secure and transparent but lacks speed and cost-efficiency. E.g., Bitcoin.
• Private (Permissioned): The project’s company validates the blocks. They offer high validation speed and low costs, but questionable reliability. E.g., Quorum.
• Consortium (Permissioned): A private network of organizations will validate the blocks. It’s a decentralized version of private blockchains. E.g., HyperLedger Fabric.
• Hybrid (Permission-less): It brings the benefits of public and private blockchains and limits their downsides. The organization can choose what information to keep private while still being verifiable by the public blockchain. E.g., Ripple Network.

How Does Blockchain Work?

By this point, you know more about blockchain than most traders do. That’s because you don’t need to understand 100% of blockchain to enjoy its benefits. Unless you’re a dApp developer (or the next Vitalik Buterin), it’s enough to learn what it does and why it works.

First, let’s see how it works in the most common scenario: trading in the Bitcoin blockchain.

Suppose you want to buy a Bitcoin from an exchange. As a trader, the steps are simple:

1. Sign up in a crypto exchange like Binance

2. Go to the “Buy Crypto” screen

3. Choose your payment method (e.g., credit card), fiat currency, and the crypto you want to get (BTC)

4. Enter payment details, and confirm the order

5. Monitor your order until you receive BTC in your crypto wallet minutes later

Now, what happens behind the scenes after the purchase?

Example: The Bitcoin Blockchain

For simplicity, let’s assume the exchange sends 1 Bitcoin from their wallet to yours. This order you created is the transaction block. It may store the address, date, amount, and then creates a hash (ID) with this data.

Before adding to the blockchain, the network needs to approve your block. How it works depends on the coin (proof-of-work, proof-of-stake). Generally, the protocol will compare your hashes with the nodes (and approve your block if they match):

Let’s say your block generates “abc1” as the hash. Your block also loads the hash from the last verified block. Let’s say it’s “edf2”.

Since all nodes have copies of the blockchain, they will check if your block has the hash “edf2.” If it doesn’t, your transaction will delay for hours and then cancel. That only happens if either (1) you try to manipulate the block or (2) the network is too congested to validate it.

If approved, your block will add to the chain.

That’s not when you get the crypto (yet). You need confirmations, which is the number of blocks created after yours. After 3–6 confirmations (~10min to ~60min), your transaction becomes secured and irreversible.

That’s when Bitcoin adds to your wallet.

Blockchain Features

Crypto isn’t revolutionary for being digital money. Electronic payments have been around for years. And so did private blockchains in banking.

What does make crypto blockchain different? You can describe it in three words:

• Decentralized: There’s no third-party regulation. There’s a growing network of validator nodes to approve new blocks.
• Irreversible: The block information becomes permanent after enough blocks build on top (from <3 to 100s, depending on the network size and validation speed).
• Pseudo-Anonymous: Anyone can see the hash that assigns to your block, but there’s no identity attached to it. It’s because users don’t need to trust each other (only the system).

Blockchain Benefits

How do these translate into benefits?

• It’s accessible. You only need a crypto wallet to use the blockchain (which doesn’t need KYC). You can also generate new addresses for the same wallet. And if you prefer peer-to-peer, you can meet with a seller to buy Bitcoin for cash.
• It’s (more) secure. Hashing is a one-way function that converts a random data length to a fixed alphanumeric string (see SHA-256). And while the same data generates the same string, there’s no way to revert a hash. The blockchain also gets more secure as it gains adoption.
• It’s faster. Depending on the token, you can trade worldwide within hours, often ❤0 minutes. Speed depends on the number of nodes, incentives, and the consensus algorithm. Still fast compared to international transfers.

Blockchain Risks

Blockchain works without intermediaries, which saves money and time on transactions. As long as there’s enough infrastructure, everything runs smoothly. Still, there are three warnings when using blockchain:

• Transactions are permanent. Even when you wait for confirmations, you can’t revert the order. The only way is to wait <24h until it cancels (which is unlikely). So you have to be precise when sending crypto, or else it’s lost forever.
• It can be expensive. Blockchain transactions include a fee to reward validator nodes and token miners. When miners raise their fees (e.g., after Bitcoin halving) or there are too many transactions, the network becomes unusable. Even sending $20 could come with a ~$200 fee in the Ethereum Mainnet (on busy hours).
• Your wallet may not be as secure. If you hold crypto in a centralized exchange, this company might freeze your funds and close the account anytime. It happens way too often whenever Bitcoin has a sharp price change. Exchanges can require ID verification.

You could use a cold wallet that only you can access (with a seed phrase). Save that password well, because if you lose it, there’s no one to recover your wallet.

Now that you know the implications of blockchain let’s see how you could use it.

What Blockchain Is Used for (In Everyday Life)

From the formal definition, you might see it as some high-finance technology. Now with these examples, you’ll find that blockchain is closer to everyday use than you think. There are at least four ways people will use (crypto) blockchains, even if they know nothing about it:

Local Shopping

In a few years, blockchain could transition from being an Internet trend to a standard payment method. To the point where’s Bitcoin is almost as common as fiat currency. And it’s already happening depending on where you live:

• There are over 48,000 Bitcoin ATMs in America alone. In big cities, you’re a few minutes away from finding one. Most allow both withdrawals and purchases (even without a crypto wallet).
• Binance, Wirex, and Crypto.com already offer crypto-fiat cards in most countries. Within seconds, you can swap coins for native currency (USD), buying in stores the same way you’d use a VISA card. You get 1% to 5% cashback, depending on your tier.
• Major brands accept Bitcoin payments (and more will join). Starbucks, KFC, Tesla, and even groceries, to name a few.

Digital Art & Collectibles

Just like you can trade currency and collectibles, you could trade crypto tokens and NFTs. NFTs use a crypto marketplace (and so rely on the blockchain). And while it’s beyond the scope of this guide, here’s a quick overlook:

• Followers can support artists by buying the original assets (NFTs)
• Copies are free and identical in quality. The value comes from the original ownership
• Every time a buyer sells NFTs to someone else, the creator earns royalties

These collectibles stand for any form of asset: a picture, song, video, event ticket, game items, domain names.

OpenSea.io trades an average of $40 million per day. But in this early stage, getting NFTs isn’t cheap ($500 minimum). We will reach a point where they become accessible to everyone ($50,$20,$5 NFTs).

Sports Club Fan Tokens

Sports have been around for thousands of years. People get together, have fun, and it boosts their motivation. Whether you’re indifferent or a die-hard football fan.

Some clubs now sell blockchain fan tokens, so their fans can be part of the experience. When the team plays better, their token price increases. True fans who stayed from the beginning make the best money.

Imagine how they spike during the sports season. Here are some of them, from football clubs to basketball.

Buying these is like an exclusive membership. You could vote on match locations, merch design, or which song to play at the stadium.

Gaming Ecosystem

Crypto will change gaming in so many ways that it would take hours to explain. But for a quick overview, these are some trends you’ll see:

• VR Item Auctions: In games, players can get exclusive items either (1) by luck, (2) grinding, or (3) limited events. You could then sell these for real money. Because of blockchain, you won’t need a game company managing the economy.
• Community Memberships: Developers can create NFTs that translate to privileges inside their game. As it gets more popular, holders get more perks, such as passive income for owning in-game land.
• Gambling: Sports fans often bet on their clubs. But there’s no such thing for Twitch or eSports, viewed by 400M people. Or digital horse races (DERC).

Not to mention play-to-earn projects (and what it means for gamers). Financial blockchains may take years to develop, but gaming can trigger mass adoption.

The Future of Blockchain

Those were only the closest examples of blockchain. In the next years, you’ll see further usability in other sectors:

• In decentralized finance (DeFi): lending becomes easier, and so does interest-earning.
• In law: you can protect your intellectual property if you own its NFT
• In software: developers can build dApps (e.g., on Ethereum) for better speed, cost, and security.
• In virtual reality: you could buy NFT land plots from big cities. So when VR becomes mainstream, advertisers pay you to use your land plot.
• In healthcare: private blockchains improve security for patient data tracking.

That doesn’t mean that every company using blockchain will be valuable. We’ve just seen its first applications, starting with Bitcoin. And whether blockchain may replace banks or not, it makes crypto a convenient option.