What Is Blockchain? How It Works, Uses and Risks

Blockchain is one of the elements that seems most complex in how a cryptocurrency is built. The technology can seem quite complicated at first glance, but that is only an impression. This article gives you a clear explanation of what it is and how it works. Understanding it is not just a matter of reading the best book on the subject. So how does blockchain work?

Blockchain: What Is It? Definition

What is blockchain? It is a new technology launched by Satoshi Nakamoto in 2008. It optimizes how information is stored and transmitted across different sectors (economy, finance, banking, insurance and more).

It also allows assets with value to be exchanged, reducing costs for the parties involved in the transaction. It offers strong traceability, as it records every movement in a ledger. It is also the technology at the heart of the decentralized web and decentralized finance, or DeFi.

For more information on this concept, see the article blockchain definition.

If this topic interests you, also see “Free Cryptocurrency” and “Compound Crypto Review“.

ISO Standards Explained

With the popularity of cryptos such as Bitcoin, blockchain technology came into focus. A committee of experts was appointed to set the first standards, as well as supporting documents on this technology. ISO 22739 is the standard that served as the basis, clarifying the definition of this technology.

Other reports followed to explain more complex concepts such as the use of smart contracts, how supply chains work and data security.

How Does Blockchain Technology Work?

According to mathematician Jean-Paul Delahaye, it is “a very large notebook that everyone can read freely and for free, on which everyone can write, but which is impossible to erase and indestructible“. Here are the different steps in how this technology works.

• an identification phase using a cryptographic process;
• validation of the transaction, which is sent to a network of storage nodes, computers around the world;
• a node hosts a copy of the database of the history of exchanges made by users. All the parties involved can of course access it simultaneously;
• a security system based on a consensus mechanism among all the nodes each time information is added. Decryption and authentication are carried out by data centers or miners (using Proof of Work). Once the transaction is validated, it is added to the database as a block. These blocks of data, once the information is stored and transmitted, make up the chain of blocks;
• decentralized management of security. This makes falsifying transactions impossible. With the full history built in and its tamper-proof nature, there is no longer any need for a central controlling body.

Financial Applications of Blockchain

1. Cryptocurrency

In general, cryptos are based on a decentralized network of computers with nodes scattered around the world, holding copies of all the transactions made. This network is none other than the blockchain. These nodes, also called blocks, once linked and secured, become the solid foundation of everything crypto is built on.

Other forms of tokens besides cryptos also use blockchain, such as NFTs, or non-fungible tokens.

2. Exchanges

As an asset, crypto can be exchanged because of its value. This is where the technology is used to the full: storing and transmitting information take on their full meaning. With progress in the crypto sector, conversions are now possible, and the exchanges blockchain enables are not limited to cryptos with each other but extend to traditional currencies too.

3. Wallets

The best solution for keeping your cryptocurrencies is a wallet. A wallet serves as a storage and security system for crypto. There are 2 types of wallets: online wallets, called hot wallets, and offline cold wallets. Which wallet is best for blockchain security will mainly depend on how you use your crypto.

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The Best-Performing Blockchains in Crypto

1. The Bitcoin Blockchain

As the pioneer, its blockchain inspired all those that came after. It built its approach on Proof of Work for mining the chain of blocks. Its performance has kept it in first place.

2. The Ethereum Blockchain

Created by Vitalik Buterin, this crypto was launched in 2014. Its blockchain stands out from number one through the ability to create smart contracts. This innovation focuses mainly on issuing tokens and raising funds directly from the blockchain.

Bitcoin and Ethereum Blockchain Performance

Should You Invest in Blockchain?

Blockchain technology is a field that can be worth millions of dollars. Its credibility comes from the trust placed in it by giants such as Amazon, Google, Microsoft, AXA, BNP Paribas, Carrefour and IBM (with IBM Food Trust). With the great popularity of cryptocurrency, one of the technology’s applications, its future is promising. The technology also has many fields of application (banking, elections, production chain control, goods tracking and more). Its use has expanded considerably, both across Europe in general and in finance in Canada.

Types of Blockchain: Private vs Public

How Different Countries Regulate Blockchain

The technology’s status is not the same around the world: sometimes banned, sometimes poorly regulated. Here are a few examples:

1. The EU’s Position

• May 2016: the European Parliament creates a working group to monitor blockchain and crypto.
• February 2018: the European Commission launches the EU Blockchain Observatory and Forum.

2. France’s Position

• December 2015: the Caisse des Dépôts launches an initiative on blockchain use cases, driven by major financial and institutional players and startups (BNP Paribas, AXA, Crédit Agricole);
• June 2016: the National Assembly receives an amendment referring to blockchain, as part of the Sapin law on financial transparency and the fight against corruption;
• End of 2017: the Council of Ministers adopts an ordinance to allow certain (unlisted) financial securities to be transferred using this technology, considered a first in Europe according to the French Ministry of the Economy;
• Early 2018: the National Assembly sets up a fact-finding mission on this technology.
• 2018: the first artwork backed by blockchain, and above all an assessment of public knowledge of this technology.

3. Status in Canada

In Quebec, an accounting firm launched Catallaxy in July 2017, a center of expertise on blockchain, especially Bitcoin’s.

4. Germany’s Position

The first financial transaction executed with blockchain technology took place on June 28, 2017, between Landesbank Baden-Württemberg and the car maker Daimler AG.

5. Asia’s Position

In November 2016, a consortium made up of the Monetary Authority of Singapore (MAS) and eight banks formed a platform project based on decentralized digital transactions. Under the MAS’s control, the banks could buy cryptos, which could be exchanged for traditional currencies or used for interbank payments.

The Advantages of This Technology

1. Very Fast Execution

This new technology makes transactions very fast. A block is validated very quickly, in a few seconds or minutes. By pairing blockchain with a payment method such as PayPal or Mastercard, transactions are even faster.

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2. Stronger Security

It offers a high level of security when using the network. This security comes from validation by different users each time ownership of the asset changes hands, which curbs attempts at falsification or other bad intentions. Monitoring of the system through the nodes and mutual control are the pillars of this enhanced security.

3. Flexibility and Adaptability

This technology makes it very easy to trace the different exchanges of an asset. For example, in a court dispute, a judge can rely on it and use it as evidence for a ruling. This traceability can also be applied to tracking a product’s journey, which has led to its adoption by companies such as McAfee, Uber, Walmart, FedEx, BMW, Bosch, fintechs, UNICEF, Ubisoft, Vodafone, UPS, Baidu, Kodak and more.

4. A Means of Certification

It can serve as a means of certifying a company or its product. Just as the electronic signature did when it arrived, this new technology will revolutionize certification. Because it cannot be modified, it is tamper-proof.

5. Major Gains in Productivity and Efficiency

It also brings huge gains in productivity and efficiency, a direct result of organizing exchanges under a computer protocol. Transaction costs fall mechanically, and the centralization seen in traditional systems is removed. Intermediate users in the chain ensure the validity of the whole.

6. A New Decentralized Virtual Economic System

It enables a completely decentralized new digital economy. This technology offers the chance to break free from the heavy centralization of the web and the constraints imposed by giants such as Google or Bing, as well as iOS or Android platforms. It lets cryptocurrency serve startups, offering various options such as crowdfunding to get started.

The Disadvantages of Blockchain

1. Huge Energy Consumption

One of the major problems raised about blockchain is its environmental impact. Its energy consumption is very high. One example is the energy-hungry transaction verification system on the Bitcoin blockchain, due to verification through PoW (Proof of Work).

This excessive use is caused by the race for ever more security. The bigger the network, like that of Bitcoin, the heavier the environmental impact. It was for this reason that Elon Musk withdrew it from use at Tesla.

2. Lack of Regulation

The second problem with this technology lies in its direct application, cryptocurrencies, which are not subject to any regulation, opening the door to many risks. A recent example is the OneCoin crypto, which was in fact a Ponzi scheme. Moreover, blockchain security is far from inviolable, as various hacks have shown.

3. Hard to Understand

How blockchain works is fairly hard for end users to grasp. Its complexity is a huge barrier to adoption by the general public. Its intangibility makes it an abstract concept that is hard to understand, on top of very limited training in this field.

The Impact of Blockchain on the World of Investing

Blockchain is considered the third major new technology. It has brought major innovation to finance and investment. Its high level of security, and therefore the impossibility of falsification, make it a tool of choice in this sector, with fintechs pioneering its use.

The digital summit organized by KPMG as a partner of the Paris Blockchain Week Summit shows a little more of the scale blockchain has reached worldwide.

Satoshi Nakamoto’s Technology in the Real World

1. Banking

This technology makes it possible to validate transactions without a clearing house, so certifying operations takes much less time. It also encourages information sharing between competing players in finance while keeping commercial data confidential. Finally, it reduces contract costs and other administrative fees by making shared instruments easier to manage. But the real innovation is undoubtedly transactions using cryptocurrencies such as Bitcoin.

2. Security: Insurance

In insurance, it contributes for example by automating claims reimbursement procedures and reducing paperwork for both customers and companies, subject of course to the compensation terms and conditions and, above all, the loss actually being established.

3. Logistics

In logistics, this technology offers two benefits. The first is the ability to trace products much more easily by going back through the chain of blocks, so tracking from production to distribution is much simpler. The second is less paperwork and better cooperation within the industry. The agri-food sector seems to be a good application.

4. Energy

In energy, the technology’s contribution concerns the exchange of services and value without going through a central management body. It brings a certain fluidity to the supply network, made possible even on a fairly large scale by balancing supply and demand.

5. Politics

Electronic voting in elections is a very promising option. With globalization, borders have opened, and many citizens of some countries find themselves far from their legal residence. Yet their rights and obligations toward their countries remain in force while abroad. They don’t lose their right to vote, but exercising it through conventional means is not efficient, and using email undermines the secrecy of the ballot. So it is almost natural for this technology to find an application here: with this process, the vote is encrypted, transferred quickly and cannot be falsified.

Summary: What to Remember About Blockchain Technology

It is an IT infrastructure that takes the form of an accounting ledger. Its main function is storing and transmitting data. In terms of applications, it fundamentally underpins cryptocurrency as an asset and promotes DeFi. The main principles it upholds are immutability and decentralization.

The biggest criticism leveled at it is that it is still recent, as adjustments are still needed. Yet the performance it has shown so far is more than encouraging. All this suggests its future is fairly promising, with its application in cryptocurrency.

Read also: Etherscan Review