Blockchain Cryptocurrency NFT Chapter 1 – What Is Blockchain?
The blockchain is a transformative technology. Some believe blockchain technology has the potential to change nearly every aspect of our lives, far beyond the impact of cryptocurrencies on our financial portfolios. Even crypto skeptics see the value of blockchain technology.
Blockchain will continue to change the way we do things.” That all sounds great, but what exactly does it mean? Here is what you need to know about blockchain and what a blockchain revolution could look like.
What is blockchain? Think of blockchain as a new type of digital form of data storage. Blockchain is the underlying technology on which many cryptocurrencies – like Bitcoin and Ethereum – are based, but its unique way of securely recording and transferring information has applications outside of cryptocurrencies. A blockchain is a type of distributed ledger. Distributed ledger technology (DLT) allows data to be recorded on multiple computers called “nodes.” Each user of the blockchain can be a node, but operation requires a lot of computer power.
Nodes review, approve, and store data within the ledger. This differs from traditional record-keeping methods, where data is stored in a central location, such as a computer server. A blockchain organizes information added to the ledger into blocks or groups of data. Each block can only hold a certain amount of information, so new blocks are constantly being added to the ledger, forming a chain. Each block has its own unique identifier, a cryptographic “hash.”
The hash not only protects the information within the block from anyone who does not have the required code, but also protects the block’s place in the chain by identifying the block that came before it. The cryptographic hash is “a series of numbers and letters that can be up to 64 digits long.
Once information is added to the blockchain and encrypted with a hash, it is permanent and immutable. Each node has its own record of the entire timeline of data along the blockchain, going back to its beginning. If someone tampers or hacks a computer and manipulates the data for their own benefit, the information stored by other nodes will not be altered. The way the system works, it’s almost impossible for someone to replicate the computing power that’s going on in the background and somehow figure out what all those hashes are,” Agarwal says.
How it works? Here’s an example of how blockchain is used to verify and record bitcoin transactions. A consumer buys bitcoin. The transaction data is sent across the decentralized network of bitcoin nodes. The nodes validate the transaction. The completed block is encrypted and the transaction record is permanent; it cannot be removed or modified from the blockchain.
Bitcoin’s blockchain is public, meaning that anyone who owns Bitcoin can view the transaction record. Although it can be difficult to trace the identity of an account, the record shows which accounts are transacting on the blockchain. Public blockchains also allow any user with the necessary computing power to participate as a node in approving and recording transactions on the blockchain. Blockchains can be designed as private ledgers, allowing an owner to restrict who can make changes or additions to the blockchain.
With a private blockchain, the pool of participants is smaller, but still decentralized among participants. The idea of a secure, decentralized, permanent record of information has attracted interest from numerous industries and potentially offers solutions to many security concerns, record-keeping processes, and data ownership issues we face today.
A blockchain-based future. Blockchain gives us the technology to move information securely and to determine the authenticity of any information we want to protect with near-absolute certainty. Consider, for example, the stories that have circulated in recent weeks about memes and celebrities who have monetized digital property by selling NFTs (non-fungible tokens). Because the underlying blockchain record is immutable, sellers can use NFTs to verify the authenticity of a digital asset.
When you buy an NFT, that transaction is added to the blockchain ledger and becomes a verifiable proof of ownership. For those who want to verify the authenticity of a digital work, the blockchain helps value digital art and collectibles similarly to their physical counterparts. In theory, this leads to creators getting their value by receiving royalties for copies of digital art. But what it really shows is that you can have a digital economy with digital property rights. For many of us, one of the most important use cases for blockchain technology may be the protection and secure transfer of personal data: imagine if your banking information was stored on a blockchain. When you open an account at a new financial institution or transfer data between different institutions, a blockchain ledger could help quickly and securely ensure that the transfer or new account is accurate and legitimate using the data you already have stored.
A prediction is that blockchain technology has the potential to be used in almost every industry because every industry has some type of information that they want to share in a very secure way.
Businesses could keep more accurate inventory records with blockchain. Blockchain could even help consumers make more informed purchasing decisions as product supply chains become more transparent. The technology could help food suppliers more efficiently track recalled products or allow consumers to avoid goods made in exploitative labor conditions. Blockchain has the potential to give people more security and certainty.
Investing in the future. Companies and governments around the world continue to test and implement blockchain technology, but none of it will happen overnight. If we ever reach a point where government currencies are based on blockchain or medical records are converted to blockchain, it will not be anytime soon. In the meantime, you can bet on the power of blockchain by adding a blockchain-based cryptocurrency like Bitcoin to your portfolio, but that’s not the only way to invest your money in this technology. For example, check to see if your ETFs or mutual funds include companies that are developing blockchain technologies or starting to use blockchain in their business operations. There are even ETFs made up exclusively of these types of companies, called blockchain ETFs.
One example launched in 2018 is the Siren Nasdaq Blockchain Economy Index (BLCN), which has outperformed the S&P 500’s total return on both a year-over-year and three-year average basis.
These funds do not invest any of your money specifically in cryptocurrencies, but instead invest in select company stocks – from long-established companies like IBM to lesser-known startups like Galaxy Digital. That still does not guarantee a return, but it can be a more conservative alternative to putting your money directly into the notoriously volatile cryptocurrency market. The difference between speculating directly in cryptocurrencies and investing in blockchain companies to the California gold rush two centuries ago. A lot of people rushed there to dig for gold, and most of them never made any money. The people who made the money are the ones who sold the shovels. The companies that support the development of blockchain are the shovel sellers.