What is a blockchain?

A blockchain is an immutable, reliable, and transparent technology for storing information, most often records of financial transactions. It functions like an ever-growing chain made of blocks of data.

New blocks are added to the end of the chain and the contents of those blocks cannot be changed after they are finalized. You cannot manipulate it, you cannot delete it, and everyone can see the transactions. The users, though, can remain private, as they are protected by their pseudonym.

A blockchain network distributes all the blockchain data to thousands of users, or nodes. This streamlines transactions by removing the need for a traditional middleman, such as a bank, to legitimize transactions and provide assurances. As long as the majority of nodes agree upon their common digital history, the information in the blockchain is considered to be valid and indisputable. In this way, the nodes function as a sort of crowd-sourced assurance that transactions are legitimate.

Replacing one central authority with thousands of nodes also means that there is no single exploitable weak point. This makes blockchain secure for storing important or sensitive information, such as legal documents, healthcare data or cryptocurrency.

The idea of the blockchain has existed for over a quarter of a century, but it was popularized by the mythical founder of Bitcoin, Satoshi Nakamoto. No one knows who Satoshi is or if they are even a real person or group of people. All we know is that they authored The Bitcoin whitepaper, published on October 31, 2008. The white paper made a revolutionary breakthrough and created Bitcoin, the first decentralized currency. Blockchain technology is the framework that made the breakthrough possible.

Since its inception in 2009, Bitcoin has grown into a global phenomenon, attracting the attention of developers, software companies, and institutions. Most of the popular cryptocurrencies today use blockchain as their technological backbone. Ethereum and Dogecoin are examples of blockchain-based cryptocurrency.

It is inaccurate, though, to equate blockchain with cryptocurrency. Not all cryptocurrencies are blockchain-based, and some use a different underlying technology to achieve a similar effect to the blockchain’s. And it works the other way round too — blockchain has many applications beyond being the foundation for cryptocurrencies.

To understand blockchain, you must first understand decentralization. Traditionally, information has been stored in centralized, physical archives. While you could make copies of physical documents, copies didn’t carry the same authority as the original – so this didn’t create a truly decentralized system.

Even with digital technology, centralized servers remain the norm. For example, a bank may store your transaction history on its own servers. Because the data is kept in a central location, a hacker only needs to compromise that one weak point to break into the system.

Decentralization means every node (computer) in a network simultaneously holds the same information. There is no original or copy — there is only one blockchain existing in many locations at once. Any valid change updates the entire network simultaneously.

This is what makes blockchain harder to attack than a centralized system. In a decentralized blockchain network, a hacker would have to compromise the majority of nodes at the exact same time. Hacking just one node is useless because the rest of the network will recognize the compromised data and replace it with the correct, healthy version.

To maintain this consistency, nodes operate through consensus. They must agree on what information is valid before it is included in the blockchain. Any conflicting version is rejected. If a change is made that isn't accepted by consensus, it results in a separate blockchain, known as a fork.

Think of a blockchain as a single, shared digital ledger. Every node can verify its contents and ensure the data matches the consensus. This shared ledger exists everywhere at once, securing past and future information in a permanent digital record.

Disclosures:

Content provided for educational purposes only. Not investment advice or a recommendation. Trading and owning digital assets involves significant risk, including the risk of substantial loss. Cryptocurrency services are offered through an account with Robinhood Crypto, LLC (NMLS ID 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency held through Robinhood Crypto is not FDIC insured or SIPC protected.