What Is Blockchain? Beyond the Hype A Clear, Honest Explanation

What Is Blockchain? Beyond the Hype, An Honest Answer

Meta description: Blockchain explained simply, without the hype or the jargon. What it really is, and where it can and can’t be used.

At some point, you’ve either heard yourself or a friend exclaim “we should put that on the blockchain”, referring to something that clearly did not deserve to be on a blockchain. It could be a program that tracks loyalty rewards, something as simple as tracking coffee beans, or any number of things.

Between the hype cycle, crypto crashes, and confusing lingo, it’s easy to think blockchain is either revolutionary magic or complete nonsense, but the reality, as per usual, is more nuanced and interesting.

The Simple Definition

A blockchain is a shared digital record-keeping system that multiple computers maintain together, in which new entries are locked in place and almost impossible to secretly change afterwards.

A Simple Analogy: The Shared Notebook

Say you have a notebook, in which every transaction that ever occurs gets written down in. Typically, this notebook could be managed by one person (usually a bank), to which everyone else trusts to keep the information secure, fair, and unaltered.

Imagine instead that there are thousands of copies of this notebook, with each page being updated and managed simultaneously by different people all over the world. If someone tries to sneakily change the information on one of their copies of the notebook, it would be immediately obvious to the other copies, as they all hold the correct information.

Blockchain works in a very similar way, except that instead of notebooks being held by people, it’s maintained by computers.

Why “Blocks” and “Chain”?

Each transaction on a blockchain is grouped together with other transactions into blocks. Blocks also include a cryptographic fingerprint of the previous block, linking them together, like a chain. Should someone try to sneakily change a block, its fingerprint would change, and thus the entire chain would be broken. This is what makes the records on a blockchain so difficult to tamper with, since each block is dependent on the one before it.

Why Does This Matter?, The Core Idea: Trust Without a Third Party

Traditionally, we place our trust in institutions, banks, governments, and companies to keep an accurate record of things and make transactions, and ensure they aren’t tampered with. The innovation of blockchain is enabling trust without a third party, by decentralizing this responsibility to a network of nodes (computers).

This has real practical value in situations where

one party cannot be fully trusted by another,

there is a strong need of transparency

or

multiple parties need to have a mutually agreed upon record.

Where Blockchain Is Useful

Cryptocurrency

This is most definitely the most well known application of blockchain, where it serves as the technology that enables cryptocurrencies to function. The first-ever cryptocurrency, Bitcoin, uses blockchain to keep track of wallet balances, without the need of a bank in the middle. However, it’s also worth noting that cryptocurrency investing is an extremely volatile space, and is not recommended for most people. This article is purely about explaining the technology, and any investment decisions should be thoroughly researched or done in consultation with a licensed financial advisor.

Supply Chain Tracking

Some companies utilize blockchain to keep track of supply chains, in order to ensure authenticity or to track products. Example applications could be tracking coffee beans, or ensuring that a product is not counterfeit.

Digital Identity and Record Verification

Blockchain can be used for verification of records, such as certificates, diplomas, or property records, in a manner that is much more difficult to forge counterfeits of.

Smart Contracts

Some blockchains, including Bitcoin, have the ability to self-execute smart contracts, which are programs that require certain conditions to be met in order for any action to be carried out. This could mean that, instead of requiring a third party to ensure that payment will only be sent upon receiving a product, it can be enforced by the blockchain itself.

Where Blockchain Is Most Definitely Not Useful

Simple cases of requiring a third party to be trusted

There’s no doubt that blockchain serves very practical applications for some situations, but for things where there’s already a clear and established third party that everyone trusts to keep records, it’s better to just stick with them. Having a regular database or a SQL database is much more cost-effective and faster than implementing a blockchain.

Speed Is Of The Essence

Blockchain transactions can be much slower than regular centralized transactions, depending on the type of blockchain.

Energy Is A Concern

Some blockchains require massive amounts of energy to verify transactions, which has made them the subject of many environmentalist critiques, as well as some criticism from within the space itself. Some blockchains are trying to tackle this by being more energy-efficient.

A lot of projects that involve blockchain for X recently were added for no real reason

This is probably the biggest one, and there are plenty of examples. Recently, there has been a hype cycle surrounding blockchain, and any project that could superficially appear to relate to it tried to jump on the bandwagon, resulting in plenty of things that are just superficially related. There are lots of “blockchain for X”, where X is virtually any subject, that don’t really need it.

Common Misconceptions, Debunked

Blockchain and cryptocurrency are the same thing

They are not! Cryptocurrency is just one application of blockchain, and there are many others.

Blockchain is completely anonymous

It is not, in fact, completely anonymous. Some blockchains are completely public and transparent, and while personally identifiable information might not be directly visible, transactions are visible to everyone.

Blockchain is completely unhackable

While the records on a blockchain are very hard to tamper with, it doesn’t mean that everything around it is unhackable. There are many other points of attack, such as exchanges or wallets being compromised.

A Simple Mental Model to Keep in Mind

A blockchain is a shared, nearly unhackable, record book that doesn’t rely on a third party to keep track of things. It has real practical applications for some situations, but is completely unneeded for others.

Final Thoughts

Blockchain is neither magic, nor is it nonsense, but rather a clever piece of engineering that solves a particular problem: how do we enable trust between parties who cannot completely trust each other, and without relying on a third party? This is both a great innovation that finds practical applications in some situations, as well as completely unneeded in others, where there is a third party available that can be trusted.

Your turn: Have you come across a “blockchain solution” that was really useful, or “blockchain for X” that was just hype? Comment below, this is always a hotly debated topic.