Blockchain is the innovative database technology that\u2019s at the heart of nearly all cryptocurrencies. By distributing identical copies of a database across an entire network, blockchain makes it very difficult to hack or cheat the system. While cryptocurrency is the most popular use for blockchain<\/a> at present, the technology offers the potential to serve a very wide range of applications.<\/p>\n At its core, blockchain is a distributed digital ledger that stores data of any kind. A blockchain can record information about cryptocurrency transactions and ownership of Non Fungible Tokens (NFTs).<\/p>\n While any conventional database can store this sort of information, blockchain is unique in that it\u2019s decentralised. Rather than being maintained in one location by a centralised administrator \u2013 think of an Excel spreadsheet or a bank database \u2013 many identical copies of a blockchain database are held on multiple computers spread out across a network.<\/p>\n These individual computers are referred to as nodes.<\/p>\n With blockchain, the digital ledger is described as a \u201cchain\u201d made up of individual \u201cblocks\u201d of data. As fresh data is periodically added to the network, a new \u201cblock\u201d is created and attached to the \u201cchain.\u201d<\/p>\n This involves all nodes updating their version of the blockchain ledger to remain identical.<\/p>\n How these new blocks are created is key to why blockchain is considered highly secure. A majority of nodes must verify and confirm the legitimacy of the new data before a new block can be added to the ledger. For a cryptocurrency, they might involve ensuring that new transactions in a block were not fraudulent, or that coins had not been spent more than once.<\/p>\n This is different from a standalone database or spreadsheet, where one person can make changes without oversight.<\/p>\n \u201cOnce there is consensus, the block is added to the chain and the underlying transactions are recorded in the distributed ledger,\u201d says C. Neil Gray, partner in the fintech practice areas at US-based Duane Morris LLP. \u201cBlocks are securely linked together, forming a secure digital chain from the beginning of the ledger to the present.\u201d<\/p>\n Transactions are typically secured using cryptography, meaning the nodes need to solve complex mathematical equations to process a transaction.<\/p>\n \u201cAs a reward for their efforts in validating changes to the shared data, nodes are typically rewarded with new amounts of the blockchain\u2019s native currency, such as new Bitcoin<\/a> on the bitcoin blockchain,\u201d says Sarah Shtylman, fintech and blockchain counsel with Perkins Coie.<\/p>\n There are both public and private blockchains. In a public blockchain, anyone can participate, which means they can read, write or audit the data on the blockchain. Notably, it is very difficult to alter transactions logged in a public blockchain as no single authority controls the nodes.<\/p>\n A private blockchain, meanwhile, is controlled by an organisation or group. Only it can decide who is invited to the system, plus it has the authority to go back and alter the blockchain. This private blockchain process is more similar to an in-house data storage system except spread over multiple nodes to increase security.<\/p>\n Blockchain technology is used for many different purposes from providing financial services to administering voting systems.<\/p>\n The most common use of blockchain today is as the backbone of cryptocurrencies, like Bitcoin or Ethereum. When Australians buy, exchange or spend cryptocurrency, the transactions are recorded on a blockchain. The more people use cryptocurrency, the more widespread blockchain could become.<\/p>\n \u201cBecause cryptocurrencies are volatile, they are not yet used much to purchase goods and services. But that is changing as PayPal, Square and other money service businesses make digital asset services broadly available to vendors and retail customers,\u201d notes Patrick Daugherty, senior partner of international law firm Foley & Lardner and lead of the firm\u2019s blockchain task force.<\/p>\n Beyond cryptocurrency, blockchain is being used to process transactions in fiat currency, such as pounds, Australian dollars and euros. This could be faster than sending money through a bank or other financial institution as the transactions can be verified more quickly and processed outside normal business hours.<\/p>\n Blockchain can also be used to record and transfer the ownership of different assets. This is currently popular with digital assets such as NFTs, a representation of ownership of digital art and videos.<\/p>\n However, blockchain could also be used to process the ownership of real-life assets, such as the deeds to property and vehicles. The two sides of a party would first use the blockchain to verify that one owns the property and the other has the money to buy. Then they could complete and record the sale on the blockchain.<\/p>\n Using this process, they could transfer the property\u2019s deeds without manually submitting paperwork to update land registration records \u2013 it would be instantaneously updated in the blockchain.<\/p>\n Another blockchain innovation is self-executing contracts commonly called \u201csmart contracts.\u201d These digital contracts are enacted automatically once conditions are met. For instance, a payment for an item might be released instantly once the buyer and seller have met all specified parameters for a deal.<\/p>\n \u201cWe see great potential in the area of smart contracts, using blockchain technology and coded instructions to automate legal contracts,\u201d says Gray. \u201cA properly coded smart legal contract on a distributed ledger can minimise, or preferably eliminate, the need for outside third parties to verify performance.\u201d<\/p>\n Supply chains involve massive amounts of information, especially as goods go from one part of the world to the other. With traditional data storage methods, it can be hard to trace the source of problems, such as which vendor poor-quality goods came from.<\/p>\n Storing this information on blockchain would make it easier to go back and monitor the supply chain, such as with IBM\u2019s Food Trust, which uses blockchain technology to track food from its harvest to its consumption.<\/p>\n Experts are also looking into ways to apply blockchain to prevent fraud in voting. In theory, blockchain voting would allow people to submit votes that couldn\u2019t be tampered with as well as would remove the need to have people manually collect and verify paper ballots.<\/p>\n Because a blockchain transaction must be verified by multiple nodes, this can reduce error. If one node has a mistake in the database, the others would see that it\u2019s different and catch the error.<\/p>\n In contrast, in a traditional database, if an individual makes a mistake, it may be more likely to go through. In addition, every asset is individually identified and tracked on the blockchain ledger, so there is no chance of double spending it (like a person overdrawing their bank account, thereby spending money twice).<\/p>\n Using blockchain, two parties in a transaction can confirm and complete something without working through a third party. This saves time as well as the cost of paying for an intermediary, a bank for example.<\/p>\n \u201cIt has the ability to bring greater efficiency to all digital commerce, to increase financial empowerment to the unbanked or underbanked populations of the world and to power a new generation of internet applications as a result,\u201d says Shtylman.<\/p>\n Theoretically, a decentralised network, like blockchain, makes it nearly impossible for someone to make fraudulent transactions.<\/p>\n To enter in forged transactions, they would need to hack every node and change every ledger. While this isn\u2019t necessarily impossible, many cryptocurrency blockchain systems use \u2018proof-of-stake\u2019 or \u2018proof-of-work\u2019 transaction verification methods that make it difficult, as well as not in participants\u2019 best interests, to add fraudulent transactions.<\/p>\n Since blockchains operate 24\/7, people can make more efficient financial and asset transfers, especially internationally. They don\u2019t need to wait days for a bank or a government agency to manually confirm everything.<\/p>\n Given that blockchain depends on a larger network to approve transactions, there\u2019s a limit to how quickly it can move. For example, Bitcoin can only process 4.6 transactions per second versus 1,700 per second with Visa. In addition, increasing numbers of transactions can create network speed issues. Until this improves, scalability is a challenge.<\/p>\n Having all the nodes working to verify transactions takes significantly more electricity than a single database or spreadsheet. Not only does this make blockchain-based transactions more expensive, but it also creates a large carbon burden for the environment.<\/p>\n Because of this, some industry leaders are beginning to move away from certain blockchain technologies, like Bitcoin. For instance, last year Tesla boss Elon Musk said his company would stop accepting Bitcoin partly because he was concerned about the damage to the environment.<\/p>\n Some digital assets are secured using a cryptographic key, like cryptocurrency in a blockchain wallet. You need to carefully guard this key.<\/p>\n \u201cIf the owner of a digital asset loses the private cryptographic key that gives them access to their asset, currently there is no way to recover it \u2013 the asset is gone permanently,\u201d says Gray. Because the system is decentralised, you can\u2019t call a central authority, like your bank, to ask to regain access.<\/p>\n Blockchain\u2019s decentralisation adds more privacy and confidentiality, which unfortunately makes it appealing to criminals. It\u2019s harder to track illicit transactions on blockchain than through bank transactions that are tied to a name.<\/p>\nWhat Is A Blockchain?<\/strong><\/h2>\n
How Blockchain Works<\/strong><\/h2>\n
How Is Blockchain Used?<\/strong><\/h2>\n
Cryptocurrency<\/strong><\/h3>\n
Banking<\/strong><\/h3>\n
Asset Transfers<\/strong><\/h3>\n
Smart Contracts<\/strong><\/h3>\n
Supply Chain Monitoring<\/strong><\/h3>\n
Voting<\/strong><\/h3>\n
Advantages of Blockchain<\/strong><\/h2>\n
Higher Accuracy of Transactions<\/strong><\/h3>\n
No Need for Intermediaries<\/strong><\/h3>\n
Extra Security<\/strong><\/h3>\n
More Efficient Transfers<\/strong><\/h3>\n
Disadvantages of Blockchain<\/strong><\/h2>\n
Limit on Transactions per Second<\/strong><\/h3>\n
High Energy Costs<\/strong><\/h3>\n
Risk of Asset Loss<\/strong><\/h3>\n
Potential for Illegal Activity<\/strong><\/h3>\n