Let’s get real: In crypto, it’s either blind luck or smarts and knowledge. Sure, there’s always tales of that one trader who bought a private island off memecoins, but for each, there are thousands of people who lost their money. So you have to come prepared, and there’s no better starting point than the 101 of all 101s: What is blockchain, actually?
That’s exactly what we’ll be diving into today. Whether you’re a fresh-faced newbie (welcome to the show!) or a battle-scarred OG looking to brush up the know-how, we got you covered — stay awhile and listen, fren.
What is blockchain?
An easy way to imagine a blockchain is a spreadsheet with transactions that sits on thousands of computers around the globe. The catch is, even though everyone can have a local copy, nobody can edit it on their own. Want to add another transaction? Well, you’ll have to follow a very strict protocol, get a nod from everyone else, and if you try to cheat, that new line isn’t happening.
Now, let’s get a bit more in-depth with a proper definition of the blockchain technology: A blockchain is a decentralized immutable linear database. Sounds like a handful, right? Let’s pick it apart to see how blockchain works:
Decentralized: A traditional database is usually stored on one server. With a blockchain, each of the computers (nodes) on the network stores a local copy of the database, meaning there isn’t one central source of truth.
Immutable: Once something happens on the blockchain, it’s set in stone: You cannot delete an old transaction or write in a new one retroactively, at least not without everyone else seeing right through that.
Linear: As the name suggests, a blockchain stores all data in blocks, which are connected between one another in a linear fashion, one by one, like links in a chain.
Database: Well, speaks for itself—a database stores data, and blockchain does exactly that. In most cases, data is transaction records, but it can be other things too, like computer code, simple images, or other small files.
Not too complicated so far, right? And the neat thing is, these features are also blockchain’s benefits, as we’re about to see. But first, let’s get a bit more hands-on and dive under the hood to see how a blockchain works.
How blockchain works
As we noted before, each node has its local copy of the data and keeps it updated, ensuring everyone has the same records. This immediately begs a few questions:
How do you make sure nobody tries to cheat?
How do you make sure that each local copy is the same?
We’ll go through all of these, but first, let’s get to know a concept that’s very crucial for blockchain technology: data hashing. The easiest way to think of it is fingerprinting for data. You run any piece of data through a function, and it returns you its hash, usually a collection of seemingly random letters and numbers. You cannot infer the original data from the hash, but if you change as little as one sign in it and run it through the same function again, the hash will be completely different.
What does that have to do with how blockchain works? Well, it comes into play when a block producer assembles a new block, picking transactions from the memory pool, the dataset with pending transactions. Before adding this block to the chain, the block producer gathers all the transactions in it, adds the hash of the previous block, and runs all of it through the hash function. The output is added to the block, so the person adding the next one can do this too. Since a tiniest tweak of the data invalidates its old hash, this means that any retroactive changes on the blockchain would be immediately visible to everyone. The hashes no longer add up—and you can trace it down to the very block where the problems began.
Of course, there are other safeguards in place as well, which brings us to our second question. If each node runs its local copy, how do they agree what version of the blockchain is legitimate? There are two main approaches there: Proof of Work and Proof of Stake. Let’s take a look at each:
On a PoW blockchain, miners have to crunch the numbers and race to solve a cryptographic puzzle to add a new block. This is to make sure the chain runs at a tangible speed, and miners have the incentive to act as honest brokers (because trying to rig the game would be too expensive).
On a PoS chain, validators stake their tokens; the more they have staked, the likelier they are to be selected for adding new blocks. This way, they don’t have to invest in costly computation infrastructure, but still have skin in the game, as they may lose their stake over dishonest behavior.
If you’re curious to learn more about how the game can be rigged, check out our blog about Nakamoto Coefficient—we go into some more details there. Meanwhile, now that we’ve gone over the gist of how blockchain works, it’s time to dive deeper into what makes it secure and reliable.
Is blockchain secure?
The quick answer is yes, with a big fat asterisk. But we don’t do quick answers, and to give you a good perspective of blockchain security, we’ll quickly have to get down and dirty with something technical again.
As you remember, the blockchain technology is basically a distributed Excel spreadsheet. Thus, your tokens only exist on its records. You can’t download your Bitcoins on a thumbdrive because your Bitcoins only exist as records on this blockchain. If you were to download these specific records, they would be completely meaningless without the rest of the blockchain.
What do these records look like, though? Implementations differ, but more often than not, it would be something like this: You got 10 coins (lucky you!) from X, who took them from the 100 coins they got from Y, who blah blah blah. Mind you, this blah blah blah is also transactions: You can usually trace every coin down to the moment it was minted.
Now, as for the X, Y, and the rest of the alphabet, the good news is that it’s not your details and postal address, but only the respective blockchain addresses. It’s like email: Your public address is what you can share with others who want to send you mail. You control it with a private key, your password, which is linked with the public address cryptographically, but cannot be inferred from it. So while anyone can review anyone’s transactions, you can only spend your coins if you have your private key.
This is a key part of what makes blockchain secure, and also one of its key benefits: You own your tokens and can spend them however you like as long as you have your private key. It’s like cash, but digital; it’s like digital money, but without pesky intermediaries like banks or PayPals, who slurp your personal data and do all other sorts of naughty stuff. And with all this protected by high-end cryptography, you can be sure that your tokens will remain yours as long as you don’t expose your private key or interact with malicious apps like wallet drainers.
The security doesn’t end there. Since everything is traceable, you have a lot more transparency than with a centralized ledger, since centralized entities don’t like to share their data. And since there are dozens of safeguards in play preventing cheating—we’ve already discussed those when describing how blockchain works—you can be sure that nobody will do any creative accounting, writing transactions in or out retroactively. So yeah, as long as it’s decentralized, a blockchain is very much secure.
Impressive, right? We think so too. But from the user perspective, a technology is only as good as what you can do with it—and that’s what we will discuss next.
Blockchain: Benefits and use cases
Central to blockchain use cases are the upsides that a blockchain brings to the table—and seeing how long this blog has been, let’s quickly recap what blockchain’s main benefits are:
Security: Everything is protected by cryptography and other safeguards.
Immutability: Nobody can mess with the records on the ledger.
Transparency: Everything is open, public, and traceable.
Decentralization: No centralized entities involved, everything is peer-to-peer.
Privacy: No personal details, just pseudonymous addresses.
That last point about privacy requires a quick note: The addresses are pseudonymous, but non fully anon. Transactions don’t happen in a vacuum, and people with the sufficient means, like government agencies, can often still identify the holders of specific wallets. Still, it’s more private than your run-of-the-mill payment app and the legion of vendors it sells your data to.
As you may have figured out from the payment app reference, the blockchain technology is a great tool for anything financial. That’s what many blockchain cases play off of. But as we are about to see, things are still pretty diverse. So here are some blockchain use cases to consider:
Decentralized finance: Trade, loan, and borrow crypto assets through peer-to-peer protocols.
Remittances: Send money cross-border without the fees and downtime that comes with using centralized services.
NFTs: Collect and trade on-chain representations of digital and physical art pieces and more.
Real-world assets: Trade on-chain derivatives of real-world assets, such as stocks, gold, and others.
Decentralized Physical Infrastructure Networks (DePINs): Deploy real-world hardware to create real value on-chain.
Web3 gaming: Play games that reward you with tokens for your time and let you own in-game assets on-chain.
Supply chain tracking: Trace the goods’ provenance with immutable on-chain records throughout the entire logistical chain.
These are just a few examples—there are many more out there, too many to cite here without turning this post into a novel. The thing is, blockchain has another benefit that we didn’t mention much earlier: It’s programmable, versatile. Anything you can code is possible. And most things you can imagine, you can also code. So the sky’s the limit, really.
Conclusion: Blockchain—how to start?
So there you have it—your end-to-end guide to all the whats, hows, and whys of blockchain. We went over what it is (a decentralized immutable ledger), how it works (by ensuring nobody cheats through cryptography and other safeguards), and what you can do with it. The potential is there, and the adoption is booming. What you’re probably wondering about now is: How do I get started?
Well… That’s kinda the tricky part. There are thousands of blockchains out there, all claiming to be the best-performing, safest, fastest, and any other -est you can think of. If you think things can’t be so rosy, you are absolutely right. They can’t, and they aren’t. Whether you are an aspiring DeFi legend, builder, or NFT aficionado, you need to put some thought into what chain you call home.
And if you’re looking for quality, unbiased data on blockchain performance, Chainspect’s got you covered. On our dashboard, you will find the top performance stats for 50+ chains, including both top industry names and up-and-coming disruptors. With the Compare tool, you can see how any two chains stack up against one another on all key performance metrics and make more informed decisions. And the best thing is, it’s just data, no paywalls. Don’t kick off your journey with erratic buys—take a look at the metrics, compare, and play it smart.