01 apr Explainer: What is a blockchain?
Blockchain is a decentralized digital ledger that stores data across a distributed network. It is designed to secure information and prevent tampering and unauthorized access. “The easiest way is to purchase cryptocurrencies, like Bitcoin, Ethereum and other tokens that run on a blockchain,” says Gray. For example, Santander Bank is experimenting with blockchain-based financial products, and if you were interested in gaining exposure to blockchain technology in your portfolio, you might buy its stock. Beyond cryptocurrency, blockchain is being used to process transactions in fiat currency, like 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 of normal business hours.
Put simply, blockchain is a technology that enables the secure sharing of information. A blockchain is a type of distributed database or ledger, which means the power to update a blockchain is distributed between the nodes, or participants, of a public or private computer network. Nodes are rewarded with digital tokens or currency to make updates to blockchains. Blockchain’s first and most prominent use case is in cryptocurrencies like bitcoin (BTC) and ether (ETH). These digital assets are integral to how blockchains operate — providing the incentives and mechanisms for consensus — but they can also be used for peer-to-peer transactions worldwide. Blockchains are also home to other kinds of digital currencies, namely tokens, which are digital assets built atop blockchain networks, but separate from its consensus mechanism.
In addition to reducing human error, their function is to facilitate decentralization and create a trustless environment by replacing third-party intermediaries. The computational power required for certain functions — like Bitcoin’s proof-of-work consensus mechanism — consumes vast amounts of electricity, raising concerns around environmental impact and high operating costs. Addressing this challenge requires exploring alternative consensus mechanisms, such as proof of stake, which consume significantly less energy while maintaining network security and decentralization. Bitcoin and other cryptocurrencies currently secure their blockchain by requiring new entries to include proof of work. While Hashcash was designed in 1997 by Adam Back, the original idea was first proposed by Cynthia Dwork and Moni Naor and Eli Ponyatovski in their 1992 paper “Pricing via Processing or Combatting Junk Mail”. While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network.
The Network
The presence of this central authority not only complicates the transaction but also creates a single point of vulnerability. Traditional database technologies present several challenges for recording financial transactions. Once the money is exchanged, ownership of the property is transferred to the buyer.
- As a result, blockchain users can remain anonymous while preserving transparency.
- A public ledger records all Bitcoin transactions, and servers around the world hold copies of this ledger.
- Plus, cryptocurrencies and their underlying investments are highly volatile (i.e., prices tend to swing violently).
- Each block is encrypted for protection and chained to the preceding block, establishing a code-based chronological order.
- Ethereum is rolling out a series of upgrades that include data sampling, binary large objects (BLOBs), and rollups.
Some hackers try to exploit computers in cryptojacking schemes, using other people’s processing power in an attempt to earn mining rewards. For a more in-depth exploration of these topics, see McKinsey’s “Blockchain and Digital Assets” collection. Learn more about McKinsey’s Financial Services Practice—and check out https://orbi-fina.com/-related job opportunities if you’re interested in working at McKinsey.
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These personal health records could be encoded and stored on the blockchain with a private key so that they are only accessible to specific individuals, thereby ensuring privacy. Since Bitcoin’s introduction in 2009, blockchain uses have exploded via the creation of various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts. Once a block is confirmed, it is appended to an ever-growing distributed ledger.
Property Records
Industries in which many organizations have common goals and benefit from shared responsibility often prefer consortium blockchain networks. For example, the Global Shipping Business Network Consortium is a not-for-profit blockchain consortium that aims to digitize the shipping industry and increase collaboration between maritime industry operators. To avoid potential legal issues, a trusted third party has to supervise and validate transactions.
Smart contracts
Technologies such as AI, IoT, NFTs and the metaverse are expected to be greatly influenced by blockchain. Blockchain technology is still susceptible to 51% attacks that can circumvent a consensus algorithm. With these attacks, an attacker has more than 50% control over all the computing power on a blockchain, giving them the ability to overwhelm the other participants on the network. This type of attack is unlikely, because it would take a large amount of effort and a lot of computing power to execute. It also cuts out complications and interference intermediaries can cause, speeding processes and enhancing security.