What Is a Blockchain?

A blockchain is a distributed database or ledger shared among a computer network's nodes. They are best known for their crucial role in cryptocurrency systems for maintaining a secure and decentralized record of transactions, but they are not limited to cryptocurrency uses. Blockchains can be used to make data in any industry immutable—the term used to describe the inability to be altered.

Because there is no way to change a block, the only trust needed is at the point where a user or program enters data. This aspect reduces the need for trusted third parties, which are usually auditors or other humans that add costs and make mistakes.

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.

KEY TAKEAWAYS

Blockchain is a type of shared database that differs from a typical database in the way it stores information; blockchains store data in blocks linked together via cryptography.

Different types of information can be stored on a blockchain, but the most common use for transactions has been as a ledger.

In Bitcoin’s case, blockchain is decentralized so that no single person or group has control—instead, all users collectively retain control.

Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, transactions are permanently recorded and viewable to anyone.

How Does a Blockchain Work?

You might be familiar with spreadsheets or databases. A blockchain is somewhat similar because it is a database where information is entered and stored. But the key difference between a traditional database or spreadsheet and a blockchain is how the data is structured and accessed.

A blockchain consists of programs called scripts that conduct the tasks you usually would in a database: Entering and accessing information and saving and storing it somewhere. A blockchain is distributed, which means multiple copies are saved on many machines, and they must all match for it to be valid.

The blockchain collects transaction information and enters it into a block, like a cell in a spreadsheet containing information. Once it is full, the information is run through an encryption algorithm, which creates a hexadecimal number called the hash.

The hash is then entered into the following block header and encrypted with the other information in the block. This creates a series of blocks that are chained together.