Blockchain Technology: What Is It and How Does It Work?

The term “blockchain” is all the rage right now. Depending on your familiarity with the word, you may think of an abstract idea that has little to no meaning. To the vast majority of people who are familiar, when they hear the word “blockchain,” they think of a cryptocurrency like Bitcoin. While the two are related, many other industries and uses are available with this type of technology.

In this article, we’ll answer the question: what is blockchain technology? We will also look at some of the benefits it provides, how it works, and how companies are beginning to leverage this technology for their purposes.

What is Blockchain Technology?

But first, blockchain meme

Image CC 2.0, by Topher McCulloch, via Flickr

Before getting too far into what blockchain is, let’s talk about where it came from. Satoshi Nakamoto conceptualized the idea in 2008. Designed to use a peer-to-peer network, it time-stamps every transaction. The technology would not have a central authority.

When you think of blockchain, think of a spreadsheet ledger full of transactions. The ledger records not only the financial aspects of the transaction but anything that has value and cannot be corrupted. Additionally, duplicate versions of the ledger exist across thousands of computers on a network.

The information on a blockchain is a shared and continuously reconciled database. Bear in mind that the database is not in one central location. This means that anyone can easily validate records kept on the chain. As a result, no one can alter signed and verified transactions added to the chain.

What is blockchain?

To explain how blockchain works, we need to think about it in terms of keys. You have two cryptographic keys: a public key, and a private key. Together, these keys form your digital signature. Your public key is how others on the blockchain identify you. Your private key lets you digitally sign and approve actions performed with your public key.

With cryptocurrency, your public key is your blockchain wallet address, and your private key authorizes transactions. It is imperative that you protect your private key. Anyone who has it can access any of your digital assets. Your public key doesn’t reveal your true identity. It’s a random sequence of letters and numbers, so you keep a certain level of anonymity with any transactions you perform.

Blockchain Blockchain wallet

Image: CC 2.0, by Descryptive via Flickr

Benefits of blockchain

The blockchain is a popular technology, and that’s not without reason. There are many benefits to using this type of technology. Here are just a few of the more well-known benefits:

It is robust

Because blockchain technology stores its information across various points, no single entity controls it, and it doesn’t have a single failure point. It is it’s similarity to the internet that makes this technology so robust. Just like the internet, most people expect blockchain technology to hold up well for the foreseeable future.

People love its transparency

Transparency is another benefit of using this type of technology. Since the network is always checking itself, the embedded data is always public. Additionally, the information cannot be corrupted or changed. That means once a transaction is validated and verified, no alterations are allowed.

Blockchain is decentralized

The blockchain is explicitly designed to be decentralized. Decentralization means that no one entity controls the power, no one central authority. Its network manages the chain. It is a peer-to-peer network, which means it is an entirely trustless system built on the collaboration of everyone involved.

Anything that occurs on the system is a function of the entire network. As a result, some old ways of performing transactions could become unnecessary or obsolete. Stock market trading, for instance, happens almost immediately with this technology.

Who Uses Blockchain?


Image: CC0, by TheDigitalArtist, via Pixabay

Just because you aren’t familiar with or don’t understand blockchain technology does not mean you can’t use it. Financial technology is a vast sector that needs blockchain developers as more and more money exchanges hands both domestically and overseas.

We will also begin to see more transactions completed without the need for a middleman. With no one needed to validate the transaction, many brokers and bankers find their services are unnecessary. This means for people who want to send money internationally; they no longer have to depend on a third party to verify and complete the transaction. In a matter of minutes, people can send and receive money.

Real-world applications of the blockchain

Many people associate blockchain with cryptocurrencies. While these two technologies do have many commonalities, blockchain technology provides more value than just authenticating digital currencies. Blockchain offers many more opportunities in the digital world. Here are just a handful of examples of what we can expect as the blockchain continues to evolve and grow:

Internet of Things

Blockchain Internet of Things design logo

Image: Public domain, by Learntek, via Flickr

The Internet of Things, or IoT, is a technology that is quickly becoming more and more common in today’s society. A ‘thing” in the IoT is anything that can be assigned an internet protocol (IP) address, including microchips implanted in humans and animals via devices such as pacemakers. With the IoT, sensors, and gadgets are becoming smarter, and are able to communicate with one another based on certain triggers. This means with the right devices in place, you can improve the costs and system efficiency for your business.

Integrating with IoT means blockchain technology can make the automation of managing remote systems a reality. As a result, companies can do things like predictive maintenance of mechanical parts. They could also use this technology to validate data analytics or create wide-spread automated systems management.

Intellectual property protection

With the internet, it is easily possible to not only duplicate digital information, but it’s also easy to distribute it as well. While many people rejoice in the existence of free content, the content’s copyright holders aren’t so lucky. The introduction of smart contracts can help alleviate some of the pain felt by intellectual property creators. An intelligent contract can protect copyright content, and eliminate some of the risk associated with file duplication.

Smart contracts

Ethereum is just one of many blockchain projects that are making use of the benefits the technology has to offer. Ethereum enables coding of simple contracts that are executed after meeting certain conditions.

Currently, smart contracts perform essential functions based on their programming. One such example is the ability to pay out a dividend if a financial instrument reaches a set point. With the use of this technology, the payout could become an automated action, without the need for human interaction.

Know your customer (KYC)

The last real-world scenario we’ll visit, although there are many, many more, is Know Your Customer, or KYC. In our current system, financial institutions must go through a rigorous process for validating each customer. This makes sense since you don’t want just anyone to have access to your platform. Using blockchain could significantly reduce KYC costs for both client and cross-institution validation.


The blockchain is not a perfect technology, and anyone who tells you otherwise is lying to you. Of course, one of the most significant challenges to using this technology is the steep learning curve associated with it. Someone without a technical background can become very intimidated by the jargon and concepts related to blockchain technology.

The second drawback to blockchain technology is the inability to edit or change a validated transaction. Since transactions are immutable, it is possible to lose money due to a typo or incorrectly entered amount.

Lastly, is the 51 percent attack concept. If somehow 51 percent of the blockchain network validates a transaction, it gets verified and added to the ledger. While this is unlikely to happen, it is possible and can cause serious problems with the validation process if it did.

Is Blockchain the Future?

So, but what does this mean for the future? Many people find the idea of unchangeable records appealing; there are still many reasons to keep records and transactions from being permanent.

With the rise of smart contracts, we could begin to see tasks typically handled by lawyers or banks dealt with and automated through this technology. One example would be that upon your death, your will automatically distribute your inheritance to the appropriate parties, instead of needing to wait on judges and lawyers to finalize paperwork.

Of course, there is also the possibility that blockchain technology evolves into something we haven’t even considered yet. Many companies in the financial technology sector are keeping their experiments private, running them on an internal server and including only specific partners. Who knows what type of possibilities could come as a result of a private blockchain?

Many people want to see blockchain succeed. Developers, investors, users, and others believe blockchain is the technology of the future. Are they right? Only time will tell.

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