Why is Blockchain Important?

Last updated Feb 26, 2024 | 07:47 PM UTC

Blockchain technology gained popularity mainly because of its role as the underlying layer of technology used by Bitcoin. For the mass public, there is some misunderstanding about the difference between blockchain and Bitcoin. In fact, many seem to think that they’re the same thing.

In this article, we’ll dive deep into what “blockchain” means and why it’s not the same thing as “Bitcoin.” By doing so, you will gain a better understanding about the fundamental technology behind most cryptocurrencies that is infiltrating and disrupting various sectors of the world today.

What is blockchain technology?

blockchain is a specific type of data

Many people trace the origins of blockchain technology  back to 1991 when something very similar to a blockchain was described by Stuart Haber and W. Scott Stornetta in a paper called “How to Time-Stamp a Digital Document.”

The blockchain widely used today was conceptualized in 2008 by the creator of Bitcoin, an anonymous developer known as Satoshi Nakamoto.

Basically, the blockchain is a chain-like structure made of blocks. Each block holds information describing the block that comes before it in the chain. This information is in the form of a cryptographic hash, which can be understood as a unique ID in the form of a text string that is generated by taking some aspects of the previous block (it can be its size and the time it was created, or any number of additional variables).

Hashes are generated by a hashing function, which is like a special program that takes input (as text) of any length and outputs a resulting hash (again as text) that has fixed length.

So if you have a hashing program that outputs a hash of length 32 characters and you send to it a single word to hash - it gives you 32 characters long hash.

If you send to the same program 2 sentences it will again output 32 character long hash.

If you send to it the entire Encyclopedia Britannica - it will output 32 character long hash.

Lets see an example:

INPUT: 15.12.2020 / SIZE: 2048

RESULT: a698c46cdbf1e4cdbfb5d1f7d9898bd3d582244f12da4fbbbd018c368d87caf2

INPUT: 15.12.2020 / SIZE: 2049

RESULT: 21d423ffe675c2195bf74f9f660a56f59e2b5bf1b1a337d626f905e06e2504e1

Blocks on the blockchain can hold any type of information, making blockchain technology very versatile and useful. Blockchains can be valuable in any situation where keeping a secure, transparent, and tamper-proof record that can’t be changed is important. Some examples include:

  • Making voting more transparent
  • Creating different financial instruments
  • Keeping record of physical products
  • Digital identity systems

Information stored using a blockchain data structure is tamper-proof, as changing one block would require changing all the blocks after it. If one past block is changed, the hashes of all subsequent blocks are modified as a result. Thus it is impossible for a change in any block to pass unnoticed.

But what stops anyone from rewriting the entire blockchain and making all sorts of changes? The answer to this question lies in the distributed nature of blockchain technology. To ensure that blocks cannot be rewritten and have their data changed, every blockchain is distributed among a network of computers running that blockchain. These computers are also known as nodes.

 the distributed nature of blockchain technology

Any change to a blockchain’s blocks requires agreement - or consensus - of its nodes. To change a blockchain, a person would need to gain control of at least 51% of its nodes, or even more depending on which blockchain is being changed.

How is blockchain being used by Bitcoin and other cryptocurrencies?

Blockchain gained popularity as the technology used by Bitcoin (and later on by most of the other cryptocurrencies) to keep a secure and decentralized ledger of transactions.

Bitcoin’s blockchain uses a network of miners that record transactions and add new blocks to the blockchain. These miners are required to solve complicated mathematical problems. The answer to these problems gets included in the block that is added to the blockchain. With Bitcoin’s architecture, new blocks get added approximately every 10 minutes.

Consensus mechanisms and mining

Complex mathematical problems that require computing power to solve them are used by Proof of work consensus mechanisms to ensure the security of their networks. The goal is to make it impossible for any single entity to gain control of the blockchain. By requiring nodes to solve problems that require vast amounts of computing power, PoW prohibits lone bad actors from adding new blocks.

How blockchain is changing finance

The rise of cryptocurrencies is often compared with the rise of the internet of the early 90s and it is expected that digital assets like Bitcoin will change the way we make everyday payments.

While many enthusiasts believe in blockchain’s potential to entirely replace our current financial practices, blockchain technology also has the power to improve the existing financial world by providing banks and institutions with secure and auditable bookkeeping.

By using blockchain technology, banks can change the current mechanism for international transactions -  correspondent banking - that is slow, old, and expensive. If banks are able to make transactions between each other using blockchain technology, it could lead to much faster and cheaper international transactions.

Many banks are also developing their own blockchain based projects. The most popular example of a bank adopting the technology is J.P Morgan, which has two blockchain projects named Juno and Quorum.

estimated spendings on blockchain

Cryptocurrencies that are targeting the financial world

One notable example of cryptocurrencies that are targeting the financial world is Ripple, a crypto that is working with banks and other financial institutions toward the goal of building the “internet of value.” The project aims to provide a bridge currency that financial institutions can use to settle cross-border payments.

Stellar is a cryptocurrency that aims to connect banks, payments systems, and people in order to help them move money quickly, reliably - at almost no cost. It also provides a convenient way to exchange national currencies for the native coin on the network - Lumens. This means that Stellar can be used as a replacement for existing money transfer options like bank transfers and specialized service providers like Western Union.

Due to its open and decentralized nature, blockchain technology may be a vehicle capable of bringing banking services to millions of people who are currently unbanked.

Possible uses of blockchain technology in the finance sector

There are many additional uses that blockchain technology provides the financial sector in addition to its role in money transactions. As it can be used to record any type of information, blockchains can be used to store deeds, rental agreements, equities, bonds, contracts, and titles.

Blockchain-based technologies like Ethereum are making it possible for anyone to digitize assets. In practice, this means that any physical object can be turned into tokens on a blockchain. Tokens of a digitized asset can be used to represent ownership in the same way that shares of a stock represent ownership of a company. For example, if several individuals share ownership in a restaurant, they could elect to tokenize that restaurant using blockchain technology. By doing so, they could vote on important matters without even having to meet in person.

Why blockchain is important

There is a constant flow of new technologies that are made possible by the invention of the blockchain. Like many other ideas that have revolutionized our world, the blockchain is simple at its core, but can be used in countless different ways to improve various processes and industries.

The change that cryptocurrencies are making in the world

Bitcoin and the cryptocurrencies that came after it are changing the way we view and use money by removing the middlemen (banks and money transfer services) and letting us make transactions in a peer-to-peer, decentralized way. To fully appreciate the magnitude of this change, we must consider the possibility of middlemen to act in their own self-interest to the detriment of the people that trust them. In many ways, blockchain technology removes the need for trust in many processes and industries that have relied heavily on trust since their inception.

Blockchain technology and decentralization

Blockchains provide transparency. As their records of transactions are public and freely inspectable, blockchains make it impossible to hide anything. This aspect of the blockchain can be used to provide better transparency for institutions and significantly reduce the possibility of corruption and misuse of funding.

The transparency that blockchain technology provides can also make democratic processes - like elections - significantly more secure. Having unchangeable records makes voting manipulation a lot harder for “bad actors.”

tim drapper quote

Blockchain technology is also decentralized, which means that there is no single point of failure; there is no single server that a hacker can attack or a technical problem can render useless. This makes blockchains more secure than traditional solutions for data keeping.

Blockchain technology makes it possible for us to have a democratic (anyone has the same level of access to it), decentralized (there is no single point of failure) and transparent (everything is recorded) store of data that requires no trusted third-parties to maintain. It completely removes the need to trust organizations, institutions, governments, and people - replaces it with open sourced code.