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• Blockchain is a decentralized, digital database that stores transactions and other forms of data.
• Key blockchain features include immutable records, distributed ledger security, and smart contracts.
• Blockchain has many other uses outside of cryptocurrencies.

It’s almost impossible to say “cryptocurrency” without mentioning blockchain technology. A blockchain is a digital, public ledger that securely stores segments of data through a self-managing, peer-to-peer (P2P) network of computers. And some of its key components include irreversible records (i.e., unchangeable blocks of data), decentralized transactions, and smart contracts.

Decentralized digital assets like crypto and stablecoins use blockchain technology for buying and selling assets. Centralized banking digital currencies (CBDCs) are centralized currencies and don’t use a blockchain.

Here’s how blockchains work — along with a closer look at their pros, cons, and potential applications.

What is a blockchain?

A blockchain is a digital database that stores “blocks” of data in chronological order. These blocks are linked together on what’s known as the “chain,” and unlike traditional databases that utilize a third party or intermediary, a blockchain is completely decentralized.

This means that no third parties can monitor or interfere with transactions. The blockchain system is basically self-regulating, thanks to a P2P computer network of nodes (i.e., individual computers) that verify all new data and distribute cross-network copies of the blockchain to keep it secure.

“Blockchains are made of, well, blocks,” explains Lorien Gabel, co-founder and CEO of Figment.io. “Each block contains a timestamp, transaction data, and a mathematical function from the previous block. Computers that mine blocks or run validating nodes that sign blocks will include that mathematical function — called a cryptographic hash — from the previous block into the current block to form a chain.”

How a blockchain works

Cryptocurrencies would essentially be nonexistent without a blockchain. This technology relies on a distributed ledger that keeps a record of all past, present, and future data (e.g., transactions or accounts). 

“A blockchain is commonly used to build a distributed ledger,” says Gabel. Ledgers, he added, track accounting transactions and accounts — we can think of it as a database that stores information. “Distributed ledgers don’t have to be on a blockchain to be considered ‘distributed,’ they just have to be shared with other computers on the network.”

But several other features separate blockchain technology from traditional databases controlled by financial institutions. These include immutable, or unchanging, records and smart contracts.

Irreversible transactions

Each transaction that the nodes add to the blockchain is permanent. So once the computer network verifies the data and adds it as a new block, that record is permanent. And this serves much more important purposes beyond simply keeping the system running.

“Transactions are irreversible, permanently recorded, and available for everyone to see. It’s challenging and complicated for any one actor to change or falsify data recorded on a ledger,” explains Gabel. 

In order to change the data on the ledger and have the modified chain become the majority chain, someone would have to both alter their duplicate of the ledger while adjusting at least 51% of other users’ copies of the database. Therefore, the immutable records component makes it extremely difficult to hack the system.

Smart contracts

“[A smart contract] is a self-executing contract with the terms of the agreement directly written into lines of code on the blockchain,” Gabel explains. This allows them to execute once the terms are met. 

But as for the blockchain process, here’s how it works: Whenever a new transaction takes place (e.g., a bitcoin or ether buy order), that data is sent to a network of computers (nodes) that solve math equations to validate the transaction. 

If the transaction is rejected, it won’t show up on the blockchain. But if it’s confirmed, the nodes will add the data as a new block on the ledger, chaining it to the prior blocks (and the ones that follow) to maintain the chain’s security. Once this step is done the transaction is complete.

• Banking and finance: Blockchain has many uses for money transfers, especially for fiat currencies (e.g., USD, EUR, or JPY) that individuals typically exchange through financial institutions like banks or payment services. 
• Cryptocurrency: This is perhaps one of the most well-known uses of blockchain technology. The blockchain stores data for all cryptocurrency exchanges.
• Healthcare: Blockchain has several applications within the medical industry. It can be used to secure medical records, healthcare data, and other related electronic records.
• Records of property: Whether it be property deeds or other assets, this technology can additionally validate property transactions between two parties.
• Voting: Though not currently in effect, the idea of using blockchain to improve the voting process has become a topic of discussion. Arguments in favor urge that it could prevent voter fraud and offer a simpler way of counting votes. Those against it insist that such a system could pose national security concerns.

“Blockchain technology provides a solution to the challenges of storing, managing, and protecting data,” says Gabel. “It provides a useful and secure way of authenticating information, identities, transactions, and more, creating a secure ledger that can be updated in real time.”

Blockchain: Pros and cons

Blockchain has several uses, including cryptocurrency transactions, fiat transfers, and more. However, there are also pros and cons to consider.

There are many perks to blockchain-secured transactions. Its efficiency, security, and lack of intermediaries can make it an ideal option for those looking to safely store a range of data. 

However, since there’s no centralized party to govern the database, you can never recover any assets if you lose your private key. This is important to keep in mind if you’d like to take advantage of blockchain-powered transactions.

Building a blockchain

You can create your own blockchain (or build onto/modify an existing blockchain) if you have coding and/or advanced computer knowledge. By building your own blockchain, you can design your own cryptocurrency for others to trade. You’ll be able to choose its purpose, tokenomics, functionality, and legality. 

You create a blockchain by:

• Designing your own by scratch: If you’re especially skilled at coding and computers, you may be able to create your blockchain from scratch. You’ll need to establish a secure network, create a functioning algorithm, choose a protocol, follow legal regulations, and make sure your code has strong defenses against hacks and other fraudulent activity.
• Modifying an existing blockchain: A slighter simpler (not necessarily easier) method of creating a blockchain is by modifying an existing chain’s open-sourced code and revising it to your liking. This way you can expand upon already functioning algorithms and possibly even improve functionality. 
• Building onto an existing blockchain: This method isn’t necessarily “creating” a blockchain, but instead allows you to design your own cryptocurrency on top of an already existing blockchain, like Ethereum or Binance. It’s easier than the other two methods but also more restrictive. 

Creating your own blockchain isn’t recommended for beginner crypto traders or beginner coders. Creating a functioning and secure blockchain is an exceptionally difficult project, and the competition is steep. Only advanced traders and computer experts will be up to the task. 

Blockchain technology

Blockchain technology utilizes a P2P network of computers to securely process and store transactions in a digital database. Unlike traditional databases that rely on central authorities, blockchain completely removes the need for intermediaries.

Security is another major component of blockchain technology. Some of its key features — including immutable records and smart contracts — work to keep all data secure.

Overall, blockchain technology has many uses in both the crypto world and beyond, but it’s important to understand how it works before you utilize it.