What is blockchain? – a basic guide

If you ever heard of Bitcoin and you got interested in the whole cryptocurrency technology, you also probably heard about blockchain. But it can offer much more than exchanging virtual money. Blockchain is an advanced network that has the potential to contribute to almost every online business. How’s that even possible? In this blog post, we explain the phenomenon of blockchain and all the possibilities that it brings to the table.

Table of contents

1. What is blockchain and how does it work?
2. What is blockchain in simple words?
3. How do you explain blockchain?
   – Distributed ledger
   – Peer-to-peer network
   – Cryptography
   – Cryptocurrency
4. What are the 3 pillars of blockchain technology?
   – Security
   – Decentralization
   – Scalability
   – Other pillars worth mentioning
5. What is blockchain good for?
   – Every business with a supply chain
   – A business organization using smart contracts
   – Payments and other B2C transactions
   – Fundraising
6. What are the benefits of blockchain?
   – Security
   – Fast operations
   – Efficiency
   – Transparency / Traceability
   – Consumer insight
7. Give blockchain a try!

What is blockchain and how does it work?

We can begin with the history of blockchain. The main goal of creating this type of network was to send data between two parties without the risk of it being stolen, hacked, or modified. It would be a transparent and highly secure system suitable for transactions, sensitive information sharing and other operations that require safety and discretion.

The idea dates back to the ’90s, but the first blockchain was formed by an anonymous author (or authors) called Satoshi Nakamoto and was strongly related to Bitcoin (BTC). This way, the currency he created could be anonymously possessed by anyone who had access code to a digital wallet. At the same time, all transactions made with Bitcoin are transparent, which means everyone can see what is happening in its blockchain. Of course, transparency and anonymity are not excluding each other, as transactions can be viewed, but we don’t know who did them unless we know their hash ID – which is a long sequence of numbers and letters.

Bitcoin was the pioneer when it comes to blockchain technology, but that doesn’t mean its only purpose is to send and receive crypto money. Let’s see how does blockchain work and why it can be beneficial for e-commerce, financial industry and more.

What is blockchain in simple words?

The term “blockchain” comes from two connected words that basically describe how it works – block & chain.

Each “block” is a piece of data, a record that needs to be processed with cryptography. This block consists of transaction data, a timestamp and the previous block’s hash. It’s the fundamental element of every blockchain. And the “chain” is the network of computers that process these blocks. The records are not stored on one central server, but they are sent through a peer-to-peer network. Every machine that is involved in cryptographic computing of the blocks is a part of a distributed ledger that copies the transactions between blocks in real-time.

We can distinguish a couple of features that describe the blockchain technology and its properties. 

How do you explain blockchain?

All blockchains can be used to process transactions thanks to mentioned distributed ledger technology. They are all managed in a peer-to-peer network that has no intermediaries – the whole data is sent from one computer to the other.

These terms might be new or unclear to you, so let’s explain a couple of blockchain-related concepts. After breaking this broad definition into small pieces, it will be easier to understand blockchain technology as a whole.

Distributed ledger

Distributed ledger technology is based on a large amount of digital data that is copied, synchronized and shared between all the members that are spread across many locations. Ledger technology is decentralized, meaning it doesn’t store data on one server and also – it doesn’t have one admin that controls and manages it.

Peer-to-peer network

To make the distributed ledger work properly, we need a network of computers that share all the tasks required to process blockchain transactions. In blockchain, peers make their computing power available to all the other members. This way, the admin is not required and the transactions can be processed really quickly. Each person that decides to become a peer can download a “copy of the blockchain” so it can start processing transactions. Then it becomes a part of the network.

Peers working in a blockchain network are called miners.

Cryptography

The whole sense of blockchain technologies is based on cryptography is means every part of the transaction that is processed in blocks is secure and unavailable to be seen by third parties. That’s how every cryptocurrency works – when we send amounts between the sender and receiver, no one knows who they are. There is no middleman like a bank or financial company involved, just the network of peers that only allow the transaction to be completed. Thanks to encryption, the operation cannot be edited, no fees are charged and the money exchange is instant. To be sure the money is sent to the right person, each party uses a digital signature, which is a form of code that proves their identity and is needed for authentication.

Cryptocurrency

Using digital money like Bitcoin or also very popular Ethereum (ETH) is not that weird anymore. There are applications and virtual exchanges that allow users to buy and sell the currency whenever we want to. Their services also include exchanging them with real-world currencies like USD or EUR. Some people use cryptocurrencies to make money by speculating – the same way as they would at the real stock market. But they can also be used to pay online and, surprisingly, offline with a special kind of payment terminal.

Bitcoin blockchain was the first working blockchain network out there, but now using blockchain is not all about money. It has so many various uses – and we will discuss them all later.

What are the 3 pillars of blockchain technology?

Blockchain passionates don’t exactly agree on these 3 main pillars of blockchain technology. All of their postulates are suitable for blockchain networks, so we could say there are more than three rules or guidelines that describe every blockchain. To find the 3 most important pillars, we should look at the blockchain from many perspectives, keeping in mind the benefits for every blockchain user. So what are the particular qualities that distinguish blockchain technology from other digital transaction solutions?

Security

That’s definitely one of the most important things when it comes to the online environment. Blockchain networks can guarantee high-level transaction safety thanks to the technologies it uses. One of the fascinating methods of verification is the fact that the majority of the network needs to agree before any new change is entered.

All of the blocks need to consist of the same components to be allowed into the blockchain – if they are not, they will be declined. Then, the majority of peers in the network need to process it and agree an intermediary did not edit it. Then we have a mechanism called the “proof of work” used by many blockchain networks. It is based on an algorithm, where every computer that is included in the system has to solve complicated mathematical calculations before it can even verify the transaction. Afterwards, the peers receive the reward – in Bitcoin blockchain and not only that’s usually a certain amount of cryptocurrency or tokens.

With these many security tools and methods, the users can trust the established blockchain networks with their transactions. And that is an advantage for almost everyone – people who don’t trust banks, people who need safe money transfers and people who want to exchange cryptocurrency.

Decentralization

Another pillar that is often mentioned as one of the crucial ones to make blockchain technology the way it is. Because lots of people ask: who controls the blockchain? And the answer is nobody. As we mentioned above, some people process transactions but they have no control over them whatsoever. They can only solve math problems to verify them and then send them to their final destination. But because of security means, they can’t add blocks, change them, or delete them. To do that, one person or a group of people would have to gain control of over half of the network – and that’s almost impossible. 

Thanks to decentralization, no institution, government, or organization can see what blockchain users are doing with their money, data, or other info they send through it. 

Scalability

Distributed ledger technology allows the constant growth of blockchain so it can perform at an equal pace all the time. Thanks to people who join the network to verify transactions, every functionality can work no matter how many requests are processed at the moment.

Financial institutions can offer scalability only to some extent. But blockchain can become more and more accessible without losing its capacity. That’s why, for example, Bitcoin can be used by professional companies in their business operations like payments, data sharing and much more.

Other pillars worth mentioning

The blockchain network has more advantages that we should discuss. These are:

Transparency

Can the technology blockchain uses be transparent with all the security measures it incorporated? Of course. You won’t see names, locations, or other personal data, but you can access the whole history of the network where you can see every transaction – hash numbers of the wallets and amounts that were sent between them. 

Immutability

Every transaction done within a blockchain network is permanent, which means it cannot be reversed. That’s mostly because of the cryptographic properties – the blockchain networks encrypt every piece of data they receive.

Distribution

Thanks to blockchain technology, the users gain a platform they can trust with their assets. That’s why it is perfect for so-called “smart contracts”. It’s another functionality of the blockchain network that is used more and more often nowadays. A smart contract is a mixture of a blockchain transaction and a traditional, written arrangement. Smart contracts are an innovative way of sending valuable resources between parties – not only money but also agreements, shares and other data that needs to be securely verified and received by a concrete person or company. We will elaborate more on them in the further part of this article.

What is blockchain good for?

We explained that blockchain is a trusted internet network for transaction validation, cryptocurrency trading and smart contracts. But around the world, blockchain is used for different industries and for various purposes. Can blockchains be the future of modern B2B and B2C transactions? Can it support companies in their day-to-day operations? Will it be the key to create transparent business environments where everything will be open and consistent? Time will show. But today we already have a lot of examples where businesses use blockchain to help them with many different things. 

What’s interesting is the fact that besides public blockchains that are based on distributed ledger technology available for anyone, there are also private blockchains, also called permissioned blockchains. In this case, the ledger is open only to a specific group of people and is more centralized. Bitcoin uses public blockchain, but there are also cryptocurrencies based on private blockchains. This type of blockchain is faster when it comes to processing transactions, but it’s also prone to be hacked.

A business doesn’t need to use a private blockchain network. For example, Ethereum is a public blockchain, but it allows the use of smart contracts, so its protocol can be excellent for business transactions. Choosing private blockchain can be justified by the need to hide transactions visible in the ledger. But that depends on the industry your business is operating in.

Speaking of industries, we would like to share a couple of examples where blockchain can come in handy. What kind of business can benefit the most from a blockchain network?

Every business with a supply chain

For companies that want to grow efficiency and have control over the supply chain on every stage – blockchain can be a great way to collect, share and analyze data. All they need to do is create a ledger, including all the parties involved in the supply chain. Each side will have access to information about the products they trade, purchase, or sell. This info will be highly secure, available at all times and traceable. Using blockchain in a supply chain is the perfect solution to always be aware of what is happening with our resources, what the costs are and where we can improve the process.

A business organization using smart contracts

As we mentioned before, a smart contract is a piece of data that is encrypted so that it can help with valuable information exchange in the company. Blockchain with smart contracts can basically be a tool to organize all the documents and records in the firm. That’s a productivity boost, as using digital technology makes everything more accessible and it eliminates the problem of lost or duplicated data, as well as most of the mistakes made by people. Automation of many processes can also be a huge advantage and a reason to use blockchain as the primary organization system.

Which industry can benefit from smart contracts and blockchain itself? Almost all of them. Especially big companies and types of businesses that use a lot of files and information. That would be, for example, every big supply chain, finance institutions, legal facilities, state-owned organizations and prominent, international corporations. For new businesses and startups, blockchain can also be something to consider if they want to achieve top security for their operations.

Another area where blockchain can turn out to be the best choice is customer relationship management. CRMs can become way more efficient, organized and transparent with this technology by collecting detailed, rich-quality data. With this tool, we can learn much more about our customers, be aware of their needs and expectations, get insightful research on their habits – and as the outcome, we will gain a clear strategy for our next business moves. 

Payments and other B2C transactions

Paying with Bitcoin is not a new idea – it’s been already happening for some years. At first, people were creeped out by using virtual money, whether buying stuff online or, even worse, using it at the payment terminal in exchange for everyday goods. Now it is possible to pay with crypto technology for food you order, games you want to play and many other assets. Of course, it’s not available everywhere, but some companies give their customers an opportunity to use this payment method.

Why should you even consider blockchain payments? Basically, they are secure and fast, which is the biggest perk, but that’s not only it. Comparing to traditional global transfers between two currencies, a blockchain charges minimal fees or doesn’t require a fee at all. We also won’t lose any money on conversions, as we send the same currency between two parties. Sender and receiver can be thousands of kilometers from each other and do a transaction within minutes without additional costs.

Other types of transactions between businesses and their customers are also enabled by blockchain – they are fast, secure and trustworthy. That’s why, for example, sharing data with a company that operates on the blockchain will be much more tolerable than in other cases. Blockchain can revolutionize the B2C sector and also B2B operations in a similar matter.

Fundraising

Another way to use blockchain is in startup funding. But in the case of blockchain, it is based on an entirely new mechanism. Instead of just transferring money to the company of choice so they can prototype their product or start selling their services, we exchange our fundings for tokens. That form of business financing is called ICO (initial coin offering) and is an excellent alternative for bank loans and other public funding options.

So the process is quite simple – the startup sells digital tokens to everyone who wants to invest in it. The token gives the investor several privileges, depending on the type of tokens that were sold. Some tokens can provide the investors with a right to gain a part of the revenue from the company they invested in. Others can give them a possibility to receive a promoted product or service in priority, before everyone else. Of course, these rights can be reassured thanks to smart contracts that oblige the startup to fulfill them. Tokens can also be traded on the exchange websites.

What are the benefits of blockchain?

As you can see, since blockchain can be employed in so many business operations in almost every industry, it is worth considering it in your strategy for the next couple of years. Customers and business partners will definitely expect better safety, a high level of transparency and other benefits that blockchain can offer. Here are the most important ones:

Security

In times where lots of businesses digitalize their internal and external processes, security needs to be provided in so many situations and on so many levels. Payments, contracts, files, documents, data – that can be a target to hackers, thieves, or even fraudulent competition.

Encryption, verification by consensus from ledger members and immutability of every block in the chain is what can ensure every stakeholder you collaborate with that working with you will always be safe.

Fast operations

If you want to increase the speed of your transactions, blockchain is the best choice. It offers almost real-time experience and with all other advantages, it can provide the whole, complete system for payments, contracts, file sharing, storage and analysis. If you’re doing business with international clients and partners, time really matters and with blockchain, exchanging digital resources can be done with a blink of an eye.

Efficiency

A robust system that can automatize and organize all collected data and give access to every interested party without an intermediary? That will be an efficiency boost for your business.

Transparency / Traceability

All the records are kept in one place, so we can follow through our operations and see where they are working well and where they need improvement. This way we can also prevent fails and potential frauds. It’s the best way of work for everyone who wants to offer honest B2B relations.

Consumer insight

Thanks to the fact that we can use blockchain to collect data about our customers, we can create better marketing strategies that will answer their goals and needs. Analyzing our B2C relationships will answer the questions: What can be done better? What is working just fine?

Give blockchain a try!

Whether it’s your first time hearing about blockchain or you know it already, it is apparent that it can be a technology that can change the world of global businesses. Even though blockchain has been on the market for a couple of years now, it is still considered quite new technology. All the benefits we discussed in this article can yet be developed to provide sophisticated, robust solutions for all kinds of enterprises and startups.

At itCraft, we can help you to implement blockchain ledger into your new project or the one that exists already. With our expertise in mobile app development and other digital technologies, we can propose a product that will bring a valuable and positive experience to your clients, suppliers and other partners. Contact us so we can talk about available options and possibilities for your company to grow. We may create something remarkable and change the way you work every day!

See also

Why is machine learning a growing trend?
What is a cloud application?
How much does it cost to make a booking type app?
19 Apps built with Flutter Framework