What is a Blockchain?
Blockchain is a distributed ledger system that stores transactional data. It is ‘decentralized’ because it is not controlled by any central authority. It is a ‘distributed’ system as all data is shared, recorded, and validated by a network of computers around the world, called ‘nodes.’ Each node contains a copy of the digital ledger with no way to tamper or duplicate that data. Nodes must reach consensus on new blocks of transactions before they are added to the chain. This system ensures only genuine data is added to the blockchain, and secures it from manipulation.
All transactions are recorded and verified in a file called a ‘block.’ All transactions in the network are chronologically grouped together to form a linear chain of data blocks, with each new block taking account of all the data from the blocks that came before it – sort of like a Russian doll. This is why the system is called a blockchain.
How Does it Work?
Each and every block in a network stores the information and hash of its previous block. A hash can be explained as a mathematical code unique to a specific block.
Each block must refer to the preceding block’s hash. When fresh data needs to be added to the network, a new block will be created, and once the block is filled with the information or data, it will be linked to the existing chain of blocks in chronological order. Changing the data once it is stored on the digital ledger is almost impossible.
Types of Blockchains
There are three broad types of blockchains:
- Public Blockchain – A permissionless blockchain that can be accessed by anyone by connecting to the network. Bitcoin is the best example of a public blockchain as anyone can become a node of Bitcoin.
- Private Blockchain – Private blockchains are closed networks open exclusively to authorized users. Companies often use private blockchains for managing internal information and sensitive data, which can only be accessed by a handful of people in the network. Access is determined by the organization itself.
- Consortium Blockchain – Instead of a single entity controlling the network, a Consortium network is controlled by a group of entities or organizations. It is more decentralized than a private blockchain and can be used by organizations with common goals to ensure transparency between the participants.
The technology has real-world applications in the healthcare industry, cross-border payments, online identity verification, copyright, royalties, and more.
Difference between Blockchain and Crypto
While blockchain is a distributed database, cryptocurrency is the unit of value of the decentralized network. Cryptocurrencies are used for transactions within and between blockchains.
So blockchain is the infrastructure, like the Ethereum network, while ETH is the medium of exchange on the Ethereum network.