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What is a Blockchain? A Beginner Investor’s Guide
Blockchain that connects different digital assets
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A blockchain is a type of database invented in 2008 that stores and secures information in sequential blocks. Unlike the case with traditional databasesThe contents of a blockchain are not stored on a single server. Instead, a copy of the entire database is recorded and stored on each computer, or node, that runs the network. Anyone in the world can run a node if they wish. Additionally, blockchains are completely transparent to anyone who wants to monitor and verify them.
Blocks of data are chained together by a network of miners or validators. Miners are most commonly associated with Bitcoin
Bitcoin
BTC
where participants enlist powerful computers in a race to solve a complex mathematical problem to earn bitcoin. Validators typically refer to participants on blockchains where operators post stakes in digital assets as collateral in exchange for the right to add transactions to the blockchain and earn in-kind rewards. You can think of both processes as updating a database. These decentralized setups are intended to make blockchains more secure than traditional databases, which are often plagued by what is known as a single point of failure. A compromised login, for example, can give an attacker access to the entire realm.
Blockchains have trade-offs. The validation process can slow down some chains. For example, the Bitcoin network can process 4.6 transactions per second, while the Visa network
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the rate is 1,700. At this time, Ethereum
ethereal
ETH
can only handle a dozen or so. Many developers are working on ways to get faster processing times, and some newer platforms like Solana
nightshade
SOL
Cardano
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and Algorand
ALGO
They claim to be able to handle thousands of transactions per second. However, centralized solutions are faster overall.
Why use a blockchain?
This brings us to the next question. Why would anyone need a decentralized database? It depends on the problem you are trying to solve and how it aligns with the characteristics of a blockchain. A common trade-off is that blockchains sacrifice speed and efficiency for security, transparency, and decentralization. Putting your company’s transaction information on a blockchain is not going to be the best option when you can update an Excel file or collaborate with colleagues on a Google Drive.
The biggest benefit of blockchains is the replacement of middlemen. One day, government officials, bankers, and lawyers may all find themselves out of work because of blockchains.
Let’s look at Bitcoin, for example. People with a reliable banking infrastructure often don’t see the need for decentralized money. In countries with hyperinflationary currencies and inaccessible or corrupt banking systems, however, Bitcoin can preserve savings simply by being money that doesn’t rely on governments or banks to mint, transfer, or access. Add in a smart contract infrastructure, and blockchains can replicate traditional banking in a decentralized, permissionless way.
Another example, which is becoming increasingly popular today, is non-fungible tokens (NFTs) that are supplanting intermediaries in digital art. Instead of working through dealers, artists can register their work directly on a blockchain and publish it on an NFT marketplace. Ownership is verified on the blockchain and transferred to the highest bidder via a smart contract. Not only does going direct to the consumer increase artists’ profit margins, but they can also schedule a royalty to be paid to their digital wallets every time a work is resold. Many different types of content creators can benefit from the ability to transfer digital ownership of intellectual property via blockchain.
What about private blockchains?
Most people think of digital assets like bitcoin and ethereum when they hear the word blockchain. That’s because public blockchains are supported by network participants who are compensated with each network’s token. What if users want the security and transparency of a blockchain but don’t need decentralization or tokens to encourage behavior?
Private blockchains are being used to upgrade conventional business systems. Shipping and logistics giant Maersk uses blockchain technology to track supply chains and process marine insurance claims. Boeing
Three-year degree
uses a blockchain-based air traffic control system to communicate and track drones. Honeywell maintains transparency with blockchain-based aircraft logs. New York-based Signature Bank offers a 24/7/365 blockchain-based instant payment system based on a privatized version of Ethereum to help customers move funds around the world in an instant.
The Future of Blockchain
No one knows what the future holds, but there are several developments that give us a glimpse of what blockchains will look like in a few years. For one, they will get better and faster over time. The public blockchain industry is also working hard on interoperability, or the ability for different blockchains to communicate with each other, and on more user-friendly interfaces for decentralized applications.
Second, there are historical parallels between blockchain and the early Internet. Private blockchains are a bit like the idea of an “intranet,” compared to public blockchains. Time will tell if one or both will survive. Blockchain tokens are also subject to speculative bubbles as investors try to find the next Amazon.
AMZN
and avoid the next Pets.com.
Blockchain is here to stay. We can know who is who and who owns what without relying on a single party to delete transactions or update their database. Blockchains could be part of our daily lives in the near future.
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future.
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