Blockchain

A blockchain is a distributed ledger that can be used to record transactions in a transparent, immutable, and verifiable way. Blockchains function as decentralized databases, but instead of storing data in tables they store data in blocks. Each block stores the applicable data, a reference to the previous block, and a timestamp. A new block is appended to the previous block, and this linearly builds the “blockchain” (1).

Blockchain was first widely introduced to the world in 2008 when a mysterious figure named Satoshi Nakamoto, whose identity is still unknown, published a whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System (2). Bitcoin was then released to the open-source community in 2009. Although blockchain made its technological debut with Bitcoin, it’s applicable to many fields beyond just cryptocurrency. The properties that blockchain provides makes it a valuable option whenever transparency, verifiability, and immutability are beneficial, and in the last decade the use cases of blockchain have grown quickly.

Implementation

A blockchain is built on the existing technological foundations of private key cryptography and distributed systems (3). These help resolve two of the fundamental problems of any secure system: authentication and authorization. A user’s private key and the cryptographic public key combine to create a digital signature that can be used for ownership and authentication. For authorization, a peer-to-peer distributed network of node computers is used to approve transactions and add to the blockchain (3).

Decentralization

Instead of one company or group owning and controlling the computers that stores the data, blockchain uses a decentralized approach. A blockchain ledger is stored on thousands of computers around the globe that are operated by different groups and individuals. These computers are called nodes, and together they form a peer-to-peer network that is able to moderate and authorize transactions on the blockchain without one person having the ultimate say (1).

This large network of different actors lends trust to the information that is stored in a blockchain. A blockchain allows you to see all of the different transactions by tracing from each block to the previous block until the root block is reached. Once a block is added to the chain, it is not allowed to be modified. In order to change the transaction within that block, another block must be appended to the chain (3).

A distributed network prevents one bad actor or node outage from destroying the validity of the whole chain. If one node has different information than the other nodes, it can use the other nodes as a reference to correct it information. This creates where chains that different from those held by the majority are cast away and determined to be illegitimate (1).

Use Cases

Blockchain can be applied to many fields that have use for a transparent and immutable ledger.

Cryptocurrency

Most cryptocurrency systems are built on blockchain. Bitcoin, the first platform built on blockchain in 2009 and the most popular cryptocurrency, recently reached a market cap of 1 trillion dollars. All forms of cryptocurrencies combined have a market cap of 1.7 trillion (4). One bitcoin currently costs over $50,000.

Non-Fungible Tokens

Non-fungible tokens, abbreviated as NFTs, are one-of-a-kind units of currency. No two NFTs are the same, even on the same platform, and being “non-fungible” means they cannot be exchanged for something else of equal value, like a bitcoin for a bitcoin or a dollar for a dollar (5). NFTs have been applied to a wide range of objects like artwork, trading cards, and music. In purchasing an NFT, you’re purchasing something that is guaranteed to be authentic. Physical art can be forged, luxury designers can be knocked-off, but NFTs will always have a clear origin and owner.

Digital Art

NFT art is increasingly becoming more popular and mainstream. The artist Grimes recently sold 6 million dollars worth of art that included images and videos set to music (6). The famous auction house Christie’s just offered their first piece of purely digital art for sale by the popular digital artist Beeple, titled Everydays: The First 5000 Days (7). The piece sold for 6.6 million dollars (8).

Digital Collectibles

Collectible items that used to be physical property are continuing to go digital. NBA Top Shot, which is backed by the NBA itself, allows users to acquire digital trading cards that are produced in limited numbers and are dropped in packs (9). Due to the artificial scarcity of some of the cards and the fact that they are verifiable by being NFTs, cards hold value and can often quickly and easily sell for more than they were purchased for. One card of Lebron James dunking sold for $208,000 (9).

Ethical Considerations

Blockchain was created to solve many of the issues that come with the consolidation of power in centralized technology. As a relatively new but quickly booming technology, all of the ethical implications of using a blockchain system are not clear yet.

Energy Usage

The way many blockchain systems, like bitcoin, have been set up is incredibly energy intensive. Blocks are added to the bitcoin ledger through a process called mining, and the computer that mines the bitcoin is rewarded. As this mining can generate lots of revenue, thousands of computers across the globe are constantly running energy-intensive machines in an attempt to mine. Most of these computers are getting their energy from networks that heavily rely on fossil fuels. Due to all of these energy-expensive computations, bitcoin alone has a carbon footprint equal to that of New Zealand and uses more electrical energy than Argentina (10,11). The energy that is required to verify transactions makes blockchain a less environmentally friendly option than traditional methods.