Blockchain breakdown: What is it, and what’s all the fuss?
Confused about what blockchain is and what it can do? We demystify what it is and how you can break into a career in blockchain technology.
Jun 08, 2023 • 16 Minute Read
Blockchain – it’s one of those buzzwords we’ve all heard thrown around alongside 'revolutionary' and 'groundbreaking' and 'disruptive'. But what is blockchain? And will it actually change the world, or is it all just hype?
In this article, we break down what blockchain is, what it can be used for, and how companies are using blockchain to innovate. We get into the finer details to understand how the technology works and compare the advantages and disadvantages of blockchain, and where the technology is headed.
And if you’re interested in breaking into a career in blockchain and the skills you’ll need to get there, we’ve got you covered too.
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Table of contents
- What is blockchain?
- What are some applications of blockchain technology?
- How does blockchain technology work?
- Cloud providers and blockchain-as-a-service
- What are the disadvantages of blockchain?
- Is blockchain a good career?
What is blockchain?
Blockchain is best known as the technology behind Bitcoin, but what actually is it?
Blockchain is what’s called a distributed ledger – it uses a network of computers and clever code to keep track of data securely and privately. It stores data in a series of chunks called blocks. Each block is linked to the previous block, and finished with an algorithm that acts as a tamper-proof seal to prevent anyone from altering it.
Data stored in vast central servers is vulnerable to deliberate or accidental harm: attacks, power outages, or fires. Instead of those databases being a single point of truth, blockchain keeps a copy of the data on each participating computer or node.
It includes mechanisms to check the data when it’s first stored to make sure it can’t be altered. It also checks that there’s a consensus between the copies of the blocks.
What are some applications of blockchain technology?
Bitcoin is perhaps the best-known use for blockchain technology. But blockchain has far wider applications than cryptocurrency – it can be used to securely and transparently track all sorts of transactional data.
Tracking goods in supply chains, monitoring intellectual property through smart contracts, and tracking pharmaceutical or food manufacturing to pinpoint problems instantly are all ways blockchain is being used. Some companies that have already incorporated blockchain technology include Walmart, Pfizer, AIG, Siemens, Unilever, and a host of others.
Blockchain is also being proposed for secure digital voting to increase access, trust and transparency.
How are companies using blockchain technology?
Let’s dig into some examples of how blockchain is being used by some of the world's biggest companies.
We’ll start with the obvious use case – cryptocurrency as payment. Bitcoin is the biggest and most well-known digital currency, and many of the world’s largest companies and retailers accept Bitcoin, and some other cryptocurrencies, as a legit payment option.
For example, AT&T lets you use crypto to pay your bills using BitPay. Microsoft also uses BitPay to enable you to top up your account using Bitcoin, among other cryptocurrencies. And with PayPal you can buy, transfer, and sell cryptocurrencies (if you’re in the US, at least). Long gone are the days scrambling around in the dark for your credit card to buy that timed-release, limited-edition action figure you’ve been coveting.
Retail and food industries are also riding the crypto wave. In the US, if you’re feeling flush with Bitcoin and got a hankering for a cold brew and avocado ice cream you can shop at Starbucks, Whole Foods, and plenty of others.
And if you’re curious where else you can spend your Bitcoin, there’s a search engine for that.
How do you know the organic, single-origin coffee beans you’re paying top dollar for are the real deal?
Blockchain can be used to track goods through supply chains, helping with stock management and building consumer trust.
Travel and tourism
Online travel agency Webjet uses blockchain technology to enhance its customer experience. It records all entries on the blockchain’s immutable ledger, reducing the likelihood of mistakes or lost bookings.
What is a smart contract?
Let’s say you’ve been contracted to build an e-commerce site for a local business. You deliver the work but don’t get paid. What follows could be a long and tedious process of following up through lawyers or courts to enforce the contract.
Ethereum uses blockchain for smart contracts. These are agreements like traditional contracts, and as well as the transparent and unchangeable benefits of blockchain, they can have the actual execution built into them.
In this example, delivering the work could automatically trigger payment. Anything that could be created as a set of ‘If… then…’ instructions can be made into a smart contract.
Dragonchain, an open-source hybrid blockchain platform originally developed by Disney, allows you to create your own custom smart contracts. You can run code written in any of the supported languages (like Nodejs, C#, Go, and Python) without provisioning or managing servers.
What are non-fungible tokens (NFTs)?
If we drew you a really nice (and by ‘nice’, we mean ‘mediocre’) digital picture of a cat and sold it to you for $10, what’s to stop you making 50 copies of it and selling them?
But if we made our artwork into a non-fungible token (NFT) – a unique digital file stored on the blockchain – it would be possible to trace which (mediocre) cat drawing was the original, legit one. Being stored on blockchain means an NFT effectively has its own certificate of authenticity.
NFTs are commonly works of art, like this Grimes video or Pak’s The Merge, but have included a court ruling and even a clock. A piece of art can also have different rights assigned to it – it can be bought and sold, like physical objects, but can also have royalties attached with subsequent sales, which is a bonus for artists. Christie’s was the first major auction house to offer a purely digital work with a unique NFT, selling Beeple’s Everydays: The First 5000 Days.
An NFT can be for artwork either completely in the metaverse or also in the physical world. Damien Hirst turned this idea into 'The Currency': each artwork in the series exists both as an NFT and a physical painting until you pick one, at which point he will destroy the other version.
So are NFTs a fad, or are they here to stay? Some big companies are banking on the latter. App-based marketplace for digital collectibles, VeVe, has collaborated with Marvel, DC Comics, and Disney to release products for the NFT industry. And fashion brands like Adidas, Dolce & Gabbana, and Ray-Ban have all released NFT collections.
How does blockchain technology work?
Okay, so now we have an idea of some of the applications of blockchain technology, we can get into the nitty gritty of how it actually works. And to do that, we need to understand that there are two parts to blockchain technology – recording and validating data in blocks, and extracting data from blocks in a useful form.
How is data recorded and validated?
So, the no-brainer basics: a blockchain is made of blocks that are filled with data, one at a time, and then linked into a chain. Cunningly, this is called a blockchain. This provides a timeline of data – a ledger of what happened when, in contrast to a traditional database that might save information under categories or in tables.
Copies of the chain are kept on computers on the network, called nodes, rather than being stored in a central server.
Once a block is completed, it’s not editable. That’s it, it’s fixed forever. Hashing algorithms create a kind of mathematically calculated fingerprint called a hash code, which is used to make a tamper-proof seal. Each block contains the hash code that was used to seal the previous block, linking them together so blocks can’t be replaced.
When data is recorded into a block, it needs to be validated before the block is sealed and added to the chain for posterity. To do this, it’s checked against other data on the network to make sure it’s legit. It’s then secured by a consensus mechanism such as proof-of-work or proof-of-stake (more on that below).
If you were to try changing a block, because you change the hashcodes you invalidate your copy of that block and all of the blocks that come after it in the chain. This is so that one anomaly or bad actor can’t wreck the whole thing – in the same way one outlier in experimental data isn’t included in the calcs, or one rogue cell gets mopped up by our immune systems. Even if someone changes one copy of a block, it wouldn't match the other copies kept on other nodes, and the change would be detected.
This sharing of copies is one of the key features of blockchain technology. Each blockchain is widely witnessed, which makes it very difficult to tamper with. The identifying info isn’t public – each block has an address, which is related to a public encryption key – but it’s also not entirely anonymous.
What are the 4 different types of blockchain technology?
The best-known type of blockchain is used for Bitcoin, which is a public blockchain. In theory, it’s open for anyone to join and for anyone to view, but not all blockchains are this accessible.
Here’s a quick summary of the four different types of blockchain technology.
- Public blockchains: This is the OG blockchain – a distributed, decentralized ledger that anyone can join, and all transactions are visible.
- Private blockchains: Operate in only one organization. They use the same idea of a distributed ledger instead of a central database, and therefore have some of the security of a blockchain but not the transparency.
- Federated blockchains: Pooled among a group of organizations, but aren’t open to everyone.
- Hybrid blockchains: Semi-public. Members in the system decide who has access and which transactions are public.
Blockchains can also be permissioned (i.e. you need specific permission to enter or must meet certain criteria) or permissionless (anyone can participate in verification or transactions).
What does proof-of-work mean?
Proof-of-work (PoW) is the most common type of blockchain validation used today. It’s used to verify Bitcoin, for example.
In the case of Bitcoin, to verify each block, nodes on the network compete to be the first to solve a complex math problem. The first one to come up with a hexadecimal number less than the target number wins the internet … Just kidding, they get awarded a small amount of Bitcoin for their effort. This is known as a PoW.
Solving the validation problem is basically just trial and error, so who gets there first is a bit random. And this much trial and error takes a lot of computational power.
It takes about 10 minutes to add a block to the blockchain, and only one block is added at a time. In Bitcoin terms, this is about 7 transactions per second, compared to Visa’s 65,000. Some blockchains are much faster, but using PoW limits this speed.
What does proof-of-stake mean?
Proof-of-stake (PoS) is becoming a more popular way of verifying blocks. Instead of anyone pitching into a mad scramble to be first to solve the puzzle, nodes offer cryptocurrency as collateral for the chance to validate blocks. A validator is chosen from these to validate each block.
PoS selects validators in proportion to their quantity of holdings in the cryptocurrency (or other blockchain token). This reduces the amount of computational power needed.
How do you extract data once it’s in the blockchain?
If data in the blockchain is stored by date, that sounds like the worst filing system ever, right? A bit like sorting your extensive vinyl collection according to when you bought it.*
[*If this is how you store your vinyl and it makes you happy, please don't send us hate mail.]
You can view blockchain data either by having a personal node or using a blockchain explorer, like this one for bitcoin. To get meaningful data from it, you’re going to need to delve into some data analytics.
However, most people aren’t going to be building a blockchain from scratch or building their data-analytics solutions from scratch – they’ll be using a tailored solution, like a blockchain-as-a-service.
Cloud providers and blockchain-as-a-service
Blockchain-as-a-service (BaaS) allows you to more easily build, host, and manage blockchain apps, because all the backend stuff is managed for you.
An example is Ethereum Virtual Machine. Ethereum specializes in digital assets and smart contracts. It’s open source and programmable, so you can develop your own blockchain applications without needing to actually build one yourself from scratch. Other open-source frameworks for blockchain include Hyperledger Fabric or ConsenSys’s Quorum Blockchain Service.
If you’re keen to adopt blockchain with less technical effort, some of the major cloud providers also offer blockchain services.
AWS has probably the most comprehensive offering – they claim to host at least 25% of nodes on the Ethereum network. IBM hosts blockchains for a variety of logistics businesses, including Walmart and shipping firm Maersk.
What are the disadvantages of blockchain?
There are lots of Web3-type ideals being touted for blockchain technologies, like enabling people to own their data rather than it being owned by individual companies and stored away in their databases.
It could also empower decentralized, local use. For example, your neighbor could give you access to spare power from their solar panels and blockchain technologies could keep track of that, rather than you both having a relationship only with a power company.
So the distributed, transparent nature of blockchain sounds pretty great. But before you rush to switch your business data to blockchain, it’s worth considering some of the downsides.
1. Blockchain uses a lot of power
A big criticism of blockchain technology is that it’s slow and power-hungry. PoW is the most common method of validation, and it requires a large amount of power. Currently, Bitcoin mining alone uses more electricity than Belgium.
Similarly, a limit to the size of blocks and the fairly slow transaction speed – especially in public blockchains validated by PoW – limit the scalability of blockchain.
2. Blockchain is secure … until it isn’t
Blockchains in theory are secure. Because accessing and changing a copy of a chain would quickly be identified and eliminated, it’s not really worth a hacker’s time trying to access and alter blockchains.
For a long time it was thought hackers would be better off putting the computing power into mining Bitcoin. However, as blockchain is adopted more widely, it’s unclear how it will fare if it’s attacked. As validation is done on consensus, if someone could control more than half of the nodes, called a 51% attack, they could potentially alter the blockchain. This already happened in a Bitcoin spending spree by hackers in 2019.
So it’s clear more work will need to be done to keep the blockchain secure.
3. Blockchain has a long memory
Among the utopian-sounding possibilities, there are downsides of a giant indelible ledger.
Think about the little voice in your head that chimes in at 3am. The one with the comprehensive catalog of everything you’ve ever done or said that was vaguely wrong or embarrassing. This voice never forgets. And neither does the blockchain. That test you went for about that rash? Recorded forever. Long-forgotten arrest at a protest when you were 19? Still there.
For countries or regions with strict data-protection laws – for example GDPR in the European Union – it’s not clear how blockchain will work.
Is blockchain a good career?
If you’ve read this far, it’s pretty obvious that – despite the hype and any potential downsides – blockchain is only going to increase in popularity and adoption. So it’s probably safe to assume the demand for jobs that know and understand blockchain will also increase.
With blockchain technology being used across a wide range of industries, you might be wondering what your career options are. Let’s take a high-level look at some of the tech roles on offer and the skills you’ll need.
What does a blockchain developer do?
Blockchain developers create applications for blockchain. There are two main types of blockchain developers:
- Core blockchain developers: This role develops and optimizes the architecture of blockchain systems. They focus on the protocols that support blockchain solutions, implement the security of the network, and ensure the network is working as it should.
- Blockchain software developers: This role develops and implements the designs planned out by the core blockchain developer, like decentralized applications (dApps) and smart contracts based on blockchain technology.
What does a blockchain architect do?
Blockchain architects design blockchain solutions, often in collaboration with research and development teams. They’ll set the overall roadmap for the team to follow, and lead blockchain projects.
In terms of skills, it’s helpful to have a strong foundation in blockchain architecture frameworks, and architecting database and storage solutions.
What does a blockchain engineer do?
Blockchain engineers are responsible for guaranteeing that all operations are of excellence in the blockchain development environment.
They develop and implement assets, work on platforms like Hyperledger and Ethereum, and set up the blockchain infrastructure. They also conduct the testing and automation of frameworks for blockchain and make sure applications are secure.
How can I learn blockchain?
Whatever path you decide to go down, you’re going to need a solid understanding of blockchain technology. A Cloud Guru has a one-hour Blockchain Explained course that takes a non-technical approach to explaining how blockchain works, so this is a good place to start if you want to cover the basics.
If you’re looking for something a bit more in-depth, Blockchain Essentials goes into the mechanics behind blockchain to understand the protocols it uses. It also gets into the mathematics of how hashing algorithms work and what they’re based on.
And if you want to get into blockchain development, Solidity is the most used blockchain programming language. We’d recommend checking out Pluralsight's Developing Applications on Ethereum Blockchain, which covers the basics of blockchain and Ethereum, and the core skills for writing smart contracts using Solidity.