In super-simple terms, a blockchain is a computer file for storing data. Or, to put it in more technical jargon, it’s an open, distributed ledger (database), which means the data contained within the Blockchain is distributed (duplicated) across many computers and is therefore decentralized.
This decentralization is one of the things that makes blockchain so transformation. Unlike in a traditional, centralized database – where records are processed by one central administrator (say, a company or government) – the entire Blockchain is transparent and data is verified by user consensus. Yet, despite this transparency, blockchains are incredibly secure. That’s because there’s no one central point of attack for hackers to target.
Decentralized. Distributed. This sounds a bit like Bitcoin
You’re spot on! Blockchain is the technology that underpins Bitcoin and it was developed specifically for Bitcoin. So, Bitcoin was the first example of blockchain in action and without blockchain, there would be no Bitcoin. That’s why the two names are so often used interchangeably.
But that doesn’t mean that blockchain and Bitcoin the same thing.
Bitcoin is a decentralised digital currency, or peer-to-peer electronic payment system, where users can anonymously transfer bitcoins without the interference of a third-party authority (like a bank or government). Bitcoin is just one example of a cryptocurrency, though; other cryptocurrency networks are also powered by blockchain technology. So although Bitcoin uses blockchain technology to trade digital currency, blockchain is more than just Bitcoin.
Looking at the wider applications of blockchain
Because blockchain and Bitcoin are so inextricably linked, it took people a long time to realise that blockchain actually has much wider applications beyond cryptocurrency networks. In fact, blockchain’s potential is so great that many people (myself included) believe the technology will revolutionise the way we do business, just like the internet did before it.
Here are just a few examples of the wider applications of blockchain beyond Bitcoin and other cryptocurrencies:
- Executing smart contracts. Thanks to Bitcoin, we already know that blockchain is great for facilitating digital transactions, but it can also be used for formalising digital relationships through smart contracts. With a smart contract, automated payments can be released once the contract terms have been fulfilled, which promises to save time and help to reduce discrepancies or solve disputes.
- Maintaining a shared, transparent system of record. Blockchain is the ideal solution for maintaining a long-term, secure and transparent record of assets (land rights would be a good example) that all parties can access securely.
- Auditing the supply chain. Blockchain allows users to trace the records of ownership for goods all the way back to the source. As an example of this, Diamond company De Beers has started to use blockchain to trace diamonds from the mine to the end customer. Anyone who wants to verify that their diamonds are free from conflict will have a transparent and complete record.
- Providing proof of insurance. Nationwide insurance company is planning to use blockchain to provide proof-of-insurance information. The tool would help police officers, insurers and customers verify insurance coverage instantly, which should help to speed up the claims process.