Blockchain is a distributed database technology. Rather than being stored on a particular machine (for example, on a cloud server belonging to Amazon Web Services), blockchain data is distributed across a network of machines. The individual machines in the network are referred to as nodes. Advocates of blockchain claim it offers three key benefits over conventional database technologies.
Three key benefits over Blockchain database technologies:
• Decentralisation – there is no single point of failure and no reliance on a trusted central authority to validate transactions (hence blockchain is sometimes described as “trustless”)
• Immutability – once written to the blockchain, transactions cannot be undone or altered
• Transparency – all transactions are a matter of public record
However, blockchain is slow and energy-intensive compared to conventional database technologies. This is a function of the consensus mechanisms used to update the database, which involve multiple nodes in the network validating each new transaction.
There are two types of consensus mechanism:
Bitcoin mining is an example of a proof-of-work mechanism, in which nodes compete for the right to add a transaction to the blockchain, with the winner receiving a reward in cryptocurrency (see Cryptocurrencies Article).
Proof-of-stake mechanisms simply reward nodes in proportion to their existing cryptocurrency holdings, meaning that they use less energy than proof-of-work mechanisms.
While it was invented to support Bitcoin and continues to support all cryptocurrencies, blockchain can also be used for other purposes, typically in conjunction with smart contracts – contracts programmed in computer code, that can self-execute based on predetermined triggers.
Smart contracts are said to be important because they remove the need for trusted intermediaries such as lawyers, banks, and brokers, paving the way for peer-topeer transactions. However, the corollary is that transacting parties must be capable of reading the smart contract code themselves: if bugs or fraudulent features in the code result in losses, they have no recourse. Malicious smart contracts are the means by which many crypto frauds and scams are perpetrated.
Many real-life uses of blockchain involve Ethereum. In addition to issuing its own cryptocurrency, Ethereum operates an open-source platform which makes it easy for software developers to create:
• dApps – distributed applications running on blockchain Protocols – sets of standardised rules determining how different categories of applications should operate.
• Distributed autonomous organisations (DAOs) – an organisational form governed by smart contracts rather than a central authority, which some see as a digital successor to co-operatives and trade unions.