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In This Article

  1. What is Blockchain? 
  2. Advantages and Disadvantages of Blockchain Technology 
  3. Elements of Blockchain
  4. Blockchain Security
  5. The Bottom Line: Blockchain

It’s a new technology. It has the potential to change the way we invest and how we conduct business. But what exactly is Blockchain?

What is Blockchain? 

Blockchains are the backbone of cryptocurrencies and smart contracts. 

Blockchain is as mysterious to most people today as the internet protocol was to most people back in the late 1980s. Remember that those who understood the internet and invested in the technology early were handsomely rewarded. The same opportunities are now available to early adopters of blockchain technology. 

However, in order to invest wisely, it’s important to have some level of understanding of what it is exactly that you’re investing in. 

To understand what a blockchain is, it’s helpful to know which previously existing technologies a blockchain might replace.

The simplest analogy is a traditional bank ledger. 

Bank ledgers have existed since the dawn of civilization. They keep a list of accounts and they record every transaction such as:

  • deposits
  • withdrawals 
  • payments

A blockchain is simply an electronic ledger system. 

Just like a bank ledger, a blockchain records transactions and balances the ledger. 

However, unlike a bank, a blockchain is not run by a central authority such as a corporation or a government.  

A blockchain is in essence a computer program that does what a bank does but without a CEO, without employees, without brick-and-mortar headquarters. 

A blockchain is an automated, robotic bank if you will. 

Although there are corporations behind many blockchains, the blockchain itself runs on its own.

The software that runs a blockchain is distributed across a decentralized computer network. The internet is the best example of a decentralized computer network. The internet runs on all the computer servers in the network. 

A blockchain is essentially a computer network that processes and records monetary transactions rather than just information exchanges. The ledger exists on every computer in the network and every transaction is updated on every computer in the network.

Advantages and Disadvantages of Blockchain Technology 

The major difference between a bank run by a corporation and a blockchain ledger is that no 3rd party or special interest has control over the blockchain. 

The advantage of this is that it allows for peer-to-peer transactions without the need for a trusted middleman.  

One of the disadvantages of a blockchain for some users is that, unlike a bank, there’s no customer service department to call when things go wrong. 

Moreover, if a mistake is made, a transaction can’t be reversed without the consent of the receiver of the funds. 

Elements of Blockchain

A blockchain requires several interdependent elements in order to function and provide value. Some of the components of blockchain include:

  • An immutable ledger system 
  • Blocks (collections of transactions)
  • Crypto wallets, private keys, and public addresses
  • Developers and governance protocols
  • Miners and nodes
  • Smart contracts 

We’ll look at each one more in-depth next. 

Immutable ledger 

Whereas a standard ledger runs on a single computer, a blockchain ledger is distributed across the entire network of computers. 

In order to change a recorded transaction, it would have to happen on every computer in the network effectively simultaneously and without anyone knowing, which is, of course, impossible

This makes all records in the ledger immutable


The transactions that live on a blockchain are stored in blocks

A block contains several transactions. Each time a block is mined — that is, processed by a miner — it is added sequentially to the rest of the blocks to create a chain…hence the term blockchain. 

While some blockchains process blocks at varying rates, Bitcoin processes a block every ten minutes. And each Bitcoin block contains an average of 2,500 transactions per block. 

Wallets, private keys, and public addresses

In order to utilize a blockchain, each user needs to set up an electronic wallet. While some wallet applications are dedicated to a particular blockchain, others might allow the user to maintain accounts on a collection of different blockchains. Wallets can also contain digital properties such as NFTs

Each wallet is protected by a private key and might contain several unique addresses in which funds are stored. 

The private key is essentially a very long account number that’s impossible to guess using existing computer technology. 

This key lives in the wallet and is required to prove the ownership of funds in order to make transactions.

Private keys can also be condensed into a shorter alphanumeric string called a public address. 

The public address is similar to a regular bank account number in that it is used to send payments to the wallet. 

Given sufficient computing power, the private key could conceivably be reverse-engineered from the public address. This level of computing technology does not yet exist, but could someday be achievable with quantum computers. 

Meanwhile, developers are working on schemes to make crypto wallets quantum-proof.

Developers and governance protocols

Like any software, blockchains depend on developers. 

Any computer programmer with sufficient knowledge can join a development team of a decentralized blockchain. 

Developers are able to work together to propose upgrades and make revisions to the blockchain’s core code.

Decisions as to which proposals are accepted and developed are performed using an agreed-upon form of governance. 

In order to take part in the governance of a blockchain, an individual or organization must have a stake in the network. 

In order for their vote to have weight, they must own a substantial amount of the native cryptocurrency. The larger the stake, the more weight the vote carries.

Miners and Nodes

Anyone can offer the computing power required to run a blockchain. This is what makes a blockchain decentralized. 

There are two types of computers connected to blockchains:

Miners are responsible for processing transactions made over the blockchain. 

In exchange for providing computer power (known as hashpower), miners are rewarded in the blockchain’s native cryptocurrency. 

For each block mined on the Bitcoin blockchain, the miner earns one bitcoin.

Nodes are computers where the blocks of data are stored and continually updated. There’s no reward for providing a node other than increased security. The more miners and nodes operating on a blockchain, the more decentralized and secure the network becomes.

There are a few different types of nodes:

  • Full nodes store the entire transaction history of a blockchain 
  • Lightweight nodes are required to create transactions outside of the blockchain 
  • Miner nodes process transactions in blocks

Smart contracts

Smart contracts are essentially computer programs that run on a blockchain network. 

Smart contracts can be programmed to automate transactions on the blockchain. For example, a smart contract can be written to pay someone periodic interest on a balance or charge interest on a loan. 

NFTs — individual and unique digital assets that can be bought and sold — are also made possible by smart contracts. 

Keep in mind these are just basic examples — the possibilities of smart contracts are limited only by human imagination. 

Blockchain Security

The security of a blockchain — that is, its resistance to hacking — depends on two things: 

  • decentralization
  • hashrate 


Decentralization is achieved by offering mining rewards. 

The more valuable a crypto network becomes, the more the mining rewards are worth, and hence more miners are incentivized to take part in the network. 

The more miners that take part in the network, the more secure it becomes. 

Higher security, in turn, increases investor confidence and investments in the network, which, in turn, increases the mining rewards. 

It's a self-perpetuating cycle. 

Over time, a successful blockchain will become more and more secure. 


Hash rate is the rate at which blocks are mined. 

As mentioned earlier, Bitcoin blocks are mined at a rate of one every ten minutes or so. 

This assures a constant creation of new bitcoins. In order to be awarded a block to mine, miners prove their worthiness by competing head-to-head to solve complex mathematical formulas. 

The more hashpower applied to a blockchain, the faster the blocks are hashed. 

In order to compensate for rising and falling hashpower and to maintain a steady flow of new blocks, the difficulty level for mining blocks increases or decreases. 

The Bottom Line: Blockchain

One of the most salient features of a blockchain is that it rewards early adopters. The earlier an investor gets on board, the greater the value of their investment as time goes on. 

That is assuming the blockchain continues to grow in value.

However, no investor should simply take one person’s word for which blockchains offer the most promising investments. 

Blind faith can be a recipe for disaster. 

Being a smart blockchain and crypto investor requires ongoing interest and education. 

The more you learn about blockchain technology before investing, the more likely you will reap the rewards of this amazing technological achievement.