The Fundamentals of Blockchain: A Brief Introduction to the Technology and its Benefits

Blockchain & E-Transactions Law

Over the course of the past few years, blockchain technology - a platform that acts as a digital ledger for assets - has rapidly grown in prominence. A fundamental understanding of how this technology works, as well as its benefits, can be helpful in assessing opportunities to leverage the technology in any particular industry. This article provides a brief overview of blockchain technology and its advantages.

Blockchain provides a peer-to-peer tool for sharing information about assets and transactions, such as digital goods, money, medical records, company records, intellectual property, contracts, and other types of data. This technology derives its names from its key components: blocks and chains. Quite simply, blockchain technology is a sequential chain of blocks containing information. Like a hardcopy ledger or record book, blockchain is a record of chronological transactions. However, blockchain departs from the traditional ledger because the ledger is electronic and, more significantly, it is distributed and decentralized. In addition, when a transaction (a "block") is recorded, each transaction is linked, or chained, chronologically to the prior block. Each subsequent block contains a reference code that relates, or connects it, to the previous block in the chain.

The entire blockchain is shared across a network of participating computers. Each computer ("node") on the blockchain has access to the entire ledger and no single node has unilateral authority over the blockchain. Instead, the nodes collectively verify the data in each transaction before the related block is created. Because of the sharing of the entire blockchain across all participants and because no participant has centralized or heightened authority to edit or otherwise control the ledger, blockchain is referred to as a distributed ledger system.

Blockchain technology contains several key benefits. The first benefit of blockchain is transparency. Because blockchain is a distributed ledger system, all participants receive a copy of the entire blockchain ledger. This means that blockchain is not reliant on a centralized authority to maintain its records; instead, all participants have access to all of the blocks, and each new block is sent to each participant for verification. This transparency and completeness should be particularly helpful for companies that store records using blockchain technology, as they should be able to efficiently present records for audit with limited risk that the records have been altered. Second, the use of a decentralized and peer-to-peer network increases the speed of transactions, as a transaction is verified quickly by a consensus of participants on the ledger, rather than being routed through a single intermediary for verification. Third, the blocks of data on the chain make tampering more difficult, due to the fact that a modified block receives a new hash and further because a new block is not added to the chain until the other nodes on the peer-to-peer system have reached a consensus regarding the new block. There is an additional layer of protection due to the use of cryptography (mathematical coding of the data) to protect the data in the blocks. While blockchain is known foremost as the technology that powers the cryptocurrency Bitcoin, the many advantages of this electronic distributed ledger system have been, and will continue to be, leveraged over several industries.

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