What is blockchain technology?

Blockchain is being heralded as a revolutionary new technology. But beyond its use in cryptocurrency, very few people understand what they can use it for or what industries it could change. This guide aims to demystify blockchain technology and explain what it is, what it’s used for, how it works and where its future might be.

What is blockchain?

A blockchain is a database where you can add information, but not remove it. It can store any type of data, including digital currency (such as Bitcoin), insurance claims or property ownership. Instead of relying on a single central server, blockchain data is stored across a network of computers called nodes, which makes the system secure, transparent and resistant to failure or tampering.

Each node maintains a copy of the database and works with others to verify new information. Data is grouped into blocks and linked together chronologically to form the blockchain. Since no single entity controls the database, no single entity can alter records or seize assets.

How does blockchain work?

A blockchain works by maintaining an unchangeable record of transactions through consensus among its nodes. When a new block of verified data is added, every node updates its copy of the database. If a node attempts to submit false information, it’s rejected by the majority, ensuring accuracy and security. The more nodes there are, the stronger and more decentralized the network becomes.

Users control their assets or data on the blockchain through private keys — unique digital codes that act like secure passwords. These keys give access to digital wallets without relying on centralized servers, reducing the risk of hacks and unauthorized access.

Types of blockchains

Public blockchains are the most widely used type of blockchain, but there are four main kinds.

Public blockchains

Public blockchains are open to anyone, allowing anyone to read, write and participate in the network. This openness ensures transparency, security and decentralization but can lead to slower transaction speeds and potential network congestion.

Private blockchains

Private blockchains restrict access to only authorized participants, giving a single organization control over the network. They’re faster and more efficient than public blockchains and are typically used for internal business processes, supply chains or enterprise applications.

Consortium blockchains

Consortium blockchains are controlled by a group of organizations rather than a single entity, offering partial decentralization. Only selected nodes validate transactions, making them more efficient while maintaining security. They’re commonly used in industries like banking, insurance and supply chain management.

Hybrid blockchains

Hybrid blockchains combine features of both public and private blockchains. They allow some data to be public while keeping sensitive information private, giving organizations flexibility and selective transparency.

What problems does blockchain solve?

Blockchain technology solves a number of problems, including:

• Double spending: In traditional digital systems, the same data can be copied or altered, allowing someone to spend the same money twice. Blockchain prevents this through time-stamped transactions and consensus among network nodes. Any attempt to alter or duplicate records is rejected, ensuring each asset can only be spent once.
• Lack of trust between parties: Blockchain enables trustless transactions. Participants don’t need to know or trust each other because all exchanges are automatically verified and recorded by the network. This removes reliance on intermediaries like banks or payment processors, since the network itself ensures accuracy, prevents fraud and enforces the rules of the transaction.
• Data integrity and security: Once information is added to the blockchain, it cannot be easily changed or deleted. This immutability ensures tamper-proof records, protects against hacking and preserves data accuracy.
• Transparency: All transactions on a blockchain are visible to network participants, creating a transparent record that’s easy to trace and audit. This helps reduce fraud and corruption in both financial and supply chain systems.
• Financial accessibility: Blockchain allows anyone with an internet connection to send, receive and store value without needing a traditional bank account. This provides an alternative to those who face barriers to opening or using conventional accounts.
• Censorship: No single authority can freeze accounts, block transactions or modify records on a public blockchain. This gives users greater control over their assets and information.

What else can a blockchain do?

Blockchains are part of a broader category called distributed ledger technologies (DLTs). Over the past decade, they’ve evolved rapidly, with new protocols and applications expanding their capabilities. Much like the Internet, additional technologies are being built on top of blockchains to enable new use cases across industries.

Let’s take a look at some of the most popular uses today.

• Cryptocurrencies

  Cryptocurrencies are digital assets native to their blockchains, originally designed to reward participants who help secure and maintain the network through processes like mining or staking. Beyond this, many cryptocurrencies also function as a store of value and a medium of exchange. Bitcoin, created in 2008, was the first cryptocurrency and has inspired thousands of others.

  Dive deeper: What is cryptocurrency?

• Tokens

  Tokens are digital assets like cryptocurrency, but they’re built on top of an existing blockchain rather than being native to it. This allows them to take advantage of the security and infrastructure of the underlying blockchain while being easily programmed for a wide range of uses, such as representing other currencies, assets or even access rights and utilities.

  Related: What is an ERC20 token?

• Smart contracts

  Smart contracts are self-executing digital contracts that automatically enforce terms when the conditions are met, such as paying out an insurance claim once the premium is paid. Pioneered by the Ethereum, they eliminate the need for middlemen, reduce costs and speed up processes.

• Digital assets

  Blockchains can digitize ownership of real world assets like stocks, real estate or collectibles. These digital assets, often issued as security tokens, utility tokens or NFTs, can be securely stored, transferred and traded on a blockchain, improving transparency, efficiency and accessibility.

• The Internet of Things (IoT)

  Blockchain can improve how the Internet of Things (internet-enabled devices like appliances, sensors and vehicles) communicate and interact with each other. For example, smart home devices can use blockchain to securely manage and automate energy usage based on demand or cost. As more devices become connected, blockchain can provide security, automation and trust across billions of smart devices.

• Digital identity

  Blockchain technology enables more secure, user-controlled digital identities. For example, the Interac Verification Service uses blockchain technology to allow Canadians to verify their identity once and then share it securely across banks, government services and other organizations. This gives users more control over their personal information while reducing fraud and duplication.

• Supply chain management

  More and more companies are using blockchain to improve supply chain transparency and efficiency. For example, the Canadian Tire Corporation implemented blockchain technology and IoT sensors for real-time product tracking, improving delivery accuracy by 40% and reducing transportation costs by 25%.

Benefits of blockchain

• Transparency: All transactions are recorded on a distributed ledger visible to participants, making data auditable and trustworthy.
• Immutability: Once data is recorded, it cannot be easily altered, reducing fraud and manipulation.
• Security: Cryptographic techniques and decentralization protect data from hacking and single points of failure.
• Decentralization: No central authority controls the network, lowering reliance on intermediaries and reducing costs.
• Efficiency and automation: Smart contracts automate processes like invoicing, payments and verification, saving time and reducing errors.
• Traceability: Blockchains offer a full audit trail of an asset’s journey, enabling transparency and accountability.
• Accuracy: Transactions are approved and validated by multiple distributed nodes, minimizing verification errors.

Drawbacks of blockchain

• Blockchain trilemma: It’s difficult to optimize security, decentralization and scalability simultaneously, as improving one often compromises the others.
• Cost and complexity: Implementing blockchain requires significant investment, specialized skills and infrastructure.
• Irreversibility: In public blockchains, transactions are permanent, so mistakes or fraud cannot be undone.
• Risk of misuse: Anonymous blockchains can be exploited for illicit activities, such as money laundering.

Which companies use blockchains?

Anyone can build a blockchain, but the most successful ones solve real problems. For example, Bitcoin enabled value transfer without intermediaries. Let’s take a look at some Canadian companies that are using or exploring blockchain technology.

• Walmart Canada: Walmart Canada partnered with DLT Labs to launch a blockchain-based freight and payment network in 2020. The system tracks deliveries in real-time, automates invoicing and payments and integrates data across 70+ third-party carriers. Since implementation, invoice disputes dropped from over 70% to under 1%, improving cash flow, reducing administrative costs and strengthening relationships with carriers.
• Royal Bank of Canada (RBC): RBC has filed multiple patents related to blockchain technology, including a credit scoring platform and a cryptocurrency exchange. These patented technologies aren’t available yet, but RBC is also one of the banks participating in the SWIFT ledger prototype. This blockchain system will enable faster, real-time cross-border payments between participating financial institutions.
• TruTrace Technologies: TruTrace Technologies partnered with agricultural producers and Shoppers Drug Mart to implement blockchain tracking for food and medical cannabis. This ensures supply chain transparency, verifies product authenticity and allows real-time monitoring of crops and medications from source to sale.
• MineHub Technologies Inc.: Based in Vancouver, MineHub has built a blockchain-powered digital supply-chain platform for the mining metals industry. The platform connects buyers, sellers, labs and financiers on a shared ledger so the data is usable, shareable, verifiable and unforgeable.

Frequently asked questions about blockchains

• Is blockchain decentralized or distributed?

  Blockchain is both distributed and can be decentralized, but these are different concepts. Distributed means the data is stored across multiple nodes rather than a single server, reducing the risk of failure or attacks.

  Decentralization means no single entity controls the network, which is typical of public blockchains. Private blockchains, however, may choose some level of centralization to suit business needs.

• How to invest in blockchain?

  Since blockchain is a type of technology, you can't invest in "it" per se; however, you can invest in companies or organizations that use it. Cryptocurrencies are a popular form of blockchain investment since they allow people to purchase the currency or token that powers a particular blockchain or uses the blockchain.

  Another way to invest in blockchain is by choosing companies that are developing blockchain technologies and purchasing stock in those companies.

• What's the difference between blockchain and cryptocurrency?

  Blockchain is the underlying technology that stores data securely and transparently. Cryptocurrency, on the other hand, is one of the most popular applications built on blockchain technology. While every cryptocurrency relies on a blockchain, not every blockchain is used for cryptocurrency.

• Are blockchains safe from hacking?

  Blockchains are highly secure due to cryptography and decentralization, but vulnerabilities can exist in smart contracts, wallets and exchanges rather than the blockchain itself.

Written by

James Edwards

Editor

James Edwards was the global cryptocurrency editor at Finder. He coordinates a distributed team of journalists to help further Finder's mission of helping people make better financial decisions. He has been using Bitcoin since 2013 and began working in the industry in 2017. He takes pride in boiling down complex topics into language his parents can understand. His expertise has seen him called on to report at events such as TechCrunch Disrupt, CoinDesk Consensus and IBM Think and has coordinated a vast number of high-profile interviews with the industry's brightest minds. He is a regular contributor to Nasdaq, The Street and is frequently called upon for market commentary in Australia and abroad. See full bio

Co-written by

Rebecca Low

Writer

Rebecca Low is a writer for Finder. She has contributed to a range of digital publications, including income.ca, Indeed, and Expatden, writing on topics like personal finance, career development, and travel. See full bio