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The Blockchain: Explained & Visualized

Find out what blockchain is, how it works and why it’s gained popularity in banking, finance, health care, real estate, the supply chain and other sectors.

Last Updated: 10/10/2022
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What Is a Blockchain?

Blockchain refers to an immutable digital database. To put it simply, it is a sequence of blocks. Each block corresponds to transactional records, chained together and distributed among users.

While many correlate blockchain with cryptocurrency, there are various applications of blockchain technology. For instance, blockchain is used in health care, real estate, NFTs, smart contracts, banking, law enforcement and music.

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Sources:

Coindesk

How Does a Blockchain Work?

To understand a blockchain, know what happens when a request for a transaction is made within a blockchain network. Blockchain networks are also known as peer-to-peer networks. That is because the validation of a transaction relies on participants called nodes.

A diagram of how a blockchain works.

The blockchain process can be described in five steps:
1

A node initiates the transaction.

This will be authenticated by the network and signed with a private key.

2

The block, which represents the transaction, is created on the platform.

It is sent to nodes within the blockchain network. There may be preset criteria specific to a network.

3

The nodes will validate the transaction and confirm its legality.

Each node has a unique identifier to distinguish them from other nodes. Typically, nodes receive rewards.

4

Once validated, the transaction is included in the blockchain.

This means the transaction has been confirmed.

5

The new block is added and distributed across the network.

It gets linked to the previous block automatically, continuing the chain.

A blockchain is composed of blocks linked chronologically to create a chain. Each block contains five elements.

  • Data: The transaction records.
  • Hash: The unique identifier of a block. It can be referred to as the block’s fingerprint. A new hash is generated each time a block is created.
  • Previous Hash: The identifier of the block before the newly created block. With this, one block is linked to another.
  • Timestamp: Proof of the existence of data at a certain date and time. It tracks the creation and modification of documents.
  • Nonce: Nonce stands for “number only used once.” It refers to an integer that helps calculate a valid hash.

Blockchains start from a genesis block or the origin of the chain. For example, Block 1 represents the genesis block. This contains data, hash, timestamp and nonce. If you added a new block called Block 2, that block would contain data, hash, time stamp, nonce and the previous hash or Block 1’s hash. The same goes for each additional block. Thus, creating a chain.

A diagram of the parts of a blockchain.

Attributes of a Blockchain

What sets blockchain apart from other centralized networks is its attributes. It is more than just a database. Below are the key features that helped make blockchain a popular option for various industries.

  • Immutable: Data found in a blockchain network cannot be altered. Additionally, each node in the network must check and agree to the validity of every transaction recorded.
  • Decentralized: Generally, the technology for blockchain is decentralized. That means there is no single governing authority. The blocks are owned and maintained by a group of nodes.
  • Secure: Since there is no single governing authority in a blockchain network, it ideally offers better security. There is no one entry point since many nodes are in a network. Instead, blockchain uses cryptography that secures data against possible attacks.
  • Transparent: Blockchains have transparency. Each change applied to the network is readily viewable. Because of unique identifiers, it is also easy to distinguish each participant.
  • Based on Consensus: All nodes in a blockchain network must validate transaction data. Decision-making in a blockchain relies on a consensus algorithm, which is based on specific mathematical rules and functions.
  • Offers Faster Settlement: Compared to traditional banking, one advantage of blockchain is faster processes. For instance, you can quickly transfer money through a blockchain network instead of lining up and going through a multi-step process at a bank or waiting days for the transaction to be completed.

With proper use and application, industries can take advantage of the various attributes blockchain technology has to offer.

Blockchain Applications

Blockchain technology has gained popularity throughout the years with various benefits to offer. Many industries and sectors have applied it to their systems, helping it go beyond cryptocurrency.

MoneyGeek rounded up some examples of real-world blockchain applications to provide insight into how this technology has changed how business and transactions are done.

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    Cryptocurrency

    Blockchain is the foundation of cryptocurrency. It is one of the applications that has brought to light the use of blockchain. The rise of cryptocurrency has also made other industries consider the technology. According to Crypto.com, there were 300 million recorded cryptocurrency users in 2021.

    Cryptocurrency cannot function without blockchain technology. That is because of digital money, payments and transactions involved. Additionally, blockchain helps make cryptocurrency accessible worldwide.

    Unlike traditional banking, cryptocurrency is not dependent on any financial institution for authenticating transactions. There is also no physical money. Instead, transactions are created, stored and transferred digitally on a blockchain network. For security, encryption techniques are put in place.

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    Smart contracts in decentralized finance

    Smart contracts refer to digitally facilitated agreements. Like traditional contracts, two or more parties agree to specific rules and obligations. But unlike traditional contracts, smart contracts do not involve intermediaries.

    A computer program running on a blockchain network conducts the verification and enforcement of the agreement based on predetermined conditions. Only the agreement of the involved parties is necessary.

    The financial sector is one of the many industries using smart contracts. With the introduction of decentralized finance (DeFi), there has been a significant change in the way people manage money.

    DeFi offers the automation of transactions for financial institutions like lending platforms, insurance companies and even financial markets. Thus, removing the need for human intermediation. In this manner, smart contracts create an avenue to decentralize financial transactions and other related services.

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    Non-Fungible Tokens (NFT)

    NFTs are unique tokens kept in a blockchain network. They are digital copies or representations of anything you create or own, such as digital art, a song file or even real estate.

    Interest in NFTs has grown as it provides a medium to buy and sell digital art and sports cards since they are maintained in a blockchain network, creating new marketplaces. There is no need for intermediaries to complete transactions.

    NFTs can be considered a more evolved application of the concept of cryptocurrency. They can also be used in trade and finance. Tokenizing certain commodities could help businesses explore new ways to raise capital. NFTs can also help companies handle sensitive data, allowing the tracking of each step without the risk of it being altered or accessed by another party who doesn’t have the necessary cryptographic keys.

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    Health care

    Rising hospital costs and vulnerability to health data breaches are among the health care sector's challenges. The introduction of blockchain technology to the industry aims to address these issues through more efficient and secure processes.

    Below are some of the major benefits blockchain offers to the health care industry:

    • Making health records electronic, more accessible and more accurate
    • Allowing medical researchers to share work and collaborate
    • Protecting health care data from security attacks
    • Securing and monitoring medical supplies
    • Real-time reporting and tracking of diseases and outbreaks
    • Presenting medical events in real-time to help with health insurance claims

    Many companies have seen the potential of blockchain in the medical field. Curisium, for instance, uses blockchain technology for contact management and rebate negotiation. Patientory, on the other hand, has adapted the technology for keeping up-to-date patient data, pandemic tracking and reporting and other health care management services.

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    Real estate

    Security is an essential factor to consider in the real estate industry, especially since it involves legal documents and asset management. Blockchain technology offers secure storage of important details, making it easier to transfer or trace ownership. It enables participants to exchange records, contracts and currency over a safe channel.

    Here are other ways the real estate sector can benefit from blockchain:

    • Asset management
    • Loan and mortgage securitization
    • Property management
    • Investor and tenant identity
    • Payments and leasing
    • Automated transactions

    Currently, there are real estate companies that have adopted blockchain technology. For example, Propy uses blockchain for a safe real estate marketplace. It allows the use of online payment, cryptocurrency and NFTs.


    Another example is StreetWire. The company makes it easier to find real estate data, complete transactions and automate the analysis of data.

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    Banking and finance

    Every year, the financial sector faces various challenges, including slow operational procedures and cybercrime. As critical players in the economy, it is vital to ensure that financial intermediaries can solve these issues.

    With blockchain networks, banks, lending institutions, insurance providers and stock exchanges can have a safer, more transparent, more affordable and faster flow of transactions. Additionally, blockchain technology can be used to track transactions, store customer data and automate processes through smart contracts.

    Visa started its blockchain journey when it invested $30 million in the blockchain developer Chain.com. In 2017, the companies launched B2B Connect. It uses blockchain to accommodate business-to-business payments across the world. In 2021, the company launched Crypto.com Visa cards that allow users to settle payments using digital currency.

    Multinational bank Barclays has also joined the exploration of blockchain technology for financial purposes. The company collaborated with other major financial institutions to create the Utility Settlement Coin, which connects commercial bank money to central bank money with the help of distributed ledger technology (DLT). The company also experimented with smart contracts and digital payments infrastructure.

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    Supply chain

    Blockchain technology can help address efficiency issues of supply chains by providing accurate tracking of items. It can also help tokenize contract agreements. Thus, removing paper-based trails and reducing losses.

    Aside from these, blockchain can also help ensure the integrity of records. It can prevent fraudulent entries or duplication. Cross-border payments are also faster and easier with this technology.

    Walmart, in partnership with IBM and Tsinghua University, enabled the use of blockchain to track certain products and determine their origin. This lets customers know about the source of their food. It also helps with the restocking process.

    UPS has also joined the digitization movement. The company joined the Blockchain in Trucking Alliance (BiTA) in 2017 to enable easier tracking of each step in the supply chain.

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    Voting

    Elections are vulnerable to security threats. Paper ballot voting, which is the most common method used worldwide, is susceptible to human error and fraud. Meanwhile, electronic voting machines are vulnerable to cyberattacks. Voter turnout is also a problem in many countries.

    Blockchain technology can be used to address these problems. It offers enhanced security and immutable records.

    Smartmatic-Cybernetica used blockchain technology for the Utah Republican Party Presidential Candidate Election in 2016. This allowed Republican Party members to vote from 45 different countries.

    In 2018, West Virginia used Voatz’s mobile voting application for overseas voters. The application uses blockchain technology to protect casted votes and ensure immutability.

Benefits, Drawbacks & Risks of the Technology

Blockchain offers many benefits. You can enjoy user privacy and enhanced security. Additionally, it may help lower processing fees and reduce errors.

But, similar to other types of technology, there are also drawbacks. For instance, the cost and power consumption of the technology can be high. There is also uncertainty in its regulatory status.

Before you give blockchain a try, it is important to weigh the pros and cons. Make sure that your choice to use blockchain will help you achieve your goals.

Benefits, Drawbacks & Risks

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Benefits
  • Data integrity: Blocks in a blockchain network are immutable. Once they are linked to the chain, they can no longer be altered. Additionally, a consensus is necessary to ensure the validity of the data.
  • Cost reduction: Expenses related to business transactions are relatively lower in blockchain networks. That is because third-party intermediaries are no longer necessary. Blockchain simplifies processes.
  • Decentralization: Blockchain networks are decentralized. Aside from protecting data from tampering, the technology ensures that audit trails are irreversible. Thus, making it easier to verify and trace information.
  • Transparency: Transaction details are readily available to participants. This allows easy access to important information. That said, only participants in a transaction can see their identifying information.
  • Faster banking alternative: Financial transactions can be completed in a blockchain network. Aside from security, this technology also makes the completion of processes faster, reducing transaction time to minutes or even seconds.
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Drawbacks & Risks
  • Power consumption: Maintaining a blockchain network consumes a lot of power. That is because the ledger is updated in real-time. Additionally, mining activities further increase power consumption.
  • High technology costs: While blockchain promises lower transaction costs, the technology itself can be costly. That is because of the high energy consumption connected to each transaction. Additionally, miners are typically incentivized or paid.
  • Speed and data inefficiency: Adding a new block to the chain can take minutes. That means a network can only manage a few transactions per second. Each network can also accommodate a limited number of blocks.
  • Uncertain regulations: Due to the decentralized nature of blockchain technology, most governments do not consider it a great option. Given that adoption of this technology is also fairly new, there are no regulations in place yet. One major concern is the possibility of blockchain being used for illegal transactions.
  • Redundancy: The computation needs of blockchain technology can be repetitive. Since all nodes in a network must have a copy of the system, they should update their version every time the ledger is updated.

Blockchain FAQs

There are various aspects one should understand to get a grasp of what blockchain is. MoneyGeek answers some frequently asked questions to provide context on some of these concepts.

Experts Insights

Blockchain can be a confusing concept. To help you better understand what blockchain is, MoneyGeek spoke with industry experts.

  1. If blockchain is so useful, why are industries slow to transition to using it?
  2. What changes could end-users potentially see or experience if a service they use regularly switches to blockchain? (consumer banking, real estate, healthcare, etc.)?
  3. Can you share some security/safety tips for consumers who wish to use blockchain networks for financial purposes?
Terry Blau
Terry Blau

Blockchain Developer and Technical Operations Lead at Blockchainsure

Zim Hang
Zim Hang

COO & CMO at Saddle Finance

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About the Author


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Nathan Paulus is the director of content marketing at MoneyGeek. Nathan has been creating content for nearly 10 years and is particularly engaged in personal finance, investing, and property management. He holds a B.A. in English from the University of St. Thomas Houston.