The Beauty of Blockchain

Updated: Apr 9, 2021

By Jake Willms, Quantitative Analyst

Cryptocurrency’s acceptance as a store of value has seen a dramatic increase in investing interest. The value of Bitcoin, the most popular cryptocurrency, has risen by almost 800% over the last 12 months, while Ethereum, a major player in the non-fungible token (NFT) industry has soared as well.

Blockchain technology was conceived by Stuart Haber and W. Scott Stornetta, in 1991. But it wasn’t until the advent of Bitcoin in January 2009 that blockchain was used in a commercial setting.

One of the drivers of cryptocurrencies price surge is its use of blockchain technology.

Here is a brief primer of how the blockchain works.

  • Structure – Blockchain is a collection of information that is stored electronically on a computer system (digital database). Like a spreadsheet, blockchain can be used to create ledger that tracks blocks of data. Each block hold sets of information that, when filled, are “chained” to the previous block in chronological order. Each “block” is chained to the previous via powerful mathematical algorithms, that give each block a unique signature that is virtually un-hackable. As a result, blockchain can be used to provide an extremely safe way to track ownership of digital data.

  • Decentralization – Like any other database, a blockchain requires many computers working together to store and maintain all of the information. With a traditional database, the computers are owned by one entity. With a blockchain, the data is stored all across the world on thousands of unique computers (called nodes), each which has the entire history of data.

  • Security – Because there is no singular ownership of blockchain data, it is impossible to compromise it or its contents by hacking. If any one location was hacked in an attempt to steal Bitcoin for example, it would stand out from the others and be quickly identified as incorrect.

It is important to understand that bitcoin is not a blockchain – it merely uses blockchain technology to record a ledger of transactions that is immutable and exact. Because blockchain is decentralized on thousands of computers in all corners of the globe, Blockchain allows Bitcoin and other cryptocurrencies to exist without the need for government backing.

While its use as a way to track the ownership of digital currency has thrusted Bitcoin and other cryptocurrencies into the limelight, because blockchain is a more secure alternative to traditional ledgers and spreadsheets, its commercial applications are almost limitless.

One example of blockchain’s adaptability are non-fungible tokens (NFTs), which have taken the music, art, and collector markets by storm. NFTs use blockchain to create and track digital certificates of authenticity of artwork, videos, tweets or any other item created by celebrity, and that a fan or collector might like to own. Blockchain technology is used to authenticate that the NFT is an original.

The non-fungible token market ballooned over 2020, climbing to a market value of at least $338 million, from about $41 million in 2018and have topped $500 million so far this year. The value proposition comes from owning something unique that is connected to someone famous. In that respect, NFTs are bought and sold on the same idea that baseball cards and stamps autographed sports paraphernalia and the like.

Time will only tell if cryptocurrencies and NFTs are here to stay. However, blockchain is likely to remain with us – until a newer technology makes it obsolete.

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