Blockchain technology isn’t a totally new idea, but it also isn’t something that everybody’s 100% confident in their understanding of either. Learn everything you need to know about what blockchain is, how it works, the different types, and which applications use it. We’re even covering the benefits of using blockchain technology, and how to update your Estate Plan to protect yourself and your estate.
What is Blockchain Technology?
Blockchain technology is a complex software system that creates a permanent record of transactions. Transactional data records are an unchangeable encrypted file called a “hash,” which includes a timestamp. Transactions are collected to form a certain data file size, called a block. Completed blocks are added to each other in sequence to create a blockchain.
What is a Blockchain?
A blockchain is a digital system of recording information with encryption that makes it nearly impossible to change, cheat or hack. Every participant has access to a copy of the entire blockchain, which updates as new blocks get added to the chain. Participants in public blockchains may remain anonymous. No trust between any parties is needed to rely on the blockchain’s accuracy.
How Does Blockchain Work?
A blockchain is a database that stores information in blocks linked together in the order of the blocks’ creation. Once a block of data is added to the blockchain, it becomes a part of a permanent, unchangeable record, organized in chronological order.
A decentralized blockchain replicates on a peer-to-peer basis. Anyone on the network can view the entire blockchain. Many participants, called “miners,” receive a reward for creating an accepted block of new transactions. Each block references the hash of the block that came before it. A decentralized blockchain is immutable. After a block is added to a blockchain, it cannot change.
Types of Blockchain
The most common and well-known use of blockchain technology is to create permanent records of cryptocurrency transactions. However, innovative uses of blockchains can include any data in many formats for unique blockchain applications. There are four general blockchain categories:
1. Public
The original invention of blockchain is the public blockchain used to record Bitcoin transactions. Public blockchains use distributed ledger technology that’s open-source code. The encrypted ledger database does not store in one place. It’s distributed peer-to-peer to everyone on the network. A public blockchain uses an algorithm that creates consensus with either proof of work (computations needed to add a block to the chain) or proof of stake (financially guaranteeing a transaction). Public blockchains support cryptocurrencies, smart contracts and creating public records of ownership.
2. Private
A private blockchain uses the same blockchain technology used for a public one. The only difference between public and private is that the users of a private blockchain are restricted. Private blockchains lose many of the features public ones maintain. They require trust and working with centralized nodes. They usually use proprietary software coding, and users are not anonymous.
3. Hybrid
A hybrid blockchain is a combination of a public and private one. The network administrators of a hybrid blockchain decide who can access information stored on the blockchain and what part of the database information is made public. Typically, transactions are not made public but can be verified as required, such as needed for a smart contract.
4. Consortium
A consortium blockchain is like a hybrid blockchain because it has public and private features. In a consortium, organizations collaborate to operate a decentralized blockchain, which offers limited access to members of a certain group.
What Applications Use Blockchain?
The use of blockchain technology is expanding with many exciting new applications, including:
Non-Fungible Tokens (NFTs): An NFT is a unique data file stored on a blockchain. The NFT could be a piece of artwork, a photo, a video or even a song. NFTs offer verifiable public proof of ownership.
Money Transfer: Blockchain technology enables secure, fast, cross-border money transfers.
Real Estate Transactions: The process of title transfer of real estate and secured document archiving improves using blockchain technology with much more efficiency and lower cost.
Smart Contracts: Smart contracts are like regular contracts, except the terms are enforced in real-time and recorded on the blockchain.
Transportation Logistics: A blockchain creates a digital ledger of shipments that improves the integrity of transportation transactions.
Medical Records: Blockchain technology can provide secure transfer of medical records between health providers.
Those are just a few examples of the many new ways that blockchain technology is useful.
Blockchain vs. Bitcoin
On January 3, 2006, the first Bitcoin came into being. This transaction was part of the first block that started the Bitcoin blockchain. Bitcoin is the world’s first cryptocurrency. Blockchain technology is the open-source software programming used to create the distributed ledger as a permanent record of every transaction made with Bitcoin.
Blockchain technology serves as the accounting method used to create the Bitcoin system that tracks the buying, selling, creation and transfer of Bitcoin between parties. Bitcoin would not exist without blockchain technology. However, it’s not at all limited to its use with Bitcoin.
Why Use Blockchain Technology
There are many benefits of using blockchain technology. It’s continued deployment in innovative ways is astounding. There are pros and cons of blockchain, but the cons are related to the limitations of certain applications, not blockchain technology as a whole.
For example, Bitcoin is not useful for processing small payment transactions due to its slow transaction speed and the high cost of each transaction. Nevertheless, the pros of using blockchain in a myriad of ways are more substantial than the cons.
Here are some of the pros of blockchain technology:
Historical Record: A blockchain creates a permanent historical record of every transaction.
Decentralization: A blockchain distributed ledger shared over a peer-to-peer public network does not have any central authority or centralized database that a hacker could attack. This system design provides greater security for transaction records.
Open-Source: Public blockchain technology uses open-source software code so that anyone can see how the program works. Blockchain technology is constantly under improvement by open-source blockchain developers.
Smart Contracts: Blockchain technology is a terrific way to record contract performances and release payments automatically when the contract provisions are complete.
Documentation of Ownership: Blockchain is a good technology for creating a public record of ownership.
Trust Not Required: Parties using blockchain technology don’t have to place trust in anyone. They don’t even need to know the identity of the other party to conduct a transaction.
Disintermediation of Gatekeepers: Blockchain technology replaces the need for intermediaries and is especially useful when these functions are complex, involve lots of paperwork, are time-consuming and are expensive, such as using an escrow for buying a property or arranging a contract to import goods.
Secure Transactions with Multiple Parties: The added security of a blockchain conglomerate system adds beneficial functionality to complex transactions involving multiple parties as members of a private blockchain system.
Update Your Estate Plan to Include Digital Assets Today
Including your digital assets like blockchain in your Estate Plan is essential in order to protect yourself, your estate, and your legacy. Now that you know more about the benefits of blockchain technology, you’re ready to ensure that you’ve properly included your cryptocurrency in your Will or Trust today.
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