Blockchain is a digital database used to store data for crypto transactions and other assets - here's how it works

• Blockchain is a decentralized, digital database that stores transactions and other forms of data.
• Key blockchain features include immutable records, distributed ledger security, and smart contracts.
• Blockchain has many other uses outside of cryptocurrencies.

It's almost impossible to say "cryptocurrency" without mentioning blockchain technology. Blockchain securely stores segments of data through a self-managing, peer-to-peer (P2P) network of computers. And some of its key components include irreversible records (i.e., unchangeable blocks of data), decentralized transactions, and smart contracts.

But blockchain technology also has many other uses beyond cryptocurrencies like bitcoin and ethereum. Here's how blockchain works - along with a closer look at both its pros and cons and potential applications.

What is blockchain?

Blockchain is a digital database that stores "blocks" of data in chronological order. These blocks are linked together on what's known as the "chain," and unlike traditional databases that utilize a third party or intermediary, blockchain is completely decentralized.

This means that no third parties can monitor or interfere with transactions. The blockchain system is basically self-regulating, thanks to a P2P computer network of nodes (i.e., individual computers) that verify all new data and distribute cross-network copies of the blockchain to keep it secure.

"Blockchains are made of, well, blocks," explains Lorien Gabel, co-founder and Chief Executive Officer of Figment.io. "Each block contains a timestamp, transaction data, and a mathematical function from the previous block. Computers that mine blocks or run validating nodes that sign blocks will include that mathematical function - called a cryptographic hash - from the previous block into the current block to form a chain."

Quick tip: Blockchain is not to be confused with bitcoin. Bitcoin transactions wouldn't be possible without blockchain technology, but the two are completely different. While bitcoin is a tradeable digital currency, blockchain is merely the underlying technology that makes secure transactions possible for bitcoin (and other cryptocurrencies).

Understanding how blockchain works

Cryptocurrencies would essentially be nonexistent without blockchain. This technology relies on a distributed ledger that keeps a record of all past, present, and future data (e.g., transactions or accounts).

"A blockchain is commonly used to build a distributed ledger. Ledgers track accounting transactions and accounts - we can think of it as a database that stores information. Distributed ledgers don't have to be on a blockchain to be considered 'distributed,' they just have to be shared with other computers on the network," says Gabel.

But several other features separate blockchain technology from traditional databases controlled by financial institutions. These include immutable, or unchanging, records and smart contracts.

Each transaction that the nodes add to the blockchain is permanent. So once the computer network verifies the data and adds it as a new block, that record is permanent. And this serves much more important purposes beyond simply keeping the system running.

"Transactions are irreversible, permanently recorded, and available for everyone to see. It's challenging and complicated for any one actor to change or falsify data recorded on a ledger," explains Gabel.

In order to change the data on the ledger and have the modified chain become the majority chain, someone would have to both alter their duplicate of the ledger while adjusting at least 51% of other users' copies of the database. Therefore, the immutable records component makes it extremely difficult to hack the system.

"[A smart contract] is a self-executing contract with the terms of the agreement directly written into lines of code on the Blockchain," Gabel explains. This allows them to execute once the terms are met.

But as for the blockchain process, here's how it works: Whenever a new transaction takes place (e.g., a bitcoin or ether buy order), that data is sent to a network of computers (nodes) that solve math equations to validate the transaction.

Related Article Module: How a Bitcoin wallet gives you more security and control over your digital assets

If the transaction is rejected, it won't show up on the blockchain. But if it's confirmed, the nodes will add the data as a new block on the ledger, chaining it to the prior blocks (and the ones that follow) to maintain the chain's security. Once this step is done the transaction is complete.

How is blockchain used?

Cryptocurrency is likely the first thought many people have when it comes to blockchain, but this technology has many other uses:

• Banking and finance: Blockchain has many uses for money transfers, especially for fiat currencies (e.g., USD, EUR, or JPY) that individuals typically exchange through financial institutions like banks or payment services.
• Currency: This is perhaps one of the most well-known uses of blockchain technology. The blockchain stores data for all cryptocurrency exchanges.
• Healthcare: Blockchain has several applications within the medical industry. It can be used to secure medical records, healthcare data, and other related electronic records.
• Records of property: Whether it be property deeds or other assets, this technology can additionally validate property transactions between two parties.
• Voting: Though not currently in effect, the idea of using blockchain to improve the voting process has become a topic of discussion. Arguments in favor urge that it could prevent voter fraud and offer a simpler way of counting votes. Those against it insist that such a system could pose national security concerns.

Quick tip: Since blockchain isn't a digital currency, you can't directly invest in it. But you can still gain portfolio exposure by investing in the stocks of blockchain companies or platforms that offer cryptocurrency products.

"Blockchain technology provides a solution to the challenges of storing, managing, and protecting data. It provides a useful and secure way of authenticating information, identities, transactions, and more, creating a secure ledger that can be updated in real-time," says Gabel.

Pros and cons of blockchain

Blockchain has several uses, including cryptocurrency transactions, fiat transfers, and more. However, there are also pros and cons to consider.

There are many perks to blockchain-secured transactions. Its efficiency, security, and lack of intermediaries can make it an ideal option for those looking to safely store a range of data.

However, since there's no centralized party to govern the database, you can never recover any assets if you lose your private key. This is important to keep in mind if you'd like to take advantage of blockchain-powered transactions.

The financial takeaway

Blockchain technology utilizes a P2P network of computers to securely process and store transactions in a digital database. Unlike traditional databases that rely on central authorities, blockchain completely removes the need for intermediaries.

Security is another major component of blockchain technology. Some of its key features - including immutable records and smart contracts - work to keep all data secure.

Overall, blockchain technology has many uses in both the crypto world and beyond, but it's important to understand how it works before you utilize it.

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