C ryptocurrencies have gone from being a nascent investment to entering the conversation among investors as a legitimate allocation in their portfolios.Whether you trade cryptocurrencies or not, you may be aware that they run on blockchain technology, but there is much more to blockchain tech than just cryptocurrencies.
Before buying any cryptocurrencies, it’s a good idea to learn about the blockchains they are based on.Additionally, you can invest in blockchain tech without necessarily buying cryptocurrencies.
What is blockchain technology? The simplest definition of blockchain tech is that it is a distributed ledger that records data digitally.Blockchain technology is also referred to as distributed ledger technology.In the case of cryptocurrencies, the data that’s being recorded consists of transactions.In its purest form, blockchain technology is decentralized, which means there is no entity formally governing it.
Although the very definition of a blockchain includes decentralization, some cryptocurrencies are somewhat regulated, like Diem, which was proposed by Facebook, now known as Meta Platforms.
Although it hasn’t been launched yet, the Diem cryptocurrency will be governed by the Diem Association if it is ever launched.As a result, some question whether Diem is even a cryptocurrency at all due to its centralized nature.
The primary benefit of blockchain technology is that data recorded on the chain cannot be modified, which makes it perfect for recording transactions.The technology provides complete transparency on whatever data is recorded on the blockchain, creating trust among parties that otherwise have no reason to trust each other.
Hard forks However, decentralization doesn’t mean no one has any control over the blockchain.A team of software engineers must still tweak the code from time to time.
One example of this is when a cryptocurrency has a hard fork, which means it suddenly breaks into two separate cryptocurrencies.
The developers writing the code for the blockchain upon which the cryptocurrency operates may become dissatisfied with the functionalities of that blockchain.As a result, they force a hard fork by radically changing the original blockchain’s protocol to create a new one.
For example, the Bitcoin Cash cryptocurrency was created from a hard fork in the Bitcoin blockchain.
How blockchain technology works Blockchains work like digital databases that store data in encrypted blocks that form a chronological chain.
Since the digital assets on the chain are distributed rather than copied or transferred, they form a transparent source of unalterable truth.Each blockchain offers total integrity of the data recorded on it because it can’t be altered, creating trust in the asset.
Builtin explains how blockchain technology works.Every blockchain is made up of three key components: blocks, nodes and miners.Blocks are linked together, forming a chain, and each block contains data, a 32-bit whole number referred to as a nonce, and a 256-bit number called a hash.
When a new block on the chain is created, the nonce inside the block is randomly generated and then creates a hash.The hash is paired with the nonce and must start with a large number of zeros, making it an extremely small number.
Miners generate new blocks on the chain by mining them.
Every block on the chain has a unique nonce and hash, but it also references the previous block’s hash within the chain, making it difficult to mine a block, especially on large chains.
To find a nonce that generates a new hash, miners use vast amounts of computing power to solve complex math problems.Since every nonce is 32 bits and every hash is 256 bits, miners must mine about 4 billion possible combinations of nonces and hashes before a new one is found.
When they uncover a new block, it’s then added to the chain, and they receive their digital reward.
Blockchains cannot be altered because to do so would require not only re-mining the block that’s being changed buy also all of the blocks that follow it.
Any kind of device that maintains copies of the blockchain and keeps it functioning can be a node.Every node contains a copy of the blockchain, and the network uses algorithms to approve all newly mined blocks on the chain, allowing the chain to be updated, trusted and verified.
Blockchains are decentralized because no one computer can own the entire chain.They are distributed ledgers via the nodes that connect to the chain.Every blockchain is transparent, so it’s possible to check and view every action taken within the ledger.Each participant in the blockchain receives a unique alphanumeric number that shows the transactions they made on the blockchain.
How cryptocurrencies use blockchain technology According to Statista , as of January 2022, there are almost 10,000 cryptocurrencies in existence, and the number continues to grow rapidly.
In December, there were about 7,550 cryptocurrencies.Many of these digital currencies have no following and very few users, but others are widely used, either due to their utility or their popularity as a “meme” cryptocurrency.
Blockchain technology makes cryptocurrencies used as methods of payment immensely secure because every transaction is recorded on the blockchain.If someone tries to change the data in any of the blocks using a particular node, it’s immediately spotted and changed back because the correct data is recorded on all the other nodes in the chain.
When a blockchain like Bitcoin is used to record payments, each block contains data such as the sender and recipient of the payment, date and other identifying information.
However, the data is encrypted, so the names of the sender and recipient are kept private despite the transparency of the blockchain.
In the case of Bitcoin, each user is identified by their address on the network, which is a random string recorded in the blockchain.Only people who have your Bitcoin address can see your transactions, but they cannot identify the owner of that address.
Beyond cryptocurrencies Although cryptocurrencies are the most widely known use of blockchain technology, there are many other ways to use it.Given that it is distributed ledger technology, the potential applications are nearly endless.One of the earliest applications that went beyond cryptocurrencies is occurring on the Ethereum blockchain.
Although ether, the blockchain’s cryptocurrency, is heavily traded as a cryptocurrency, the Ethereum blockchain has plenty of other uses due to the smart contracts it enables.Smart contracts are software programs stored on a blockchain that run whenever pre-set conditions are met.
“The term ‘smart contact’ is misleading and causes confusion because they’re actually more than just contracts,” explained Ryan Boder, core team lead at API3 DAO.“Smart contracts are ‘trustless’ computer programs that run exactly as programmed and, if done correctly, can’t be modified by anyone to cheat the system like traditional software managed by a central company can.”
Smart contracts enable users to automate the execution of an agreement so that every participant is ensured of the outcome.Other than payments, smart contracts can be used in trading and investing, borrowing and lending, supply chain management, construction, gaming, healthcare, real estate, and other applications.
“The biggest limiting factor for smart contracts is that they only exist on blockchains and are isolated from the rest of the world,” Boder added.
“In order for these ‘trustless’ computer programs to be used to build non-cryptocurrency applications, they need to connect to the real world through what we call ‘blockchain oracles.’ Oracles are the most vital component for smart contracts to go mainstream.”
Other potential applications of blockchain technology include decentralized virtual private networks and internet services, voting, electronic medical records, supply chain management, tracking music royalties, and creating real-top operating systems for Internet of Things Devices.Other possibilities include creating a tracking system for anti-money laundering, uses in personal identity security, cybersecurity, and more.
How to invest in blockchain tech The potential uses of blockchain technology are virtually endless, so it’s clear that anyone can invest in it in a variety of ways.The easiest way to invest in blockchain technology is by purchasing cryptocurrencies, a cryptocurrency exchange-traded fund or crypto derivatives.You can also buy stock in companies that have some connection to cryptocurrencies, such as crypto exchange Coinbase or PayPal, which supports crypto transactions.
However, there are ways to invest in blockchain tech without buying cryptocurrencies.
For example, you could look into investing in one of the many private companies that are working on blockchain technology.These private companies are the best pure plays if you want to invest in companies focusing on non-cryptocurrency applications of blockchain technology.
“Pay attention to the utility of blockchain technology in new spaces,” said Dennis Consorte, digital marketing consultant at Consorte Marketing.“For example, Web 3.0 is a movement towards a decentralized web.I would take a hard look at companies that use blockchain technology to connect people in new ways.”
Some examples include Chain.io, which builds cloud blockchain infrastructures for financial services, BurstIQ, which builds big data blockchain contracts for the sharing of medical records, and Propy, a global real estate marketplace with a decentralized system for registering titles.Builtin has an extensive list of private companies working on various applications for blockchain tech.
Another option is Mediachain, which uses smart contracts to track and pay royalties to music artists.
It’s actually owned by the publicly-traded Spotify.
Many cloud stocks could also make good blockchain bets, such as Amazon, Microsoft and Alphabet.Another publicly traded company that has made a name for itself in the blockchain niche is Overstock.com, which expanded heavily into the technology with its subsidiary Medici Ventures.Overstock later spun Medici Ventures off into an investment fund.
Finally, you could invest in one of the large cryptocurrency miners, like Riot Blockchain, or in companies that build components for mining rigs, like NVIDIA.
Final thoughts There’s no denying that blockchain technology is the future.
You could even be investing in blockchains without knowing it, given that the technology has grown rapidly from its nascent start into mainstream conversations at big tech companies.Blockchain technology will probably become the foundation of many daily activities one day.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc..
