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Lesson 9: What is Blockchain

Lesson 9: What is Blockchain

Blockchain is the underlying technology that enables the creation of cryptocurrencies. How does a blockchain network work, and what are the main uses of this technology?

Blockchain is a technology that enables companies direct and transparent governance, faster processing, and lower capital requirements. How exactly does a blockchain network work, and what are the main uses of this technology? What is blockchain, and what are the most popular use cases of blockchain technology?

How to use this guide:

  • Learn what is Blockchain and what it means for traders and investors
  • Open a demo account and see how you can gain exposure to the Blockchain technology
  • When ready to open a live trading account and start investing in the Blockchain boom

What is blockchain?

Blockchain technology is the backbone of cryptocurrencies such as Bitcoin and Ethereum. At the most basic level, the blockchain represents a transparent record of all transactions available for everyone. For example, the Bitcoin blockchain contains records of all Bitcoins sent and received. The blockchain technology behind cryptocurrencies makes it possible to transfer cryptocurrency peer-to-peer without the use of a middleman such as a bank or any central authority.

All cryptocurrencies are created on a blockchain network. A blockchain is a distributed database that is shared between the nodes of a computer network and securely stores information in a digital format. Blockchains are unique because they guarantee the security and integrity of data records and can generate trust without the need for trusted third parties.

This digital structure has become very popular for holding lists of digital payments due to its cryptographic nature. You don't have to share any sensitive information when making a Bitcoin transaction. This means that there's almost no chance of your financial information being compromised, or your identity being stolen. At the same time, it allows secure payments between people who aren't acquainted with each other.

How does blockchain work?

Blockchain's goal is to enable digital information to be recorded, distributed, and unable to be edited. A blockchain is an immutable ledger. These are records that cannot be deleted, altered, or destroyed. Blockchains are also known as distributed ledger technology (DLT).

A blockchain's data structure is a key difference from a traditional database. A blockchain gathers information in groups known as blocks. These groups can hold multiple information sets. Each block has a certain storage capacity and is linked to the previous filled block. This creates the chain of data called the blockchain. Any new information following the newly added block is combined into a new block, which will be added to that chain once it has been filled.

A database typically structures its data in tables. However, a blockchain structures its data in chunks (blocks). When these decentralized blocks are chained together, this data structure creates an irreversible timeline of data. Once a block has been filled, it becomes part of the timeline. Every block is assigned a timestamp when it's added to the chain.

How is blockchain used?

Due to the decentralized nature of Bitcoin's blockchain, all recorded transactions can be easily verified by anyone with an internet connection. You can use any of the Bitcoin explorers or a blockchain node to view transactions. Every node has its very own copy of the chain, which is updated every time new blocks are added or confirmed. The use of a blockchain network allows users to remain anonymous while keeping the transparency of all performed transactions.

The records stored on the Bitcoin blockchain are useful for any type of service that requires a secure ledger that registers all transactions. Some of the most popular blockchain use-cases are:

  • Cryptocurrency
  • Banking (financial data recording, money laundry protection etc.)
  • Insurance
  • Supply chain management
  • Copyright management
  • Property ownership
  • Healthcare

Cryptocurrency

Cryptocurrencies were one of the first products of blockchain technology. While most of us know about Bitcoin by now, it is important to recognize that this new financial space would not be possible without the blockchain.

Banking and financial services

Globalization translates to organizations that make cross-border transactions. Blockchain can be used to facilitate secure and efficient cross-border payments by eliminating the need for intermediaries, and many organizations already use it. Ripple and Stellar, for instance, are two of the most popular services for cross-border transactions. These services use blockchain technology to decrease the number of intermediary banks so that individuals or organizations can transfer money internationally faster, more securely, and more efficiently.

But that’s not the only thing that blockchain is used for when it comes to the traditional financial industry. The most developed use case of blockchain revolves around money. Blockchain aids trading systems, capital markets, anti-money laundering protection, and others. It will probably expand even more soon.

Insurance

Insurances are one of the best applications for smart contracts blockchains. Smart contracts enable customers and insurers alike to securely and transparently manage their claims. The blockchain can record all claims and contracts. This would eliminate invalid claims since multiple claims for the same accident would be rejected.

Supply chain management

Blockchain's immutable ledger makes the system well-suited for tasks such as tracking goods in real-time as they move through the supply chain. Companies transporting these goods have many options when using a blockchain. A blockchain's entries can be used for a supply chain to create a queue and assign goods to different shipping containers. Blockchain is a dynamic way to organize tracking data and put it to work.

Copyright management

The blockchain can be used for the storage and categorizing of original works. It is often difficult for authors to find the right tools to catalog their work and prove copyright ownership. Authors may not be able to identify who is using their work. Third parties will need to find out from whom they can obtain a license. Many authors are unable to stop infringements and monetize their work. Blockchain allows copyrights to be created automatically after creating any creative work.

Property and personal data ownership

The government is responsible for keeping records about its citizens (e.g., birth, death, marital status, and property transfers). However, managing these data can be complicated, and some records are only available in paper format. Sometimes, citizens must physically visit their local government offices in order to make any changes. This process is tedious, time-consuming, and often frustrating. Blockchain technology could make this more accessible and secure.

Healthcare

There are many possibilities for blockchain in healthcare. The blockchain can store general health data such as age, gender, and possibly basic medical history data like vital signs or immunization history. None of this data can be used to identify a patient when dissociated. This is why it can be stored on a shared blockchain, where other people can access the information, and there wouldn’t be any privacy concerns.

Blockchain can link medical devices that are connected to the person's health records. The data generated by healthcare blockchains can be stored on devices and attached to the individual’s medical records. One of the major issues with connected medical devices is the data silos, but blockchain can solve that.

And these are only a few examples of how blockchain can be used. There are so many other ingenious use cases for blockchain, which may not necessarily be industry generic but specific to a company. Organizations should look deeply into their operations to determine which blockchain-related benefits are most useful for upgrading their products and services – transparency, governance, security, public accessibility, or immutability/audit.

Advantages of blockchain

Blockchain's potential to be a decentralized record-keeping system is nearly limitless despite its complexity. Blockchain technology could have many other applications than those listed above. It can deliver greater privacy, heightened security, lower processing fees, and fewer errors.

The most notorious advantages of blockchain are:

  • Verification accuracy is improved by eliminating human involvement
  • Eliminating third-party verification to reduce costs
  • Decentralized systems are harder to alter
  • Transactions are private, secure, and efficient
  • Transparent technology
  • This service offers a banking alternative as well as a means to protect the personal information of citizens from countries with underdeveloped or unstable governments.

Disadvantages of Blockchain

As with any technology, there are a few drawbacks when using blockchain technology. Some of the most acknowledged disadvantages of blockchain use are:

  • Cryptocurrencies that use the Proof-of-Work (PoW) consensus mechanism require expensive equipment
  • Transactions per second are low for most blockchains
  • The blockchain holds a history of illicit activity
  • Regulations vary by jurisdiction and can be subject to change at any time
  • Limitations on data storage

How to Invest in Blockchain

You cannot invest in blockchain because it is a system that stores and processes transactions. However, you can invest in cryptocurrencies and companies that use this technology.

Cryptocurrency

The easiest way to invest in the blockchain is to invest in Bitcoin and cryptocurrencies that run off a blockchain.

Bitcoin (BTC) is the first cryptocurrency ever created. To this day, we don’t know its true inventor. All we know is the pseudonym, Satoshi Nakamoto, used to release Bitcoin’s whitepaper and the nickname on BitcoinTalk, the first Bitcoin forum. With a few exceptions, the person running that account completely vanished. The one million Bitcoin mined by Nakamoto remains untouched to this day.

Proshares Bitcoin Strategy ETF (BITO) is the first Bitcoin ETF that offers investors the opportunity to get exposure to bitcoin returns in a simple, transparent, and liquid way. The fund aims to increase capital through managed exposure to futures contracts.

Ethereum (ETH) is the second most popular cryptocurrency. Thanks to its smart contract feature, the Ethereum blockchain can be used to run everything from financial tools to complex databases and games. According to the Ethereum Foundation, Ethereum is much more than a payment system.

Cardano (ADA) is the native currency of the Cardano network. Cardano was created as a rival to the Ethereum network. Cardano's main applications are traceability and identity management. Such applications can simplify and streamline processes that require data from multiple sources. This is useful for monitoring and auditing the manufacturing of a product from its origin to its finished products.

Stellar Lumen (XLM) is the native currency of the Stellar payment network, which aims to unite the world’s financial infrastructure, connecting banks, payment systems, and individuals with near-instant and secure transfers.

Dogecoin (DOGE) started as an internet joke, aiming to mock Bitcoin. It is commonly referred to as a meme coin but has become one of the most valuable cryptocurrencies.

Ripple (XRP) is a cryptocurrency created to power the Ripple money transfer network. Ripple was created to complement the services of traditional banks and aid international money transfers.

Litecoin (LTC) is a cryptocurrency created using the same Bitcoin code and brings some improvements. It is considered the first altcoin, but it lost some of its popularity over the last years.

Tron (TRX), or Tronix, is the native currency of the Tron network. Tron aims to become a decentralized global platform for digital content creators and consumers. Online content creators will be able to earn a living from posting their content to the network without needing any third party to facilitate their exposure.

Polkadot (DOT) is the cryptocurrency powering the Polkadot protocol. The network uses multi-chain technology and aims to address the scalability, interoperability, and governance issues of other existing blockchain networks.

Chainlink (LINK) is the native coin of the Chainlink decentralized oracle network. The protocol is bound to play one important role in implementing real-world blockchain applications. Chainlink uses oracles to translate real-life off-chain data to the network’s smart contracts.

Other cryptocurrencies worth mentioning and researching for potential future investments are AAVE, NEO, Tezos (XTZ), Monero (XMR), DASH, Compound (COMP), NEO, and Yearn.Finance (YFI).

Buy and hold cryptocurrency

Investors who want to take ownership for the long run should consider buying and holding cryptocurrency. This is the type of investment in which you do not need to monitor the asset's price daily, nor do you need to perform technical analysis or look at charts frequently. But even if you choose to invest in cryptocurrency this way, you should be aware of the latest news and check your positions every now and again. However, it takes less time than short-term trading.

Trading through CFDs

Blockchain stocks and ETFs
Source: CAPEX WebTrader

If you want to take advantage of the high volatility of cryptocurrencies or simply want to speculate on the price movement of company stocks that use blockchain, then you might want to trade crypto CFDs.

CFD stands for contract for difference, and it is a derivative product that allows you to speculate on multiple financial markets like cryptos, shares, forex, and indices without owning the underlying assets. CFD trading is a way to trade the difference in price between the time a contract is opened and the time it closes. CFD trading has the main benefit that you can speculate on price movements either way, with your profit or loss depending on how accurate your forecast is. Margin or leverage also reduces the capital required to open a position. However, leverage can increase not only profits but also losses.

With CAPEX you can trade CFDs on +20 top cryptocurrency with zero commission and tight spread, as well as +2.000 international stocks, commodities, funds, and currency pairs in a single trading account.

Blockchain stocks and ETFs

Numerous public companies have incorporated blockchain in their operations and offer services related to blockchain or participate in the cryptocurrency market. While some solely focus on blockchain innovation or cryptocurrencies, others use blockchain-related products and services to enhance an already successful business.

Blockchain ETFs (Exchange-Traded Funds) is an extremely trendy way to invest in hundreds of companies that use blockchain-based strategies.

These blockchain ETFs own stocks of companies using or developing blockchain technology. They are more likely to invest in a wider range of assets than Bitcoin ETFs or crypto ETFs which tend to focus on the price of an individual cryptocurrency. These ETFs invest in hundreds of companies.

Bottom Line

Blockchain is making waves, thanks to many practical applications that have been implemented in recent years. Blockchain is a popular buzzword in many countries, and many investors want to know “What is blockchain?” When learning about blockchain, every investor should know that it will make government and business operations more efficient, secure, and cost-effective. There will be less need for intermediaries.

It is no longer a matter of whether legacy companies will adopt the technology, but a question of when. We see an increase in blockchain use cases, including the popular NFTs and tokenization of assets. It is expected that blockchain technology and its use cases will experience significant growth in the coming decades.

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