As the digital asset space continues to heat up, I believe it’s important to share some knowledge on blockchain technology. Blockchain is the internal mechanism that secures almost all digital assets, including Bitcoin and Ethereum.

What is a Blockchain?

A blockchain is a distributed database or ledger shared amongst a computer network’s nodes (individual computers). While blockchain is best known for the vital role it plays in digital asset systems – by maintaining a secure and decentralized record of transactions – the technology has various potential applications (which we’ll explore later in this article). Blockchains can be used to make data in any industry immutable, or unable to be changed.

Blockchain technology facilitates the recording of transactions and tracking of assets in a business network. In this case, an asset can be tangible (i.e. a house, car, land) or intangible (i.e. intellectual property, copyrights, patents).

Since Bitcoin’s introduction in 2009, use cases have rapidly increased in the digital asset space via the creation of scores of cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.

How Does a Blockchain Work?

A blockchain shares some similarities with a spreadsheet in that it is a database where information is entered and stored. The fundamental difference between a traditional database and a blockchain is the way in which the data is structured and accessed.

A blockchain is made up of programs called scripts. These scripts carry out the tasks you would carry out in any typical database, like entering and accessing information, and saving/storing it somewhere. A blockchain is distributed, meaning multiple copies are saved on numerous machines. In order for it to be valid, all of these copies must match.

The blockchain collects transaction information and enters it into a block. Think of a block like a cell in a spreadsheet. Once the block is full, the information is run through an encryption algorithm. The algorithm creates a hexadecimal number called the “hash.” Note that a hexadecimal number is comprised of 16 symbols (0, 1, 2, 3, 4, 5, 6, 7, 8, 9, A, B, C, D, E, and F). After the hash is created, it’s entered into the block header that follows and encrypted with other information in the block. The result is a series of blocks that are chained together, hence the name “blockchain.”

You may have heard “proof-of-work” mentioned before with respect to blockchain technology. Miners – or those who use a computer to solve the hashes and add them to the blockchain – must generate random hashes until a specific value is found and “proves” that the miner did the work. The amount of work it takes to validate the hash is why bitcoin mining consumes so much energy.

Three Core Features of Blockchain Technology

Decentralization

Rather than being maintained in one location by a central administrator (i.e. an Excel spreadsheet), identical copies of a blockchain database are held on many computers that are spread out across a network. The individual computers are known as “nodes,” and thousands of nodes can be active at one time on the same chain.

Transparency

All transactions can be viewed in one of two ways: 1) either by having a personal node; or 2) using blockchain explorers. A blockchain explorer allows anyone to see transactions live as they occur. Simply put, this means that you’re able to track a singular bitcoin wherever it goes. Since the records are encrypted, blockchain users can remain anonymous while still preserving transparency.

Check out a block explorer here: blockchain.com

Security

Security comes via the fact that a new block is always stored linearly and chronologically, meaning they are added to the “end” of the blockchain. After a block has been added to the end of the blockchain, previous blocks cannot be altered.

Note: Not all blockchains are 100% impenetrable. They are distributed ledgers that use code to create the level of security. If there are vulnerabilities in the code, they can be exploited.

Pros and Cons of Blockchain Technology

Pros

• Increased accuracy as human involvement in verification is not necessary
• Elimination of third-party verification reduces costs
• Decentralization makes tampering more difficult
• Secure, private, and efficient transactions
• Technology is transparent
• Provides an alternative to banking and a means to securely store personal information for countries with unstable governments

Cons

• Some blockchains are associated with significant technology cost
• Transactions per second are considered low
• A history of usage for illegal and unlawful activities (i.e. dark web)
• Regulation varies and the future regulatory environment remains uncertain
• There are data storage limitations

Potential Applications of Blockchain Outside of Digital Assets

Blockchain has proven to be a dependable method of storing data in many types of transactions outside of digital assets. Potential applications include:

• Banking
• Healthcare
• Property Records
• Smart Contracts
• Supply Chains
• Voting

Want to Learn More About Digital Assets?

At Crossover Capital, our number one goal is to provide people with the support, knowledge, and access to make informed decisions about their financial futures. Building a foundation for success starts with steady support and a customized approach. Crossover Capital is here to provide the necessary tools we believe are required for growth and to be a champion for our clients’ success.

If you want to receive tools, knowledge, and digital asset insights delivered directly to your inbox once a month, subscribe here.

Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.

Crossover Capital may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Crossover Capital will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.