Crypto 101: What Is Blockchain and How Does It Work With Crypto? – Ally Bank

Our site works better with JavaScript enabled. Learn how to turn it on in your browser.

Cryptocurrency continues to be a hot topic in financial circles. Whether you hear about it via news headlines or in a subreddit you check daily, you may be considering investing in it … even if you’re unsure how it works.
If this sounds like you, learning about blockchain can be a great place to start. Blockchain is the core technology behind Bitcoin and several (though not all) cryptocurrencies. With its ever-increasing list of uses, blockchain has the potential to change the financial world and beyond.
Read more: What Is Cryptocurrency? Decoding Digital Currencies
A blockchain is a decentralized digital ledger that records transactions in one continuous record (hence, “chain”). It’s maintained across multiple computers (a.k.a. nodes) that are linked in a connected network and can be operated by institutions or individuals. This network of linked nodes helps make the blockchain difficult to hack or alter, thus offering a relatively secure way for individuals to deal directly with one another, without a go-between like the government, bank or third party.
Although it was developed to support Bitcoin, blockchain technology is also the power behind many cryptocurrencies, and it has numerous applications outside of digital currency. You might have heard of blockchain for property sales, medical records, legal contracts and any other industry that requires you to record and authorize a series of actions or transactions.
Blockchain technology allows you to record and distribute digital information (and transactions) without being able to edit them. The transaction sequence typically consists of the following steps:
Blockchain and Bitcoin are two separate things, but they are closely related. Without getting into the nitty gritty, Bitcoin is a type of digital currency, while blockchain is a ledger for recording and tracking transactions and assets. Bitcoin is powered by blockchain technology, but blockchain has found many uses beyond Bitcoin.
When Bitcoin was released as open-source code back in 2008, blockchain was foundational to its technology. Since Bitcoin was the first application of blockchain, people often confuse the two, using “Bitcoin” to mean blockchain. But don’t let that throw you off! Remember, you just learned the difference between the two.
Simply put, blockchain is a record-keeping technology, and its uses are ever-growing across a variety of industries. It’s a decentralized, digital ledger that records transactions and tracks assets, and is maintained by a linked network of computers (“nodes”). This network of nodes also helps keep the ledger secure because each separate node must validate a transaction before it can be recorded on the blockchain.
Why “blockchain”? Once a transaction is validated by every computer in the network, the information is contained in a “block” of data. Each block is then chained together, creating a chronological “blockchain” of historical transactions.
All network participants have access to this shared ledger and its transaction history, which can’t be altered. With this distributed ledger, transactions are recorded only once, ensuring there aren’t any version control issues that sometimes exist with traditional business networks.
Related: What Is an NFT?
You can’t alter or meddle with a blockchain transaction after it’s been recorded. This is because the other computers in the network would reject any alterations as invalid since the changes wouldn’t match the existing records. In the event of a true error, a new transaction would be added and validated by the network of computers to reverse the error, and both the new and old transactions would then be visible across the shared ledger.
This set of rules stored on the blockchain and executed automatically speeds up transactions. Smart contracts are simply programs stored on a blockchain that run when predefined conditions are met.
You can characterize all blockchains as permissionless, permissioned or both.
Permissionless blockchains allow any user to join the blockchain and become a “node” of the network. These types of blockchains don’t restrict the rights of nodes on the blockchain network.
Pro tip: You might have heard that permissionless blockchains are entirely anonymous, but that’s only the case if there is absolutely no link between you and your wallet address (for instance, your IP or email).
On the other hand, permissioned blockchains control access to the network and may also restrict access of nodes that join. The identities of the users of a permissioned blockchain are known to other users on that network.
Public, hybrid, private and consortium are the four types that describe the variety of ways that you can build a blockchain network.
One of the most innovative things about public blockchains is that everyone in the world has equal rights to view, send transactions, be included and participate in the verification process. It’s worth noting they are also completely decentralized.
The many supporters of public blockchains are drawn to them because of their anonymity. Since they are open, many organizations are likely to adopt them without third-party verification. Currently, public blockchains are primarily used for the exchange and mining of cryptocurrency. Some popular public blockchains you likely have heard of include the networks behind Bitcoin and Ethereum.
Also known as managed blockchains, private blockchains are permissioned blockchains controlled by a single organization. The central authority determines who can join the network and gives each member of the network equal functional access and rights. Private blockchains are only partially decentralized as public access is restricted.
Unlike private blockchains, consortium blockchains are permissioned blockchains governed by a group of organizations rather than a single institution. They enjoy more decentralization, which gives them higher levels of security.
Setting up a consortium isn’t easy, though, as it requires cooperation between several organizations.
Hybrid blockchains are digital registries controlled by a single organization, but with a level of oversight from the public blockchain required for specific transaction validations.
The more decentralized and widely distributed the blockchain becomes, the more secure it is. With many digital “eyes” watching and validating, the shared record is trickier to manipulate.
Read more: What Do Experts Think About Crypto? 3 Investors Weigh in
By offering transparency and verified trust, the applications of blockchain technology continue to grow well beyond the world of cryptocurrency. Blockchain tech is already being used across industries — for instance, in healthcare to maintain patient information, in supply chain management to track shipments, and even in estate planning to record wills.
This continually growing list of use cases for this innovative digital ledger show that blockchain is poised to vastly change how we live and work.
Looking for more on cryptocurrencies?
Take a Closer Look at Crypto
This icon indicates a link to a third party website not operated by Ally Bank or Ally. We are not responsible for the products, services or information you may find or provide there. Also, you should read and understand how that site’s privacy policy, level of security and terms and conditions may impact you.
bart r. on February 25, 2022 at 3:32pm
Great and excellent info for CRYPTO INVESTING!
Ally on February 25, 2022 at 3:33pm
Thanks for reading, Bart!
A few things you should know
The information contained in this article is provided for general informational purposes, and should not be construed as investment advice, tax advice, a solicitation or offer, or a recommendation to buy or sell any security. Ally Invest does not provide tax advice and does not represent in any manner that the outcomes described herein will result in any particular tax consequence.
Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances.
Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in loss. While the data Ally Invest uses from third parties is believed to be reliable, Ally Invest cannot ensure the accuracy or completeness of data provided by clients or third parties.
Options involve risk and are not suitable for all investors. Review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment or more in a relatively short period of time.
Trading on margin involves risk. You can lose more funds than you deposit in a margin account. Please review Margin Account Agreement and Disclosure for more information regarding margin trading.
Securities products and services are offered through Ally Invest Securities LLC, member FINRA/ SIPC. You can find background on Ally Invest Securities at FINRA’s BrokerCheck. View Securities Disclosures
Advisory services are offered through Ally Invest Advisors Inc., a registered investment adviser. View Advisory Disclosures
Ally Invest Advisors, Ally Invest Securities, and Ally Invest Forex LLC are wholly owned subsidiaries of Ally Invest Group Inc. Ally Bank and Ally Invest Group are wholly owned subsidiaries of Ally Financial Inc. Securities products are NOT FDIC INSURED, NOT BANK GUARANTEED, and MAY LOSE VALUE.
Foreign exchange (Forex) products and services are offered to self-directed investors through Ally Invest Forex. NFA Member (ID #0408077), who acts as an introducing broker to GAIN Capital Group, LLC (“GAIN Capital”), a registered FCM/RFED and NFA Member (ID #0339826). Forex accounts are held and maintained at GAIN Capital. Forex accounts are NOT PROTECTED by the SIPC. View Forex Disclosures
Ally Financial Inc. (NYSE: ALLY) is a leading digital financial services company, NMLS ID 3015. Ally Bank, the company’s direct banking subsidiary, offers an array of deposit, personal lending and mortgage products and services. Ally Bank is a Member FDIC and Equal Housing Lender , NMLS ID 181005. Credit products and any applicable Mortgage credit and collateral are subject to approval and additional terms and conditions apply. Programs, rates and terms and conditions are subject to change at any time without notice.
Ally Servicing LLC, NMLS ID 212403 is a subsidiary of Ally Financial Inc.
Ally and Do It Right are registered service marks of Ally Financial Inc.
App Store is a service mark of Apple Inc. Google Play is a trademark of Google Inc.
Zelle and the Zelle related marks are wholly owned by Early Warning Services, LLC and are used herein under license.
From MONEY. © 2021 Ad Practitioners, LLC. All rights reserved. Used under license.
©2009–2022 Ally Financial Inc.
©2009–2022 Ally Financial Inc.
Options involve risk and are not suitable for all investors. Options investors may lose the entire amount of their investment in a relatively short period of time.
Prior to buying or selling options, investors must read the Characteristics and Risks of Standardized Options brochure (17.8 MB PDF), also known as the options disclosure document. It explains in more detail the characteristics and risks of exchange traded options.
November 2012 Supplement (PDF)
October 2018 Supplement (PDF)
You can also request a printed version by calling us at 1-855-880-2559.

source