What is Blockchain? Understanding the Basics of This Revolutionary Technology.
Are you familiar with the term "blockchain"? If not, you're not alone. Despite its growing popularity, many people are still unsure what blockchain is and how it works. In this article, we'll break down the basics of blockchain technology and explain why it's become such a game-changer.
Blockchain is a distributed database that is shared among nodes in a computer network. As a database, blockchain stores information electronically in digital form. Blockchains are well known for their important role in cryptocurrency systems like Bitcoin to maintain secure and decentralized transaction records. Blockchain innovation ensures the accuracy and security of data recording and instills trust without needing a trusted third party.
The main difference between a regular database and a blockchain is how the data is structured. Blockchain collects information in groups known as blocks, which contain a collection of information. Blocks have a specific storage capacity, and when filled, they close and connect to the previously filled block, creating a data chain known as a blockchain. Any new information after a newly added block is compiled into a freshly formed block, which is then added to the chain after it has been populated.
Databases usually organize their data in tables, whereas blockchains, as the name suggests, manage their data in organized chunks (blocks). This data structure is inherently immutable when data is decentralized. When a block is filled, it is embedded in the rock and becomes part of this timeline. Each block in the circuit is given an accurate timestamp as it is added to the circuit.
How does blockchain work?
Blockchain technology relies on a network of computers to validate transactions and maintain the integrity of the ledger. Each computer on the network (known as a node) has a copy of the ledger and works together to verify new transactions. When a new transaction is initiated, it is broadcast to the entire network. The nodes then use complex algorithms to validate the transaction and add it to the blockchain.
Is blockchain secure?
Blockchain technology achieves decentralized security and trust in several ways. First, new blocks are always stored linearly and chronologically at first. They are always added at the “end” of the blockchain. Once a block is added to the end of the blockchain, it is complicated to go back and change the block’s content unless most of the network has agreed to it.
This is because each block contains its hash, along with the hash of the previous block, as well as the timestamp mentioned above. A mathematical function creates a hash code that converts digital information into a sequence of numbers and letters. If this information is edited in any way, the hash code will also change.
Let’s say a hacker who also manages a node in a blockchain network wants to change the blockchain and steal cryptocurrency from other people. If they had to change their single copy, it would no longer match anyone else’s copy. When everyone passed their copies to each other, they saw that one copy caught the eye, and this hacked version of the chain was deemed invalid.
The success of such a hack would require the hacker to simultaneously control and modify 51% or more copies of the blockchain so that their new copy becomes the majority copy and, thus, the agreed chain. Such an attack would also cost a lot of money and resources as they would have to rework all the blocks as they would now have different timestamps and hash codes.
Due to the size of many cryptocurrency networks and their rapid growth, the cost of doing so will likely be prohibitive. It would not only be costly but also pointless. This will not go unnoticed as network members will see such drastic changes in the blockchain. Then it will be difficult for network members to switch to a new version of the chain that is not affected.
This results in a severe depreciation of the attacked version of the token, which ultimately renders the attack meaningless as the attacker controls useless assets. The same thing happens when bad actors attack new Bitcoin forks. It is set up so that participating in the network is more economically stimulating than attacking it.
How is blockchain used?
As we already know, blocks on the Bitcoin blockchain store data related to monetary transactions. Currently, more than 10,000 other cryptocurrency systems run on the blockchain. But blockchain is a reliable way to store data for different types of transactions.
Some companies that have integrated blockchain are Walmart, Pfizer, AIG, Siemens, Unilever, and many others. For example, IBM developed the Food Trust blockchain to track the path groceries take to reach their location.
Why did they do that? Numerous outbreaks of E. coli, Salmonella, and Listeria have been reported in the food industry, as well as the accidental introduction of harmful substances into food. In the past, it took weeks to find the source of this outbreak or the cause of the disease based on people’s diets. Using blockchain allows brands to track a food product’s journey from its origin, through each stop, to its delivery.
So if food is contaminated, it can be traced back to its source from every visit. Not only that, these companies can now see anything else they may have contacted, which can help identify issues more quickly and potentially save lives. This is an example of a real-world blockchain, but many other forms of blockchain implementation exist.
Banking and finance
There is no longer an industry that will benefit from integrating blockchain into its banking operations. Financial institutions only work during business hours, usually five days a week. If you try to cash a check at 6 pm on a Friday, you may have to wait until Monday morning to see the money in your account. Even if you deposit during business hours, it can still take one to three days to verify the transaction due to the large volume of transactions the bank has to process.
Blockchain, on the other hand, never sleeps.By integrating blockchain with banks, users can see their transactions processed in just 10 minutes — essentially, the time it takes to add blockchain to the blockchain, regardless of the holiday, time of day, or week. With blockchain, banks also can exchange funds between institutions faster and more securely.
In exchange trading, for example, the settlement and clearing process can take up to three days (or longer in international trade), meaning funds and shares are frozen. Given the amount, even a few days of transporting the money can result in considerable costs and risks for the bank.
Blockchain forms the basis for cryptocurrencies like Bitcoin. The Federal Reserve controls the US dollar. Under this system of central authority, consumer data and currency are technically at the whim of their bank or government.
If a consumer bank is hacked, the customer’s personal information is at risk. If the customer’s bank fails or the customer lives in a country with an unstable government, the value of their currency may be at risk. In 2008 several bankrupt banks were rescued – some with tax money. This is the concern that first conceived and developed Bitcoin.
By extending its operations to computer networks, blockchain allows Bitcoin and other cryptocurrencies to operate without a central authority. This reduces risk and eliminates a lot of processing and transaction fees. It can also offer countries with volatile currencies or a more stable currency financial infrastructure with more applications and a more comprehensive network of individuals and institutions to do business with domestically and internationally.
Using a cryptocurrency portfolio for a savings account or as a form of payment is especially important for those who still need an official ID. Some countries may be engulfed in war or have governments that have no real identification infrastructure. The nationals of those countries may need access to savings or brokerage accounts and, therefore, no way to keep assets safe.
Healthcare providers can use blockchain to store their patients’ medical records securely. When medical records are created and signed, they can be recorded on the blockchain, providing evidence and peace of mind to patients that they cannot be changed. In addition, these private health records can be encrypted and stored on a private key blockchain, making them accessible only to specific individuals, thus ensuring confidentiality.
If you’ve ever spent time in your local clerk’s office, you know that the property registration process could be more efficient and efficient. Today, physical measures must be submitted to officers at the local registry office, where they are manually entered into the central database and the district general register.
Property claims must be compared with the general register in a property dispute. This process is expensive, time-consuming, and prone to human error, with any inaccuracies making property tracking less effective. Blockchain can eliminate the need to scan documents and track physical files at local record offices. If property ownership is stored and verified on the blockchain, owners can rest assured that their deed is properly and permanently registered.
In a war-torn country or region with no government or financial infrastructure and no registry office, proving property ownership is nearly impossible. When a group of people living in such an area can use the blockchain, transparent and clear ownership requirements can be established.
Smart contracts are computer codes embedded in the blockchain to activate, verify, or negotiate contractual agreements. Smart contracts work under a set of consumer-approved conditions. When these conditions are met, the terms of the agreement are automatically met.
For example, a potential tenant may want to rent an apartment through a smart contract. The landlord undertakes to provide the tenant with the code on the apartment door as soon as the tenant has paid the security deposit. The tenant and the landlord send their share of the transaction to the smart contract, which stores and automatically exchanges the door code for a deposit on the day the lease begins.
The smart contract will return the deposit if the owner does not provide the door code on the rental date. This will eliminate the costs and litigation typically associated with hiring a notary, third-party agent, or attorney.
As in the IBM Food Trust example, suppliers can use blockchain to record the origin of the ingredients they buy. This means that companies can not only check the authenticity of their products but also standard labels such as “organic,” “regional,” and “fair trade.” According to Forbes, the food industry increasingly uses blockchain to track road and food safety from farm to branch.
As mentioned above, blockchain can be used to enable modern voting systems. As a result, blockchain elections can potentially eliminate voter fraud and increase voter turnout, as tested in the November 2018 West Virginia midterm elections. Using blockchain in this way would make it nearly impossible to fake votes.
The blockchain protocol will also maintain transparency in the voting process, reduce the number of staff required to conduct elections and provide staff with near-instant results. This will eliminate the need for a recount or the fear that fraud could jeopardize the election.
Advantages and disadvantages of blockchain
Despite all its complexity, the potential of blockchain as a form of decentralized recording is almost limitless. From greater user privacy and increased security to lower processing costs and fewer errors, blockchain technology may see applications beyond those outlined above. But there are some drawbacks.
|Improved accuracy by eliminating human involvement in inspections||Significant technological costs associated with Bitcoin mining|
|Reduce costs by eliminating third-party verification||Low transactions per second|
|Decentralization makes manipulation more difficult||History of use in illegal activities like the dark web|
|Safe, private, and efficient transactions||Regulations vary by jurisdiction and remain uncertain|
|Transparent technology||Data Storage Limits|
|Provide banking alternatives and ways to protect personal information for citizens with unstable or underdeveloped governments|
A network approves blockchain transactions of thousands of computers. This eliminates almost all human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network makes a calculation error, the error is only allowed up to one copy of the blockchain.
To propagate this glitch across the blockchain, it would need to be done by at least 51% of the computers on the network – almost impossible for a large and growing Bitcoin-sized network.6
Usually, the consumer pays the bank to confirm the transaction, the notary to sign the document, or the minister to marry. Blockchain eliminates the need for third-party verification and its associated costs. For example, business owners receive a small fee for credit card payments because banks and payment processing companies need to process these transactions. Bitcoin, on the other hand, has no central authority and has limited transaction fees.
Blockchain does not store any information in a central location. Instead, blockchain is copied and distributed across computer networks. Whenever a new block is added to the blockchain, every computer on the web updates its blockchain to reflect the changes.
By spreading this information across the network instead of storing it in a central database, blockchains become more difficult to forge. If a copy of the blockchain falls into the hands of a hacker, only one copy of the information, not the entire network, is compromised.
Processing of transactions by a central authority may take up to several days. For example, if you try to deposit a check on a Friday night, you may see the money in your account on Monday morning. While financial institutions operate during business hours, typically five days a week, blockchain works 24 hours a day, seven days a week, 365 days a year.
Transactions can be completed in just 10 minutes and can be considered secure in just a few hours. This is especially useful for cross-border transactions, which usually take longer due to time zone issues, and all parties need to confirm payment processing.
Many blockchain networks act as public databases, meaning anyone with an internet connection can view a list of the network’s transaction history. Although users have access to transaction details, they do not have access to identifying information about the user who made the transaction.
A common misconception is that blockchain networks like Bitcoin are anonymous when they are only secret. When users make a public transaction, their unique code — the public key, as mentioned earlier — is written to the blockchain.
However, your personal information is not like that. For example, suppose someone has made a Bitcoin purchase on an exchange that requires identification. In that case, that individual’s identity is still tied to their blockchain address, but the transaction, even though it’s tied to the individual’s name, does not reveal any personal information.
Once a transaction is recorded, its authenticity must be verified by the blockchain network. Thousands of computers on the blockchain rushed to confirm that the purchase details were correct. After the computer confirms the transaction, it is added to the blockchain block.
Each block on the blockchain contains its unique hash and the previous block’s unique hash. If the block information is edited in any way, the hash code of that block changes – but the hash code of the block after it does not. This difference makes it very difficult to change information on the blockchain without notice.
Most blockchains are completely open-source software. This means everyone can see their code. This allows auditors to look at cryptocurrencies such as Bitcoin for security reasons. It also means there is no real power over who controls the Bitcoin code or how it is edited. Therefore, anyone can suggest system changes or improvements. If most network users agree that the new version of the code with improvements is stable and feasible, Bitcoin can be upgraded.
Banking by non-bankers
Perhaps the most profound aspect of blockchain and Bitcoin is the ability for anyone, regardless of race, gender, or cultural background, to use them. According to the World Bank, some 1.7 billion adults need a bank account or means to store their money or wealth. Nearly all these people live in developing countries, where the economy is still in its infancy and entirely cash-dependent.
These people often get little money paid for in physical money. They must then store this physical money in hidden places in their homes or other places of life and expose it to robbery or unnecessary violence. Bitcoin wallet keys can be stored on a piece of paper, a cheap cell phone, or even memorized if necessary.
This option may be easier to hide for most people than a small pile of cash under the mattress. The future blockchain is also looking for solutions to not only be a unit of wealth but also to store medical records, property rights, and various other legal contracts.
Drawbacks of blockchains
While blockchain can save consumers money on transaction fees, the technology is far from free. For example, a PoW system that uses the Bitcoin network to validate transactions consumes much computing power. In the real world, the power of the millions of computers on the Bitcoin network is equivalent to what Norway and Ukraine consume yearly.
Despite the Bitcoin search fees, consumers continue to increase their utility bills to confirm blockchain transactions. When miners add blocks to the Bitcoin blockchain, they are rewarded with enough bitcoins to be worth their time and energy.
However, miners have to be paid or encouraged to validate transactions when it comes to blockchains that don’t use cryptocurrencies. Several solutions to this problem emerged. For example, Bitcoin mining farms are designed to use solar power, excess natural gas from fracking sites, or energy from wind farms.
Data speed and inefficiency
Bitcoin is an ideal case for the potential inefficiency of blockchain. The Poco-Bitcoin system takes about 10 minutes to add a new block to the blockchain.9 At this rate, it is estimated that the blockchain network can only manage about seven transactions per second (TPS). Even though other cryptocurrencies like Ethereum perform better than Bitcoin, they are still limited by the blockchain. For example, the old Visa brand can handle 65,000 TPS.
Solutions to this problem have been developed over the years. Currently, there is a blockchain with more than 30,000 TPS. Another problem is that each block can only hold so much data. The block size debate is one of the most pressing issues for future blockchain scalability.
While blockchain privacy protects users from hacking and maintains privacy, it also allows illegal trade and activity on the blockchain network. The most frequently used example of blockchain for illegal transactions is probably the Silk Road, an online marketplace for illegal drugs and money laundering that ran from February 2011 to October 2013, when it was shut down by the FBI.
The dark network allows users to buy and sell illegal goods without being tracked by the Tor browser and make illegal purchases in Bitcoin or other cryptocurrencies. Current US regulations require financial service providers to collect information about their customers when opening accounts, verify the identity of each customer, and confirm that the customer is not on a list of known or suspected terrorist organizations.
This system can act both as a deterrent and against it. This gives everyone access to financial accounts and makes illegal transactions easier. Many argue that good use of cryptocurrencies, such as B. Banking in an unbanked world, outweighs improper usage, mainly when most illicit activities are still carried out with untraceable money.
Although Bitcoin was originally used for such purposes, its transparent nature and maturity as a financial asset have spread illicit activity to other cryptocurrencies such as Monero and Dash. Today, illicit activity accounts for a small fraction of all Bitcoin transactions.
Many in the crypto space have expressed concern about government regulation of cryptocurrencies. While it is becoming increasingly difficult and nearly impossible to shut down something like Bitcoin as its decentralized network grows, governments could theoretically make owning or participating in cryptocurrencies illegal. However, this concern has lessened over time as large companies like PayPal have started to allow the ownership and use of cryptocurrencies on their platforms.
What is a blockchain platform?
Blockchain platforms allow users and developers to create new applications on top of the existing blockchain infrastructure. One example is Ethereum, which has its cryptocurrency called Ether (ETH).However, the Ethereum blockchain also allows the creation of smart contracts and programmable tokens used in initial coin offerings (ICOs) and non- fungible tokens (NFT). Everything is built around the Ethereum infrastructure and protected by nodes on the Ethereum network.
How many blockchains are there?
The number of live blockchains is growing every day at an increasing pace. By 2022, there will be more than 10,000 blockchain-based active cryptocurrencies, with several hundred non-cryptocurrency blocks.
What is the difference between a private blockchain and a public blockchain?
A public blockchain, also known as an open or permissionless blockchain, is one where anyone can freely connect to a network and create nodes. Due to its openness, this blockchain must be protected by cryptography and a Consensus Proof System (PoW). On the other hand, with private or official blockchains, each node must be approved before joining. However, since nodes are considered reliable, the security layer need not be that strong.
Who Invented Blockchain?
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornett, two mathematicians who wanted to implement a system where the timestamps of documents could not be faked. A digital payment system is known as household gold (which was never introduced).
What’s Next for Blockchain?
With many practical applications for the technology already being explored, blockchain is finally making a name for itself, largely thanks to Bitcoin and cryptocurrencies. A buzzword in the language of every investor in the country, blockchain makes business and government operations more accurate, efficient, secure, and cost-effective with fewer middlemen.
As we prepare for the third decade of blockchain, it’s no longer a question of whether legacy companies will catch up with the technology—it’s a question of when. In addition, we are looking at the proliferation of NFTs and asset tokenization today. As a result, the coming decades will be an important growth phase for blockchain.
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