What is blockchain?
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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 is ensuring the accuracy and security of data recording and instilling trust without the need for 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 certain 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 newly formed block, which is then also added to the chain after it has been populated.
Databases usually organize their data in tables, whereas blockchains, as the name suggests, organize 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?
The purpose of a blockchain is to record and distribute digital information, but not edit it. As such, the blockchain is the basis for an immutable ledger, or transaction record, which cannot be changed, deleted, or destroyed. Hence, blockchain is also referred to as Distributed Book Technology (DLT). The blockchain concept was first proposed as a research project in 1991, predating its first widespread application: bitcoin in 2009. In the years since, the use of blockchain has grown with the creation of various cryptocurrencies, decentralized finance (DeFi) applications and token tokens ( NFT). ). explode. and smart contracts.
Imagine a company has a server farm with 10,000 computers that it uses to maintain a database containing all the information about its customer accounts. The company has a warehouse building that houses all of these computers under one roof and has complete control over each of these computers and all the information contained within them. However, this provides a point of failure. What happens if the power goes out in this place? What if the internet connection dies? What if it burns to the ground? What if a bad actor erased everything with the press of a button? In both cases, the data will be lost or corrupted.
Blockchain makes it possible to distribute the data stored in this database across multiple network nodes in different locations. This not only creates redundancy but also maintains the accuracy of the data stored in it – if someone tries to change an entry in one database instance, the other nodes will not be changed, thus preventing malicious actors from doing so. . If a user falsifies a Bitcoin transaction record, all the other nodes are relayed among themselves and can easily identify the node with the fake information. This system helps create an accurate and transparent sequence of events. In this way no node in the network can change the information stored in it.
Therefore, information and history (e.g. cryptocurrency transactions) cannot be changed. Such a record may be a list of transactions (e.g. cryptocurrencies), but the blockchain may also contain various other information, such as e.g. legal contracts, official ID cards or inventory of company products.
Due to the decentralized nature of the bitcoin blockchain, all transactions can be viewed transparently, have private nodes, or use a blockchain explorer that allows anyone to view live transactions. Each node has its own copy of the circuit which is updated as new blocks are confirmed and added. This means if you want, you can track Bitcoin anywhere. For example, exchanges have been hacked in the past where those who kept bitcoins on the exchange lost everything. While hackers can be completely anonymous, the bitcoins they extract are easy to track. If the bitcoins stolen in some of these hacks are moved or given away somewhere, this will be known.
Of course, the records stored on the Bitcoin blockchain (like most others) are encrypted. This means that only the owner of the record can decrypt it to reveal their identity (using a public-private key pair). This allows blockchain users to remain anonymous while maintaining transparency.
Is blockchain secure?
Blockchain technology achieves decentralized security and trust in several ways. New blocks are always stored linearly and chronologically at first. That is, they are always added at the “end” of the blockchain. Once a block is added to the end of the blockchain, it is very difficult to go back and change the content of the block unless most of the network has agreed to it. This is because each block contains its own hash, along with the hash of the previous block, as well as the timestamp mentioned above. A hash code is created by a mathematical function 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 own 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 is likely to be prohibitive. It would not only be very expensive, but also probably 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 in such a way that participating in the network is much more economically stimulating than attacking it.
Bitcoin vs Blockchain
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornett, two researchers who wanted to implement a system where document timestamps could not be falsified. But it wasn’t until nearly two decades later, with the release of Bitcoin in January 2009, that the blockchain had its first real-world application.1 The Bitcoin protocol is based on the blockchain. In a research paper on digital currencies, Bitcoin quasi-creator Satoshi Nakamoto called Bitcoin “a new, completely equal electronic money system, with no trusted third parties.”
The main thing to understand here is that Bitcoin only uses a blockchain to transparently record a list of payments, but a blockchain could theoretically be used to record any number of data points without fail. As discussed above, these can be transactions, election votes, product inventory, government IDs, house deeds, and more. Today, tens of thousands of projects are trying to implement blockchain in various ways to help society go beyond just recording transactions—for example, as a way to safely vote in democratic elections. The immutability of blockchain means fraudulent voting will be much more difficult to enforce. For example, a voting system can serve to issue cryptocurrencies or tokens to every citizen of a country. Each candidate is then assigned a specific wallet address and voters send their token or cryptocurrency to the respective address of the candidate they wish to vote for. The transparency and traceability of the blockchain will eliminate the need to count people’s votes and the poor ability of participants to forge physical ballots.
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 it turns out that blockchain is actually a reliable way to store data for other types of transactions. Some of the 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.3
Why did they do that? Countless 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 gives brands the ability to track the journey of a food product from its origin, through each stop, to its delivery. If a food is contaminated, it can be traced back to its origin from every stop. 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 there are many other forms of blockchain implementation.
banking and finance
There is probably no longer an industry that will benefit from integrating blockchain into their banking operations. Financial institutions only work during business hours, usually five days a week. That means if you try to cash a check at 6pm on a Friday, you may have to wait until Monday morning to see the money in your account. Even if you make a 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 holiday or time of day or week. With blockchain, banks also have the ability to 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 for that time frame. 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 US dollar is controlled by the Federal Reserve. 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 the need for a central authority. This not only reduces risk, but also 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 wider 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 do not have 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 not have access to savings or brokerage accounts and therefore no way to keep assets safe.
Healthcare providers can use blockchain to securely store their patients’ medical records. 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. These private health records can be encrypted and stored on a private key blockchain, making them accessible only to certain individuals, thus ensuring confidentiality.
If you’ve ever spent time in your local clerk’s office, you know that the property registration process is tedious and inefficient. 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. In the event of a property dispute, property claims must be compared with the general register. This process is not only expensive and time-consuming, but also prone to human error, with any inaccuracies making property tracking less effective. Blockchain has the potential to 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 that has no or no government or financial infrastructure and certainly no registry office, proving ownership of property 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 code that can be 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. Both the tenant and the landlord send their respective 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. If the owner does not provide the door code on the rental date, the smart contract will return the deposit. 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 common labels such as “organic”, “regional”, and “fair trade”. According to Forbes, the food industry is increasingly turning to using blockchain to track road and food safety from farm to branch.4
As mentioned above, blockchain can be used to enable modern voting systems. Blockchain elections have the potential to eliminate voter fraud and increase voter turnout, as tested in the November 2018 West Virginia midterm elections. 5 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 real 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
Reduce costs by eliminating third-party verification
Decentralization makes manipulation more difficult
Safe, private and efficient transactions
Provide banking alternatives and ways to protect personal information for citizens with unstable or underdeveloped governments
Significant technological costs associated with bitcoin mining
Low transactions per second
History of use in illegal activities like dark web
Regulations vary by jurisdiction and remain uncertain
Data Storage Limits
Blockchain transactions are approved by a network 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 the costs associated with it. For example, business owners receive a small fee when receiving 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 network 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 not see the money in your account until Monday morning. While financial institutions operate during business hours, typically five days a week, blockchain operates 24 hours a day, seven days a week, and 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 the fact that all parties need to confirm payment processing.
Many blockchain networks act as public databases, meaning that 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 in reality they are only secret. When a user makes a public transaction, their unique code — called the public key as mentioned earlier — is written to the blockchain. Your personal information is not like that. If someone has made a bitcoin purchase on an exchange that requires identification, the identity of that individual is still tied to their blockchain address, but the transaction, even though it’s tied to the name of the individual, 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 own unique hash, along with the unique hash of the previous block. 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 gives auditors the ability to look at cryptocurrencies such as bitcoin for security reasons. It also means that 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 the majority of 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 do not have a bank account or means to store their money or wealth.7 Nearly all of these people live in developing countries, where the economy is still in its infancy and is 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. For most people, this option may be easier to hide than a small pile of cash under the mattress. The blockchain of the future 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.
Disadvantages 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 a lot of computing power. In the real world, the power of the millions of computers on the Bitcoin network is roughly equivalent to what Norway and Ukraine consume each year.8
Despite the bitcoin search fees, consumers continue to increase their utility bills to confirm blockchain transactions. This is because when miners add blocks to the bitcoin blockchain, they are rewarded with enough bitcoins to be worth their time and energy. However, when it comes to blockchains that don’t use cryptocurrencies, miners have to be paid or encouraged to validate transactions. 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.10
Solutions to this problem have been developed over the years. Currently there is a blockchain with more than 30,000 TPS.11 Another problem is that each block can only hold so much data. The block size debate is and 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.12
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.13 This system can act both as a deterrent and against. This gives everyone access to financial accounts, but also makes transactions easier for criminals. Many argue that good use of cryptocurrencies, such as B. Banking in an unbanked world outweighs bad use of cryptocurrencies, especially when most illegal 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 actually spread illicit activity to other cryptocurrencies such as Monero and Dash.14 Today, illicit activity accounts for a small fraction of all Bitcoin transactions.15
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 it illegal to own or participate in cryptocurrencies. 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 own cryptocurrency called Ether (ETH).16 However, the Ethereum blockchain also allows the creation of smart contracts and programmable tokens that are used in initial coin offerings (ICOs) and non-replaceable 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 blocks17
What is the difference between a private blockchain and a public blockchain?
A public blockchain, also known as an open blockchain or permissionless blockchain, is a blockchain 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. 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 known as household gold (which was never introduced).18
What’s Next for Blockchain?
With many practical applications for the technology already existing and being explored, blockchain is finally making a name for itself, thanks in large part 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. Today we are looking at the proliferation of NFTs and asset tokenization. The coming decades will be an important growth phase for blockchain.
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