People who are a part of or even keen on banking, investing, or cryptocurrency are aware of the term blockchain. This revolutionizing technology is the bedrock of the crypto network. The vision behind blockchain was to create a safe, streamlined, and decentralized platform for the digital asset. Initially, people did not quite understand this phenomenon.
But today, basically every sector understands the potentials of blockchain. From finance, healthcare to retail, and cybersecurity, every sector integrates blockchain technology to achieve safety and more efficiency. In this comprehensive guide, we will tell you everything you need to know about blockchain technology.
What Is Blockchain?
Also reckoned as Distributed Ledger Technology (DLT), blockchain allows you to access unalterable and transparent records of digital assets by leveraging cryptographic hashing and decentralization. Good Doc is a good analogy for understanding blockchain technology. When you create a document and share it with people, it is distributed rather than being transferred or copied. This results in a decentralized distribution chain that provides access to all the members simultaneously.
It means that you do not have to wait for other members to make changes. Moreover, all modifications are recorded in real-time, making the whole process transparent. While blockchain is a more complex concept than Google Docs, it does explain what blockchain is and its core functionality. Blockchain emerged as a transformational technology as it helps in reducing risks and frauds and offering transparency in a lot of processes.
It is an extensive database, including a collection of data that is sorted digitally on the computer system. The data or information added in this database is typically structured in a tabular format. This makes it easier for the user to search and filter particular information. How is it different from a spreadsheet?
The spreadsheet is used by a small group of people to store and access limited information. However, a database is designed to encompass large amounts of data that can be accessed, sorted, and modified easily by a lot of users simultaneously. Larger databases accomplish this by storing the data on servers that are developed of robust computers. Sometimes these servers can be designed through hundreds of computers to have the desired storage capacity and computation power.
A blockchain gathers information in groups called blocks. Each block holds a particular set of information based on its storage capacities. These blocks are connected together, which creates a chain of data, referred to as the blockchain. New information that is added to the block gets compiled into new blocks that will be added to the chain.
History Of Blockchain
To truly understand what blockchain is, you need to know about its history. Let’s understand how blockchain technology came into existence. Two research scientists, Stuart Harber and W. Scott Storenetta described blockchain technology in 1991. They envisioned extending a computationally practical solution for timestamping electronic documents. This way, they would not be tampered with or backdated. They created a system by leveraging the phenomenon of a cryptographically secure chain of blocks to secure the documents.
Furthermore, in 1992, Merkle Trees integrated the design, which made the concept of blockchain more efficient. It allowed the collection of multiple documents into one block, thereby creating a secure chain of blocks. Basically, it secures a series of data records wherein each data record is connected to the preceding one. The newest data record in the chain includes the history of the overall chain. But the technology remains unused, and in 2004, the patent lapsed.
Later in 2004, Hal Finney, a computer scientist and cryptographic activist designed a system known as Reusable Proof Of Work or RPoW. It was created as a prototype for digital cash and was at a very early stage in cryptocurrency history. This system worked by obtaining a non-fungible Hashcash non-exchangeable proof-of-work and developed an RSA-signed token that could be further transferred from one individual to another. This system solved the issue of double-spending by ensuring that the token ownership remains on the trusted server. It was developed to enable users to authenticate its authenticity and precision in real-time.
It was Santoshi Nakamoto who finally conceptualized the distributed blockchain theory in 2008. He improved the design in a way that allowed users to add blocks to the previous chain without needing them to be signed by verified parties. These modified trees contain a secure record of all the data exchanges while leveraging a peer-to-peer timestamping network and authenticating each exchange. Additionally, the whole process can be managed autonomously and without the need for a central authority. These modifications were so effective that they made blockchain the backbone of cryptocurrencies.
Is Blockchain Secure?
The main goal of blockchain technology is to allow people to share valuable data in a tamperproof, secure manner. There are two things that make this system theoretically tamperproof that include the cryptographic fingerprint and consensus protocol.
The fingerprint is known as a hash, and it takes a significant amount of computing time and energy. Therefore it serves as proof that the mine that has integrated the block to the chain performed the computational work to acquire a bitcoin reward. This is the reason why Bitcoin is considered to harness a proof-of-work protocol.
Moreover, it also acts as a seal, considering that modifying the block would need producing a new hash. Authenticating whether or not the hash aligns with its blocks is easy, and once the nodes have been added, they are updated on the respective copies of the blockchain. This is known as the consensus protocol.
Moreover, the hashes also act as links in this technology. Each block has the unique hash of the previous block. Therefore, if you want to make changes to an entry within the ledger retroactively, then you must calculate a new hash not just for the block it is present in but also for every proceeding block. This process should be done quickly so that other nodes can encompass new blocks to the particular chain.
On the whole, if you don’t have a more robust computer than the nodes combined the nodes, any block you add will conflict with the current ones, and the other nodes will reject the alterations automatically. This is what creates an immutable or tamperproof blockchain ecosystem.
How Does a Blockchain Work?
The function of blockchain can be understood via the following concepts:
Every chain has different blocks, and every black has three aspects:
- The Block Information
Nonce, which is a 32-bit whole number, is generated randomly when a block is formed, which further produces the header hash of a block. The 256-bit number hash is integrated into the nonce. It should be initiated with a large number of zeroes. After the initial block of a particular chain is created, a nonce generates the cryptographic hash. Additionally, the data inside the block is considered authenticated and tied to the nonce and hash until it is mined.
Miners develop new blocks within the chain via the mining process. Every block in the blockchain has its distinctive hash and nonce. However, it also references the hash of the preceding block inside the chain. Therefore, mining a block is a challenging task, particularly on large chains. Additionally, miners leverage dedicated software to resolve the extremely complex math issues of determining the nonce that creates an authorized hash.
Since the nonce is merely 32 bits and hash has 256 bits, there are around four billion potential nonce-hash pairings that need to be mined prior to identifying the accurate one. When the miners get the right combination, they are considered to have achieved the golden nonce, and their block is included in the chain. Making alterations to the block earlier within the chain needs re-mining of not merely in the block where you want to change, not on all of the subsequent blocks. This is the reason why blockchain technology is considered tamper-proof.
Decentralization is one of the core elements of blockchain technology. This implies that no organization or computer owns the chain; rather, it is a distributed ledger through the nodes linked to the chain. Nodes can be any electronic device that has copies of the blockchain and maintains the functioning of the network.
Every node comes with its copy of the blockchain. Moreover, the network needs to algorithmically verify any newly mined block for the particular chain to be altered, trusted, and authenticated. Every action within the ledger can be checked and viewed easily due to the transparent nature of the blockchain. Participants are provided with a unique alphanumeric identification number for their respective transactions.
Blockchain Technology Vs. Banks
Blockchain technology is considered to be among the most revolutionary technologies of the modern era. But the idea of a shared ledger has been around for a long time. Central banks share ledgers with financial institutions that include banks. However, the difference between banks and blockchain lies in decentralization.
Moreover, the banking system is categorized by central banks, which have a certain degree of control over commercial banks. Therefore, they operate in a centralized system. On the other hand, blockchain does not possess a central authority, thereby making the system decentralized.
To understand which one is the perfect choice for you, it is imperative to consider what both the solutions extend. The banking system has existed for a decade; therefore, it is tried and tested. But the system has its own share of challenges like slow transactions and high fees.
On the other hand, the decentralized nature of blockchain technology implies there is a minimum regulation. This increases the risk of money laundering, funding terrorist activities, etc.
Moreover, the centralized nature of the banking system and the fact that it entirely depends on the databases paves the way for weakness. Vulnerabilities of the banking system make them more prone to hacking. Moreover, the centralization system means that banks can be influenced by economic conditions. The decentralization in blockchain, along with the fact that the technology is virtually unhackable, mitigates some of the issues associated with centralization.
Bringing Together Blockchain Technology And Banking System
Blockchain technology and banking systems have their own share of strengths and weaknesses. Instead of choosing between one, there is a possibility that both of them can be brought together. It implies that there can be interdependence between the banking system and blockchain technology.
Experts have been working on hybrid blockchain, which has the best features of the banking system and private blockchain. This can be used by financial institutions and banks to offer financial services more efficiently.
Who Will Use The Blockchain?
Gone are the days when blockchain technology was only limited to the financial industry. Today, their application has become widespread and covers basically every industry. Here are some of the use cases of blockchain technology –
- Supply Chains Monitoring
Blockchain technology proves efficient in monitoring supply chains. By eliminating the paper-based documentation, businesses can better highlight inefficiency within the supply chain quickly. Moreover, the technology also allows the companies to locate the issues in real-time and take timely actions. It allows businesses and customers to look at products from a quality-control viewpoint.
- Faster Processing And Transferring Of Money
The most common use of blockchain is as a method of expediting the transfer of money from one individual to another. When banks are no longer in the picture and authentication of the transactions takes place round the clock, blockchain is able to process transactions within a couple of seconds.
- Data Sharing
Blockchain can also be used to share or sell information in the marketplace. Considering that businesses collect a massive amount of data and most of it goes unused, blockchain can be an intermediary to secure and share this data to improve an array of industries.
- Tamperproof Data Backup
Blockchain can be the perfect way to store the previous data securely. While cloud sources are the go-to source for data backup, they are vulnerable to hackers and infrastructure issues. You can use blockchain as a backup source. Considering that no one can tamper with the data, you can be rest assured of the security.
- Real Estate, Auto Title, And Land Transfers
Among the main objectives of blockchain is to eliminate the need for paper-based documentation. This is because the paper-based trail can be confusing and can increase the chances of errors. Blockchain allows you to store titles on its database, facilitating a transparent view of the transfer and legal ownership.
What is a Permissioned Blockchain?
Permissioned blockchain is defined as the blockchain networks that need access to be a part of. In such types of blockchain, a control layer operates on top of that blockchain that controls the actions executed by the verified participants. These blockchains are designed without impacting the authority of a centralized system. One of the major differences between a permissioned and a permissionless blockchain is the way users are interacting with the network.
A permissioned system is reckoned to have some restrictions on the consensus participants, making permission networks extremely configured as well as controlled by the administrators. Some of the popular permissioned blockchain frameworks include Quorum, Hyperledger, Corda, etc. There are two core aspects of permissioned blockchain that include:
Public Permissioned Blockchain
A public-permissioned blockchain network is a form of networking that fills the gap between the public-permissionless networks and private consortium networks. This network amalgamates the permission from private consortium using a decentralized governance model. Public blockchain runs on an incentivizing model that motivates new participants to join and maintain the agility of the network. In terms of democratized, decentralized, and authority-free operation, public blockchains extend the invaluable solution.
Private Permissioned Blockchain
Private permissioned blockchain was developed using a shared ledger, which was developed for a dedicated organization network. In this, participants should be aware of the users they are interacting or collaborating with. Permissions are needed to offer data visibility on a need-to-know basis. Private blockchains are prominent for implementing private blockchain functions. Therefore transactions are verified and authenticated, adding more trust and security within the digital workflow.
What Is Blockchain Good For?
Blockchain technology is a reliable approach for storing data with regard to different kinds of transactions. Companies like Walmart, Unilever, Siemens, AIG, etc., are some of the companies that have already integrated this technology.
It is a computer code that can be developed into the blockchain to ease, verify or negotiate contract agreements. Moreover, smart contracts run under a set of pre-agreed conditions. When the conditions have complied, the agreement terms are automatically executed.
Healthcare institutions can harness the potentials of blockchain to safely store the medical records of patients. As soon as the medical records are generated and verified, they can be stored on the blockchain. This will act as proof and give confidence to the patients that their records cannot be hampered.
Blockchain can be leveraged to make the voting system more efficient and authentic. The use of this technology eliminates fraud and increases voter turnout. Since blockchain cannot tamper, it will help in maintaining transparency in the overall electoral process. This will also reduce the personnel needed to execute an election and provide officials with real-time results.
Blockchain is the core technology that backs up cryptocurrencies. By spawning the operations across a wide network of computers, this technology allows cryptocurrencies to perform without requiring a central authority. This reduces the risk along with eliminating transaction and processing fees. Moreover, blockchain can offer countries with unstable financial infrastructure a more stable currency with an extensive network of companies and individuals and applications to transact with worldwide.
Banking And Finance
The banking and finance sector is the industry that benefits most from blockchain technology. The operation duration of financial institutions is between five business days in a week and during business hours. So if you are depositing money on Friday after 6, then you are likely to wait until Monday to see the transaction reflected on your account.
By leveraging the blockchain in the operations of the banks, these transactions can be processed within 10 minutes. And the fact that blockchain performs 24×7 allows banks and financial institutions to provide better services.
Advantages And Disadvantages Of Blockchain Technology
Blockchain as a technology has brought significant changes to a myriad of industries. But similar to any other concept, there are both sides to it. While the technology has excelled in many verticals, it still needs to address challenges in certain areas. In this section, we are discussing some prominent advantages and disadvantages of blockchain technology.
Advantages Of Blockchain
One of the main features of blockchain is that its transaction ledger for public address is accessible to view. In the business and financial realm, this offers an unprecedented degree of accounting. When there is clear transparency, businesses will be more responsible for acting with integrity towards themselves, customers, and the community.
In comparison to other record-keeping systems, blockchain offers a higher level of security. This is because each transaction is encrypted and linked to the preceding transaction. It is created by a network of computers aligning to verify a block that contains the data. The block is added to the ledger only when the block is verified by the miners.
The decentralized nature of blockchain eliminates the need to rely on middlemen in completing processes in many fields. Moreover, blockchain is capable of completing transactions faster as opposed to conventional financial services. This is done by enabling P2P cross-border transfers using a digital currency. Moreover, leveraging a unified system of ownership records as well as a smart contract makes the process of property management more efficient.
- Enhanced Traceability
Companies that deal with products that are traded via a complex supply chain often experience difficulty in trace the item back to its main source. However, when the information about goods’ exchanges is recorded on a blockchain, an organization can access an audit trail that displays where the product came from and every location it stops on the journey. Such traceability is imperative in preventing fraud.
Companies, irrespective of their nature, are looking to reduce costs, and blockchain can help with the same. The technology eliminates the need for middlemen or third parties to complete the transactions or processes. Rather, organizations can depend on the data recorded on the blockchain. The tamper-proof nature of the technology allows you to complete the process without even having to review it. By eliminating the middlemen and third parties, blockchain allows you to complete the trade in a streamlined and cost-effective manner.
Disadvantages Of Blockchain
- Data Modifications
In most cases, the fact that the data cannot be altered in the blockchain is viewed as a positive sign. But sometimes, the difficulty of modifying data within the blockchain can be a downside. To change certain information or code, users will have to go through a demanding process. You will need a hard fork, wherein the chain is taken out, and a new one is built.
In most cases, the Proof of Work consensus algorithm is able to offer strong protection. But there are a couple of attacks that can hamper the security of blockchain networks. 51% attacks are among the most common attacks that can take over more than half of the hashing power of the network. This will allow the attackers to completely disrupt the network in different malicious manners.
While blockchain can save money on transaction and processing fees, it is not a free technology. The Proof of Work consensus mechanism consumes a lot of computation power. Practically, the power generated from the millions of computers on a crypto network is somewhere around what Denmark consumes in a year. Depending on the electricity cost in your region, you can expect to spend thousands of dollars per coin.
- Illegal Attempts
Although the nature of blockchain technology protects the users from hackers and privacy, the technology also enables illegal activity and trading.
The proof of Work system of Bitcoin takes around 10 minutes to include a new block into the blockchain. This means that the network can manage around seven transactions per second. While other cryptocurrencies lie, Ethereum can perform better than bitcoin; they are restricted by blockchain.
What’s Next For Blockchain?
Although looking at the future of blockchain may seem enthralling, the market is constantly brimming with innovation that promises bolder use of technologies. With blockchain networks is bringing transformative changes to a myriad of industries, here we are highlighting few predictions about the future of blockchain:
We, Will, Be One Step Closer To The Conceptualization Of Interconnectivity
We are still far away from interconnectivity at its optimal level, and there are different definitions of interoperability. According to a report, 83% of organizations believe assurance of standards and governance enable interconnectivity and interoperability among both permissionless and permissioned blockchain networks to be a vital factor to associate with an industry-wide blockchain network. While there continues to be a lot of work done on the concept, we are likely to witness more emerging networks with critical mass in the coming years.
The Growth Of Practical Governance Model
We are likely to see new governance models that allow large and versatile consortia to approach permissioning schemes, decision making, and payment processing. Additionally, these models will assist in standardizing information from various sources and collect a newer and more powerful set of data. In fact, 68% of CIOs and CTOs expect to witness a scalable governance model for interactions across various blockchain networks to be imperative features for the blockchain environment of the organization.
Authentication Tools Will Combat Fraudulent Data Sources
There is a need for an increased data protection mechanism. In the coming years, blockchain solutions will leverage validation tools and combine them with IoT beacons, crypt-anchors that connect digital assets to the real world by adding outside data within networks. This will boost trust and eliminate the reliance on human data entry.
Coming Together Of Technology To Increase The Potential
Adjacent technologies will combine with blockchain to help industries accomplish various tasks that they have not done before. More reliable data from blockchain technology will inform better and reinforce the underlying algorithms. Additionally, blockchain will ensure that the data is secure and audited at every step of the decision-making process.
There you have everything you need to know about blockchain technology. With every passing year, we are exploring the newer and better way of implementing this powerful technology in various sectors. Evidently, in the coming years, we will see more innovative and effective applications of blockchain across various sectors.
The blockchain is behind more cryptocurrencies are public, peer-to-peer (P2P), open-source, and public, enabling users with the right knowledge and equipment to access the features and functionalities. This is vital to furnish transparency and entice buyers. A blockchain encompasses various technological mechanisms working towards a common objective. For instance, consensus mechanisms like proof of stake (PoS) and proof of work (PoW) protect the network by combating cyber-attacks from hackers.
While a revolutionizing technology, blockchain continues to deal with some challenges that need to be addressed. To prove that a user has permission to write a chain, the complex algorithm must be performed, and this requires a substantial amount of computing power. And this power comes at a high cost, which cannot be afforded by many users. Additionally, the lack of regulation makes it a risky environment. And, considering that it is complex in nature, many users fail to appreciate its core potentials.
People have this misconception that blockchain networks are anonymous. But in reality, they are confidential. This means that when users make public transactions, their respective codes, known as a public key, are stored on the blockchain; instead of their personal information. So if an individual makes a purchase on an exchange that requires authentication, then his or her identity is still associated with the blockchain address.
The cost of developing a blockchain application depends on multiple factors that include its features, complexities, types, kind of platform, etc. Moreover, you need to invest cost in consulting, designing, development, quality assurance, deployment, and maintenance. On the whole, you expect the cost to be between $5000 and $200,000. While blockchain makes various processes streamlined and efficient, setting up the overall blockchain environment is quite expensive.
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