Unless you’ve been living under a rock for the last decade, you’ve probably heard the phrase “blockchain” with cryptocurrencies, or in some cases, banks. You may be aware that Blockchain is the technology behind Bitcoin, which has taken the globe by storm since its inception in 2008. Have you ever wondered what makes blockchain technology unique, how it works, or what applications it may be used for?
Look no further because I’ll unravel all you need to know in one place.
What exactly is Blockchain?
The notion as a whole might be intimidating, yet the principles are relatively simple to grasp. Before delving into what Blockchain entails, it is critical first to learn what a database is and how it functions. A database, according to Oracle, is an organized collection of structured information, or data, that is often kept electronically in a computer system.
If you read the linked article further, you will get information on the numerous types of databases, how each sort of database works, and how it may be used for various reasons. To comprehend Blockchain, all you need to know is that databases are an electronic and structured manner of storing data, typically in a tabular format.
Blockchain is a particular sort of database that unexpectedly stores information. Unlike a traditional database, the data on a blockchain is arranged differently. The data is organized into groups called blocks. Each block has a preset storage limit, and when it is reached, it is linked with the previously completed block. When new data is supplied, a new block is formed in which the new data is compiled and added to the chain. This results in creating a virtual chain of blocks, which is referred to as a “blockchain.”
Why is Blockchain used?
Blockchain technology may be used for various purposes (we’ll go over them in more depth later). Still, the most extensively utilized use has to be in cryptocurrency.
Since the birth of the Internet, many institutions — governments, commercial corporations, and even enthusiastic groups of software developers – have sought to build a virtual currency as an alternative to fiat currency (legal tender money that we use, like the INR, USD, EUR, etc.). However, there has always been a trust issue that has kept these endeavors from succeeding.
Consider the following example: a well-known technology business has established a currency known as JSL. According to the firm, JSL is worth 200 INR and may be used as a replacement for traditional cash. Suppose the corporation utilizes a standard database system, such as SQL, to keep track of the money. In that case, users have little assurance that the company would not illegally manipulate the records to boost or reduce anyone’s account balances. They may even opt to grant themselves a billion JSL, destroying the coin’s integrity.
Even in the case of fiat currencies, the government may choose to print more money as needed, as has happened several times throughout history. This causes the currency’s value to fall, and this drop in value is referred to as inflation in economics.
Blockchain, on the other hand, is a decentralized technology. A single individual does not manage a blockchain database.
“How, though, do we settle disagreements?”
“If no one is in control, everyone may manipulate data to their benefit, right?” Some of the most typical questions people have when they learn that cryptocurrencies, and by extension blockchain, are decentralized. While it is true that no single entity is in charge, the P2P (Peer Peer) ecosystem solves this problem.
How is Blockchain Decentralized?
As previously stated, Blockchain operates on a peer-to-peer network. It overcomes the problem of having no one in charge by putting everyone in control. It doesn’t make sense, does it? Let us go through this in more detail.
Assume there were only 100 individuals in the world. They decide to use the blockchain network to establish their own coin. Let’s call it Pitcoin for short. Each of the 100 persons will be a part of the network and a part of the shared Blockchain. Once a transaction has been validated, it is added to the block and sealed with an immutable (unchangeable) cryptographic signature known as a hash.
A copy of this version of events saved in the Blockchain would then be shared with all 100 network participants.
Assume that one individual with evil intent attempts to steal 200 pitcoins from innocent bystanders. He hacks his version of the Blockchain and receives the 200 pitcoins after a lot of hard labor. However, after he alters his balance, his version of events will be different from everyone else’s version of events. This chain will be easily identified as the malicious chain, and it will be discarded as invalid. Now apply this to the actual world.
As a result of utilizing peer-to-peer networks, Blockchain has addressed the problem of decentralization. It may stay trustless (there is no necessity of trust for the system to operate).
Benefits of Blockchain
Highly Accurate
Blockchain networks eliminate the need for a person in the verification process, hence eliminating human mistakes. Even if a computational error occurs in one section of the network, it will not be reflected in the Blockchain as a whole for the same reasons that the attack outlined previously is impossible.
It cuts out the middlemen.
Typically, the cost of intermediaries is high for any transaction to take place. Whether it’s banking for international transactions, payment gateways for completing a sale, attorneys for contracts, and so on, intermediaries have played a big part in the conventional system, covering a considerable amount of costs. However, because blockchain transactions take place on a peer-to-peer network, direct transfer and verification are feasible, removing the need for intermediaries and their related expenses.
Security
As stated above in the section “How is a blockchain decentralized?” the data submitted is incredibly safe. Bitcoins are a practical witness to the security of Blockchain since they cannot be counterfeit, hacked, or double-spent (the same bitcoin cannot be spent twice). Dispersing the data over the network rather than keeping it in a single location makes it nearly difficult to tamper with the database. Even if some computers in the network are destroyed, physically tampering with more than 51 percent of the machines in the network is nearly hard, especially for a network the size of Bitcoin.
Efficiency
Blockchain enhances transaction efficiency by removing intermediaries while also lowering total costs. In the case of currencies, international settlement can take days and is frequently impacted by holidays and other availability concerns. The Blockchain, on the other hand, allows for direct money transfers, and a transaction that would have formerly taken days may now be done in minutes.
Transparency and privacy
Although every member has access to the Blockchain’s data, the data is encrypted and pseudonymous. Although the transactions are visible to everybody, only the public key is recorded, rather than personal information in the case of Bitcoin, keeping these transactions relatively private.
Most blockchains, on the other hand, are entirely open-source. Everyone has access to the code, regardless of whether or not they participate in the network. Anyone can propose improvements and enhancements, but they will only be implemented with the approval of a majority of the network’s members.
Blockchain's Disadvantages
There are no such drawbacks to the world’s most advanced technology. But here are a handful that is readily remedied.
Costs and resources associated with technology
Even though it saves money on transaction fees and validating transactions is expensive. The “Proof of Work” mechanism, particularly in the case of Bitcoin, makes extensive use of computer power. According to Forbes.com, the cost of mining one Bitcoin can range between $5000 to $8000. To make this worthwhile, miners (those who apply computing power to validate transactions through this “proof of work” approach) must be adequately paid.
Speed
Being one of the fastest databases comes at the expense of security. Bitcoin, for example, can only validate 7 transactions per second. This pales compared to traditional databases like Visa’s, which can process over 1,700 transactions per second. However, progress is being made on this front even as you read, with Ethereum 2.0 reportedly capable of handling more than 100,000 transactions per second.
Invasion of Privacy
While Blockchain provides anonymity and, in the case of Bitcoin, pseudonymity, there have been incidents in the Blockchain’s history when people have misused this technology component for criminal reasons. The most prominent example of Bitcoin serving as the primary money on the Silk Road has tarnished Bitcoin and Blockchain, momentarily reducing adoption rates.
Additional Uses
While cryptocurrencies are the most widely known application of blockchain technology, the technology may be used for various applications. The blockchain database is used as a digital ledger to record transactional data in the case of cryptocurrencies. It can theoretically be used to store a wide range of data. This can comprise, among other things, real estate data, health records, and inventory records. Let’s take a look at some of the possible disruptions that blockchain technology might create.
Finance and banking
Apart from cryptocurrency, this has to be the most apparent area on the list. Blockchain is available 24 hours a day, seven days a week, unlike traditional financial institutions. Transactions that may take days can now be finalized in a matter of minutes. DeFi (or Decentralized Finance) is already wreaking havoc in the financial sector, allowing for cheaper and more secure exchanges without the need for a central authority.
Healthcare
Hospitals can best use Blockchain to securely store private medical data, with complete trust that it cannot be tampered with. Patients may be sure that their medical records will not be altered while keeping privacy when medical data is available in a blockchain.
Real Estate
One of the most prevalent issues in the real estate sector revolves around ownership, which can be practically hard to track in some circumstances. The existing procedure for registering ownership is inefficient and requires several middlemen. However, all of this would be avoided if blockchain technology were used in the area.
Smart Contracts
DeFi exchanges that use cryptocurrencies like Ethereum already use smart contracts. Smart contracts are incorporated into the Blockchain, and when the requirements are satisfied, the transaction is executed automatically. This avoids a lot of difficulty and intermediaries like notaries, arbitrators, and attorneys, to name a few.
These are just a few examples of industries where Blockchain might be helpful. Other sectors of interest include automobiles, education, and food – all of which are experimenting with the use of Blockchain.
Blockchain technology has created significant upheaval in our daily lives and will soon become an intrinsic part of our existence. This guide should have provided you with a good knowledge of the fundamentals of Blockchain.
DeFi exchanges that use cryptocurrencies like Ethereum already use smart contracts. Smart contracts are incorporated into the Blockchain, and when the requirements are satisfied, the transaction is executed automatically. This avoids a lot of difficulty and intermediaries like notaries, arbitrators, and attorneys, to name a few.