What Is a Blockchain?
A blockchain is a ledger or database shared between the nodes of an electronic network. A database blockchain records information electronically in digital form. Blockchains are most well-known for their essential role in the cryptocurrency system, including Bitcoin, as a means of creating secure and non-centralized records of transactions. The advantage of blockchains is that they ensure the integrity and security of data. It also builds trust without the requirement for an untrustworthy third party.
The main difference between a traditional database and one that is a blockchain is how the data is organized. A blockchain stores information in groups, also known as blocks containing different data types. Blocks can store specific amounts of data, and once they are complete, they are shut down and linked to the filled block, creating an entire chain of data referred to as the blockchain. Any new information added to the newly added block is assembled into a brand-new block, which will become part of the chain when it is filled.
A database usually organizes its data in tables, while the blockchain, as the name suggests, contains it into connected pieces (blocks). This data structure creates an inexplicable timeline of the data used with a decentralized design. Once a block has been filled with data, it is placed in stone and becomes part of the timeline. Each block gets a specific time at the time it's added.
How Does a Blockchain Work?
The purpose of blockchain is to permit digital data to be stored and shared; however, it is not altered. This is why blockchain technology is the base for immutable ledgers or documents of transactions that can't be changed, deleted, or destroyed. This is why blockchains are also called distributed ledger technology (DLT).
It was initially thought of as a research project in the year 1991. The concept of blockchain was first proposed in 1991. It predated its first widely-used application in the form of Bitcoin, which was launched in 2009. Since then, the blockchain concept has been used; its use has increased exponentially with the introduction of numerous crypto-currencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and intelligent contracts.
Transaction Process
Attributes of Cryptocurrency
Blockchain Decentralization
Imagine a business with a server farm that houses 10,000 computers to keep the database that holds all client account details. In addition, this business owns a warehouse that houses all these computers in one location and is entirely in charge of each computer and the data stored within the databases. It is, however, only one source of failure. What happens when the electricity at the location is cut off? What happens if their Internet connection is cut off? What happens if it burns to the floor? What happens if a criminal erases all data with one keystroke? In any event, the data will be destroyed or lost.
The function of a blockchain is to allow the information stored in the database to be distributed across several nodes in the network at different places. This creates redundant data but also ensures the accuracy of the information that is stored in it. If someone attempts to alter the data in one database, all the other nodes will not be affected and would therefore stop an intruder from doing it. If a user modifies the Bitcoin transaction record, other nodes will cross-reference with each other and quickly locate the node with incorrect data. This helps determine an accurate and precise sequence of events. In this way, no device within the network could modify its information.
This is because the history and information (such as in the case of transactions made by cryptocurrency) can never be changed. This record could include a list of transactions (such as when dealing with cryptocurrencies); however, it can be used to store a range of other data, such as legal contracts, state-issued identifications, or even the inventory of a company's products.
Transparency
Due to the decentralization of Bitcoin's blockchain system, all transactions are visible through a personal node or by using blockchain Explorers that let anyone observe transactions happening live. Furthermore, each node can have its version of the chain, which is refreshed as new blocks are added and confirmed. That means that if you were to do so, you would be able to keep track of Bitcoin wherever it travels.
Exchanges, for instance, were hacked at times, and those who stored Bitcoin on the deal were able to lose everything. While the hacker could be completely private, those Bitcoins they stole are traceable. If the Bitcoins taken in any hacks were relocated or spent in a specific location, they would be identified.
Of course, the data kept in the Bitcoin blockchain (as with the majority of other blockchains) are protected by encryption. It means the person who is the owner of the record can decrypt it and expose their identities (using the public or private key pair). This way, Blockchain users can remain anonymous while maintaining transparency.
Is Blockchain Secure?
Blockchain technology offers secure and decentralized trust in various ways. In the beginning, the blocks are stored chronologically and linearly. They will always be added at the "end" of the blockchain. Once a block is added to the "end" of the chain, it becomes tough to return and change the block's content unless the large majority on the blockchain has reached a consensus on how to change the block's contents. This is because every block has its very individual hash and its hash is created by the block before it and the timestamp mentioned above. Hash codes are generated by a mathematical process that converts digital information into an array of letters and numbers. If the data is altered by any means, the hash codes change also.
Suppose the hacker who manages a node in blockchain networks would like to alter the blockchain and get cryptocurrency from everyone else. If they change their copy of the blockchain and modify it, it will no longer be in sync with the other copies. If all other people cross-reference their copies with one another, they will find this particular copy standing out, and the hacker's version is deemed untrue.
A successful attack would require the hacker to simultaneously alter and control 51 percent or more duplicates on the blockchain so that the new copy is the most famous and, consequently, the chain agreed upon. A successful attack like this would require considerable money and resources since they'd have to recreate all blocks since they now have different timestamps and codes.
Because of the sheer size of many cryptocurrency networks and how quickly they expand, the cost of pulling off such an undertaking is impossible. It's not just expensive but also unsuccessful. The act will not go unnoticed since network members would be able to see radical changes in the blockchain. Network members would have to hard take the fork into a different Blockchain model that hasn't been affected. This could cause the affected variant of Bitcoin to drop in value, rendering the attack useless because the person who is responsible is in control of an unvalued asset. This would be the case if the accountable person were to take on the variant of Bitcoin. It's designed to ensure that participating in the network is more lucrative financially than attempting to attack it.
Bitcoin Vs. Blockchain
The concept of blockchain technology was first described in 1991 by Stuart Haber and W. Scott Stornetta, Two researchers looking to establish an electronic system to ensure that document timestamps couldn't be altered. It wasn't until 20 years after the introduction of Bitcoin in January 2009 that blockchain technology saw its first application in the real world.
It is believed that the Bitcoin protocol is built upon the blockchain. In a paper of research that introduces Bitcoin as a digital currency, its pseudonymous creator Satoshi Nakamoto was quoted as "a new electronic cash system that's fully peer-to-peer, with no trusted third party."
The main thing to remember is that Bitcoin utilizes blockchain merely to keep a payment ledger. However, blockchain could theoretically be used to record immutably any number of information details. For example, this could take the forms of the transaction and votes during an election inventory of products and state identifications, home deeds, and more.
Currently, tens of thousands of projects are attempting to use blockchains in various ways to benefit society and not just record transactions. For instance, it could be an option to ensure that people vote during democratic elections. The immutability of blockchain makes it possible for fraudulent voting to be much more challenging to take place. For instance, a voting system could function so that each person in the country is issued an individual token or cryptocurrency. Each candidate would receive a separate wallet address, and voters would then send their crypto or tokens into the account of the candidate they would like to cast their vote. The transparency and traceability of blockchain could eliminate the need for human counting, as well as the capability of malicious actors to manipulate the ballots in physical form.
Blockchain Vs. Banks
Blockchains have been hailed as a disruptive force for the financial sector, particularly in banking and payments. But banks and decentralized blockchains are very different.
How Are Blockchains Used?
We now know that blocks in Bitcoin's Blockchain are used to store information about transactions in the monetary sector. There are currently over 10,000 other blockchain-based systems for cryptocurrency. It turns out that blockchain can also be an efficient method of keeping information about different types of transactions.
A few companies that have included blockchain in their operations include Walmart, Pfizer, AIG, Siemens, Unilever, and many others. For instance, IBM has created its Food Trust blockchain to trace food products' routes to their destinations.
What is the reason? The food industry has witnessed many instances of E. Salmonella, coli, listeria, and harmful substances accidentally being added to food items. It has been the case that it's taken several weeks to identify the cause or the root cause of what we eat. Blockchain technology allows companies to monitor the food's journey beginning at its source, all the way to every stop it takes, and finally, the delivery. If a food item is identified as being contaminated, it will be traced back to the point at which it was taken to its source. In addition, the companies can be aware of any other items they might have come into contact with, which allows the recognition of the issue to occur much earlier and possibly save lives. This is a good instance of the use of Blockchain However, there are different ways to implement blockchain.
Banking and Finance
Perhaps no other industry can gain from integrating blockchain technology into their business processes better than banks. Banks only function during regular business hours, typically all week. So if you try to cash a check on a Friday, between 6 and 7 p.m., it is most likely needed for a week before seeing the money in your account. Likewise, if you deposit during regular office hours, it will take between one and three days for verification because of the quantity of transactions banks must settle. Blockchain, however, does not sleep.
Through the integration of blockchain technology into banks, customers can have their transactions processed in just 10 minutes, roughly the amount of time required to upload a block on the blockchain regardless of holiday or even the date or time of the week. In addition, through blockchain, banks can rapidly exchange funds between institutions and secure them. In the business of trading stocks, as an example, the settlement and clearing process can take between the duration of three days (or longer if trading internationally), which means that shares and money are held indefinitely for that amount of time.
Due to the massive amounts at stake, the short days the money is transported can bring substantial costs and risks for banks.
Currency
Blockchain is the basis for cryptocurrencies such as Bitcoin. Bitcoin is the Federal Reserve that controls a cryptocurrency that has its roots in the U.S. dollar. With the central authority system, users' data and their currency are at the decision of the bank they use or their government. If a bank a user owns is compromised, the user's private data is at risk. If the user's bank fails or the person is in a country with an unstable government and the value of the currency of their country could be in danger. In 2008, several failing banks were saved, partly with funds from taxpayers. This is the scenario from which Bitcoin was initially thought of and then developed.
Spreading its operations across computers in a network blockchain lets Bitcoin and other cryptocurrencies function without needing a centralized authority. This is not just a way to reduce risk but also reduces the amount of the transaction and processing charges. It could also provide those living in countries with unstable financial infrastructures or currencies with an increasingly stable currency, with more significant applications, and a broader range of institutions and individuals who can conduct business in the United States and internationally.
Using digital wallets to save money or as a payment method is essential for those with no identity card issued by the state. Certain countries are in a state of war or do not have the infrastructure to offer identity. The citizens of these countries might lack access to brokerage or savings accounts, and thus, there is no safe way to store wealth.
Healthcare
Healthcare professionals can use blockchain technology to store their patients' medical records securely. Once a medical history has been created with a signature, the description could be recorded in the blockchain, providing patients with proof and confidence that the document cannot be changed. Personal health records can be stored and encoded on the blockchain using a private key, which means that they can only be accessed by certain people, guaranteeing security.
Property Records
If you've spent time in the local Recorder's Office, you will realize that recording property rights is complicated and inefficient. Nowadays, a physical deed needs to be given to a government official at the local recording office, which is manually entered into the central database of the county as well as the general index. In a property dispute, the claims to the property have to be aligned with the index of the public.
This isn't just expensive and time-consuming; it is also vulnerable to human error—every error results in tracking property ownership becoming less effective. Blockchain could reduce the need to scan documents and track physical files at the local recording office. In addition, if property ownership information is recorded and verified by the blockchain, property owners can be sure that their title is authentic and is forever recorded.
In war-ravaged areas or countries with no financial or government infrastructure or even a Recorder's Office, it can be almost impossible to prove the ownership of an asset. However, if a group of individuals living in the area can leverage blockchain technology, it is possible to establish transparent and precise lines for property ownership can be found.
Smart Contracts
Smart contracts are computer programs embedded into blockchains to help facilitate, verify or even negotiate an agreement. Intelligent contracts function under certain conditions to which the users are bound. If those conditions are fulfilled, all the contract conditions are immediately implemented.
Let's say, for instance, that a potential tenant prefers to rent an apartment through a smart contract. The landlord agrees to provide the tenant with the code to the apartment once the tenant makes the payment for the security deposits. The tenant and landlord will transfer their respective parts of the contract into the smart contract, which would then hold and swap the door key for the security deposit on the lease's date. The smart contract will refund the deposit if the landlord cannot provide the door number by the lease's expiration date. It will also eliminate fees and procedures typically required by an attorney, notary public, mediator, or attorney.
Supply Chains
Like the IBM Food Trust example, suppliers can utilize the blockchain to document the origins of the products they've purchased. This could allow businesses to confirm the authenticity of not just their products but also the standard labels like "Organic," "Local," and "Fair Trade."
According to Forbes, the Food industry has been increasingly using blockchain technology to monitor the journey and the safety of food items from farm to user.
Voting
As we've mentioned before, blockchain could be utilized to help modernize the voting system. The blockchain-based voting system can potentially eliminate fraud in elections and increase the turnout of voters, as testified during the midterm election in West Virginia. 5 Blockchain used to vote this way could ensure that votes are impossible to alter. In addition, blockchain technology will provide transparency throughout the voting process, decreasing the amount of personnel required for an election and giving officials almost immediate results. This will make it unnecessary to conduct recounts or worry that fraud could threaten the election's outcome.
Pros and Cons of Blockchain
Despite its complexity, the potential of blockchain as a decentralized method of record-keeping has no limitations. From increased privacy for users and enhanced security to lower processing costs and fewer errors, Blockchain technology could likely have applications in addition to those mentioned in the previous paragraphs. However, there are some negatives.
Pros
- Increased accuracy by removing the human element involved in the verification.
- Cost reductions through the elimination of third-party verification.
- Decentralization makes it difficult to interfere with.
- Transactions are safe, secure, and efficient.
- Transparent technology.
- It offers a bank alternative and the ability to secure citizens' personal data from countries with unstable or weak governments.
Cons
- A significant technology expense is related to mining bitcoin.
- Transactions per second are low.
- Use in illegal activities, like the dark web.
- Regulations vary by country and are not completely clear.
- Limitations on storage of data.
Benefits of Blockchains
Accuracy of the Chain
The transactions on the blockchain network are vetted by a network consisting of thousands of computers. This eliminates nearly all people from being involved in verification processes, which results in fewer human errors as well as data that is accurate the information. Even if a computer connected to the network made an error in computation and the error was to be corrected, it would be limited to one instance of the blockchain. For the error to propagate across the entire blockchain, it will need to be generated by at most 51 percent of the computers on the network--a nearly impossible scenario for a growing and extensive network as large as the Bitcoin networks.
Cost Reductions
Consumers need to pay a financial institution to confirm a transaction, a notary to sign an agreement, and a pastor to conduct a wedding. Blockchain removes the requirement to use third-party verification and, in turn, the cost. For instance, business owners pay a fee of a few dollars each time they accept credit cards, as banks and payment processors must process the transactions. On the contrary, Bitcoin is not governed by an underlying authority and has only a small transaction fee.
Decentralization
Blockchain doesn't save any of its information in a central place. Instead, it is replicated and distributed across computers on a network. When a new block is put on the blockchain, each computer in the network updates its blockchain to reflect the new. Because the information is distributed throughout the network instead of storing it in a single database, blockchain is more secure from manipulation. For example, if hackers stole an encrypted blockchain, only one copy of the information, not the entire network, could be affected.
Efficient Transactions
Transfers made through a central authority may take up to several days to be settled. If you try to deposit an unpaid check on a Friday night, for example, you might not have funds available in your account until the morning of Monday. Although banks are open during business hours, typically all week long, blockchain is available 24/7 and all year. The transactions can be completed in just 10 minutes and are declared secure after only several hours. This is particularly beneficial for international transactions, which typically require a lot more time due to concerns about time zones and requiring all parties to verify the payment processing.
Private Transactions
Many blockchain networks function as public databases, meaning anyone with an Internet connection can access the list of their transactions history. While users can access information about commerce, they can't gain access to the identifying details of the individuals who make these transactions. It's a common misconception that blockchain networks, such as bitcoin, are not a source of anonymity when they're, in reality, private.
When a user conducts an online payment, the transaction's unique code - referred to as the public key described earlier, is recorded as a blockchain. The personal information of the person is not. If someone has completed a Bitcoin purchase through any exchange needing identification, their identity remains tied to their bitcoin address. However, the transaction, regardless of whether it is linked to a person's name, is not revealing any personal data.
Secure Transactions
After a transaction is registered, its authenticity must be confirmed via the blockchain. The thousands of computers part of the blockchain are rushing to verify that the purchase information is accurate. Once a computer has confirmed the transaction, it's included in the block of the blockchain. Every block on the blockchain has a unique hash, and it's fantastic to have before it. If the information in an individual block is modified or altered in some way, the block's hash code is changed, but the hash code of the block that follows it will not. This difference makes it difficult for the data stored on blockchains to change without notice.
Transparency
Many blockchains are utterly open-source software. This means that all can see the code. Auditors are then able to examine cryptocurrencies such as Bitcoin to ensure security. It also means there is no official authority regarding who is responsible for Bitcoin's code and how it is modified. This means that anyone can propose modifications or updates to the bitcoin system. If most Bitcoin users believe that the updated version of the software with the update is safe and worthy, Bitcoin can be upgraded.
Banking the Unbanked
One of the most significant aspects of Bitcoin and Blockchain is the capacity for any person, regardless of race or gender background, to use it. Based to The World Bank, an estimated 1.7 billion people don't have bank accounts or any way to store their wealth or money. Most of these people reside in developing countries where the economy is still in its early stages and entirely dependent on money.
They typically earn a tiny amount of money which is accumulated in cash. They are then required to keep the cash in a safe location at their homes or other residence locations, making them vulnerable to robbery or unnecessary violence. The keys to a bitcoin wallet can be kept on paper or a simple mobile phone or stored in a notebook if needed. For most people, these choices are likely less complicated to hide than a few ounces of cash hidden under the mattress.
The blockchains of tomorrow are seeking solutions that will not just be a type of account to store wealth but also keep medical documents, property rights, and many different legal agreements.
Drawbacks of Blockchains
Technology Cost
While blockchain can reduce transaction costs, the technology isn't cost-free. For instance, the bitcoin network's PoW system verifies transactions and uses vast computing power. On the other hand, the power of all the computers running the Bitcoin network is similar to the quantity Norway and Ukraine consume every year.
Despite the expense of mining bitcoin, people are still racking up electric bills to verify transactions made on the blockchain. This is because the moment miners can add blocks to Bitcoin's Blockchain, they're paid enough bitcoin to keep their energy and time worth it. In the case of blockchains that don't use cryptocurrency, miners must be paid or otherwise rewarded to confirm transactions.
A few solutions to these problems are beginning to appear. For example, bitcoin mining farms have been established to use solar energy, natural gas generated by fracking facilities, or wind farms' power.
Speed and Data Inefficiency
Bitcoin is an excellent example of the potential inefficiencies that blockchain technology could bring. Bitcoin's PoW system requires about 10 minutes to insert a block on the blockchain. At this rate, it's believed that the blockchain can only handle about 7 transactions per second (TPS). While other cryptocurrencies like Ethereum are more efficient than bitcoin, they're restricted by the blockchain. To give context, the brand of the past Visa can handle 655,000 TPS.
Solutions to this problem have been developed for many years. There are blockchains in development that have more than 3000 TPS.
Another issue is that each block will contain a limited amount of information. Therefore, the block size issue is and is still one of the biggest concerns regarding the capacity of blockchains moving forward.
Illegal Activity
Although the security of the blockchain network shields users from hackers and protects their privacy, it also allows illegal trade and activity on the blockchain. One of the most famous examples of blockchain being used to facilitate illicit transactions is most likely that of the Silk Road, an online dark web illicit drug and money laundering market that operated from February 2011 to October 2013 and was later closed in October 2013 by authorities from the FBI.
It is believed that the black market lets users buy and sell illicit goods without being tracked using an application called the Tor browser and makes illegal transactions using Bitcoin or another cryptocurrency. The current U.S. regulations require financial service providers to collect details about their clients when they establish an account, verify the identity of every customer, and ensure that the customer is not listed in any list of terrorist suspects or known organizations. This system can be viewed with both pros and disadvantages. It allows anyone to access financial accounts and permits criminals to make more transactions. Many have suggested that the positive benefits of crypto, including banking in the world without banks, outweigh the negative aspects of cryptocurrency, mainly because most illegal activities are carried out using untraceable cash.
Although Bitcoin was used from the beginning for these purposes, its transparency and longevity as a financial asset have led to illegal activities shifting to other cryptocurrencies like Monero and Dash. Today, illicit activity accounts for a tiny portion of Bitcoin trades.
Regulation
Many people in the crypto world have expressed their concerns over the regulation of cryptocurrencies by governments. As it becomes more difficult and nearly impossible to eliminate something like Bitcoin since its decentralized network expands and expands, governments could declare it illegal to own cryptocurrency or be part of their networks.
The concern has gotten smaller in the past as influential organizations such as PayPal begin to allow the use and ownership of cryptocurrencies through its platform.
What Is a Blockchain in Simple Terms?
In simple terms, a Blockchain is a shared database or ledger. Data is stored in data structures referred to as blocks. Each node in the network is an exact copy of the database. Security is assured because when someone attempts to alter or remove an entry in one ledger, however, the rest of the ledger will not be able to reflect the change, and the entry will be rejected.
How Many Blockchains Are There?
The number of active blockchains is increasing every day at an ever-increasing rate. In 2022, over 10,000 actively operating cryptocurrencies based on blockchain technology and hundreds of other non-crypto currency blockchains.
What's the Difference Between a Private Blockchain and a Public Blockchain?
An open or public blockchain, also called an "open" or "permissionless cryptocurrency, is a type of blockchain where anyone can join the network at any time and create a node. Due to their open nature, they must be secured using cryptography and a consensus mechanism such as the proof of work (PoW).
In contrast, a private blockchain or one that is permission requires every node to be vetted before joining. Because nodes are considered trustworthy and secure, the security layers are not required to be as safe.
What Is a Blockchain Platform?
A blockchain platform permits developers and users to develop innovative uses for the already existing infrastructure for blockchain. One instance could be Ethereum which has its native cryptocurrency known as the ether (ETH). However, Ethereum's Ethereum blockchain also permits the creation of smart contracts and tokens that can be programmed to use in Initial coin offerings (ICOs) and not-fungible tokens (NFTs). They are all built on top of the Ethereum infrastructure and protected by nodes that are part of the Ethereum network.
Who Invented Blockchain?
Blockchain tech was initially introduced around 1991 by Stuart Haber and W. Scott Stornetta, two mathematicians looking to establish an application where the timestamps of documents cannot be altered. 1 In the mid-1990s, Cypherpunk Nick Szabo suggested using blockchain technology to protect a digital payment system known as Bit Gold (which wasn't actually implemented).
The Bottom Line
With many practical applications for blockchain technology that are being developed, researched, and explored, blockchain is now becoming a household name mainly due to the popularity of cryptocurrency and bitcoin. A buzzword that all investors are using in the country, blockchain will help make government and business operations more efficient, accurate as well as secure, affordable, and less entangled.
As we move to the next decade in blockchain technology, there's not a matter of whether or not legacy companies will adopt blockchain technology. It's about when. Currently, we are seeing the growth of NFTs and cryptocurrency of assets. Therefore, the next decade will likely be a crucial period of expansion for blockchain.