What is Blockchain Technology?
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value,” Don & Alex Tapscott, authors of Blockchain Revolution (2016).
In simple terms, a Blockchain ledger is digital, distributed, and decentralized. So, how does blockchain technology work? As per the blockchain definition, it records transactions across a global network of computers where the information is highly secure. As the name suggests, a blockchain is nothing but a linear chain of blocks that holds information about transactions taking place over the web. Every block contains data in the form of coding that is organized in a chronological manner.
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At its rudimentary level, blockchain is just a chain of blocks, but not in the traditional sense of those words. When we say the word ‘blockchain’ here, we are basically referring to the digital information (block) stored in a public database (chain). Blocks are dispersed across multiple computers.
Blockchain Explained Diagrammatically
The History of Blockchain
Blockchain was first conceptualized in 1991 by Stuart Haber and W. Scott Stornetta, through the time-stamping of digital documents to avoid being tampered with or backdated. The idea evolved through the years, and in 2009, Bitcoin was first introduced to the world by an anonymous developer(s) under the pseudonym, Satoshi Nakamoto.
Let’s quickly take a look at the timeline from the conceptualization to the execution, history, and Blockchain applications.
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A Brief History of Blockchain
Stuart Haber and W Scott Stornetta come up with a practical idea and solution describing a system that implements a chain of blocks secured cryptographically.
Nick Szabo designs a decentralized digital currency, coined ‘bit gold.’
A theory of encryption protection chains and their implementation gets published by Stefan Konst.
A white paper establishing a Blockchain model gets published by Satoshi Nakamoto.
The first Blockchain is brought into existence as a public transaction ledger for the most successful version of cryptocurrency, called Bitcoin.
Blockchain technology finds potential in other sectors like finance, and Blockchain 2.0 is born as a means to introduce more applications beyond currency. Smart contracts come into existence with the introduction of the Ethereum Blockchain system.
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Second Generation Blockchain
Second-generation Blockchains include similar currency systems, but these run on different rules with different applications. Let’s check out some examples.
- Ethereum: Ethereum works with a currency called Ether, as well as smart contracts, and it is another big implementation like Bitcoins Blockchains.
- Ripple Blockchain: It is based on a public ledger and is a real-time gross settlement system with currency exchange and the remittance network.
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Why is Blockchain popular?
From the Blockchain timeline, you can already assume that several attempts may have been made to formulate digital currency before Bitcoin but without any success—the main reason being security and trust issues. Bitcoin, on the other hand, through its Blockchain technology, is the perfect solution to the problem.
Because Blockchain’s database is run mainly by users, it has no central authority. Data in the Blockchain network cannot be tampered with due to its transparency. For obvious reasons, the Blockchain gained traction and popularity. The future of Blockchain Technology is very bright. Its applications can be used in various applications.
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How can be blockchain explained in simple terms?
At its rudimentary level, blockchain technology can be explained as a chain of blocks, but not in the traditional sense of those words. When we say the word ‘blockchain’ here, we are basically referring to the digital information (block) stored in a public database (chain). Blocks are dispersed across multiple computers.
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Blockchain Technology Explained: The Blockchain Definition
- Blocks store primary information about transactions, such as date, time, and purchase amount of your last transaction
- They store information about who the participating entities are in transactions. A block for your purchase from a vendor would record your name. But the catch here is that, instead of using your actual name, your purchase is recorded without any identifying information. In real, a unique ‘digital signature’ is used to refer to your username.
- Also, blocks store apt information that distinguishes them from other blocks in the same blockchain. Each block stores a unique code called a ‘hash’ that allows it to be different from every other block.
Understanding blockchain might be tricky. But we have made it simple for you. A single block on the blockchain ledger can store data depending on the size of the transactions, i.e., a single block can host a few thousand transactions under one roof. Hash codes are used to make sure that blocks in a blockchain are in sync with each other. When too many blocks are connected in a single blockchain, the blockchain ledger size increases. The large network of ledgers (blocks) is what makes a blockchain secure and, therefore, ready and a go-to technology for widespread business adoption. Unlike a centralized database, in the decentralized blockchain structure, a security breach of just one block or one computer has no major detrimental effect on the whole system.
Is Blockchain explained, according to you?
We have learned what is blockchain. Now that we understand blockchain technology at a basic level, we must discern the myths that revolve around this emerging form of technology.
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Advantages and Disadvantages of Blockchain
Advantages of Blockchain
- Trustworthy distributed systems: Blockchain allows for the verification of every transaction stage, which is public, and cuts cost without the need for intermediaries.
- No interference from the government: Government has no control over the currencies implementing Blockchain technology.
- Stability: The stable and transparent Blockchain system streamlines all transactions and processes easier with hardly any fraudulent activities.
- Speedy payments with reduced costs: With its single record-keeping and zero third-party interventions, there is no requirement for elaborate documentation in Blockchain, and transactions happen with the least errors at reduced costs.
- Security and efficiency: Financial efficiency is due to the fact that there are no third-party interventions. The openly distributed transactions make it easy to detect any unusual activities, which in turn prevents any hackers from tampering with it as well.
Disadvantages of Blockchain
- Private key issues: If users lose their private key, a serious issue would arise as there will be no other way to access their money or carry out transactions.
- Volatility: Since virtual currencies are new to the market, they can get easily affected by the decisions made by companies or groups regarding their adoption or otherwise, which makes them highly volatile. The ever-fluctuating price can be an issue for anyone thinking of investing.
- Scalability: There is a limitation to the number of transactions per node, which means that it is not wise to expand the number of users as per the transaction speed. Hence, scalability is an issue.
- Security concerns: The anonymous nature of the system can be a magnet for hackers as they can remain unidentified.
- Data modification: Irreversible records can be a disadvantage, and the modification process can be quite demanding.
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Here’s what Blockchain Technology is NOT! Blockchain Explained!
- Blockchain technology is not entirely all about bitcoins: Though Bitcoin was the first application of blockchain, it has certain fundamental differences from a business-based blockchain ledger.
- Blockchain is not a product: Blockchain is not particularly a product on sale. Built on the inundation of blocks, the utility of blockchain technology comes from an appropriate set of applications built on top of it.
- Blockchain is not needed in the absence of a business network: There are cases when a business network collapses or ceases to exist. In these cases, there is no need for a blockchain.
Blockchain is not the replacement of a transaction processing system: Under specific conditions only, blockchain may be used to transform a transaction processing system across a business network. If the following criteria are not on priority, a blockchain implementation is not required at all.
In addition to these points, blockchain is neither a distributed database and a secure messaging replacement nor is it usually suited for high-volume and low-value transactions.
When we say Blockchain, we often hear the term ‘distributed ledger technology.’ Here’s the connection between blockchain definition and distributed ledger technology.
In business language, distributed ledger technology or DLT revolves around an encoded and distributed database that serves as a ledger. In that ledger, records regarding transactions are stored. At the core, DLT is an innovative database approach with a data model wherein cryptography is utilized in each transaction update. Thereby, verification becomes possible across the specific blockchain network, depending on its goal and stakeholders.
In a distributed ledger network, there is no central administration. Rather, there is shared ownership, making data secure.
Now that we understand Blockchain in a nutshell, let us skim through its variants. Here are the Blockchain variants, as per the blockchain definition.
In public blockchains, distributed ledgers are visible to every user on the Internet. It allows users to verify and modify blocks of transactions in a blockchain. Example: Bitcoin, Ethereum, Dash, and Factom.
Private blockchains are generally incorporated within single organizations at an intra-level. Specific individuals of the organization are permitted to manipulate transaction blocks. However, anyone from the Internet can view the content of the blocks. But to manipulate the content of blocks, specific permissions are mandatory. Example: Multichain and Blockstack.
With consortium blockchains, things are different. Only a group of organizations or individuals can verify and add transaction blocks. The ledger here may be open or restricted to certain groups only. For its high-security enablement, this variant of blockchain is used by organizations across disparate verticals. Example: Ripple, R3, and Hyperledger 1.0
Applications of Blockchain
Blockchain has the potential to be known more widely across the world due to its future applications. Let’s take a look at a few of them:
- Finance sector: Financial institutions are taking notice of blockchain’s potential and have started investing in it. Blockchain can help address black-money flow and dealings and introduce efficient regulations.
- Cybersecurity: Encryption through cryptography can enhance Cybersecurity.
- Cloud storage: Implementing Blockchain can make cloud storage more secure.
- IoT and networking: The concept of a distributed network of connected devices aims to remove the centralized location for the management of communication for various activities.
- Digital advertising: Blockchain can resolve issues in the supply chain of digital advertising through its reliability and transparency.
- Supply chain management: Blockchain’s traceability and reduced time delays and errors can truly streamline supply chain operations and management.
- National digital currencies: Governments are predicted to introduce their own digital currencies to an open market after seeing the success of Bitcoin.
- Government agencies: Government agencies can benefit from Blockchain with an effective data management system.
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Blockchain Definition – Permissioned and Permissionless Blockchains
There exist two philosophies in the world of blockchains—permissioned blockchains and permission-less blockchains. Here’s what they are and the underlying difference between them.
||Open and transparent
Permissioned Blockchains: These blockchains maintain an access control layer to restrict and in some cases allow certain actions to be performed only by select and identifiable participants or individuals. The intrinsic configuration of these blockchains put a check on the transactional activities of participants. Owing to their security aspect, these blockchains are popular among industry-level enterprises and businesses. For instance, a manufacturer may implement a permissioned blockchain for managing supply chains. In this case, third parties including logistic partners and banks may be involved in the whole transaction process. These third parties may be part of the whole process, ought not to know the actual transaction values. This is where permissioned blockchains pitch in. They restrict transactional control to the manufacturer only.
Permission-less Blockchains: Permission-less blockchains are contrary to what you read above. Here, anyone can join the network and participate in the process of block verification to create consensus. Good examples of permission-less blockchains are Bitcoin and Ethereum blockchains, where any user can join the network and start mining. In permission-less blockchains, the use of Proof of Work (PoW) mining is done. Here, hashing power is offered to build trust. If 51 percent of nodes say that something is true, the output becomes true.
Is the blockchain ledger secure?
The answer to this question is the perception of the user. Of course, blockchains are much more secure than traditional technologies, but there is a catch here.
Why do we need blockchains in the first place?
We need blockchains as we do not trust each other with transactions. Therefore, we leverage sophisticated math and innovative software rules that are extremely difficult for threat-attackers to manipulate. However, blockchain is not completely full proof. With the right set of skills, hackers can easily hack their way through even the best-designed blockchain security firewalls.
Blockchains are undoubtedly the most secure form of technology we have presently, but it won’t be far from now when some hacker will eventually find his/her way through our so-called secured blockchains. A lot of research is being done to curb the broken ends that exist in the blockchain world today.
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