Unless you’ve been living under a rock for the past few years, you might’ve heard of blockchain. Whether it is in the context of cryptocurrencies or the fancy new technologies big companies are deploying, the term blockchain seems to be ubiquitous these days.
But what is blockchain exactly? All the terms like public and private keys, cryptography, digital signature, etc. can make it seem like something complex and cryptic.
The reality is, blockchain is actually quite simple when you get down to its basics. Here, we have compiled everything about blockchain from blockchain basics to its potential uses to save your time and energy.
What is Blockchain Technology?
Blockchain, in simple words, can be said to be a decentralized public ledger. It can be visualized as a long chain made of interconnected “blocks”.
Each block contains information about a particular transaction and its timestamp. A new block is added to the chain whenever a new transaction is conducted.
Any person can view and verify the transactions on a blockchain network.
This openness and transparency open up numerous possibilities for the application of blockchain technology in various domains.
How Does Blockchain Technology Work?
1 Understanding Blocks
Blockchain is essentially made up of blocks of information. The blocks contain some data, their own hash, and the hash of the previous block.
Hash works as a unique identity of a particular block. Since each block contains the hash of the previous block, it creates a chain of interlinked blocks, as discussed above.
If anyone attempts to change the hash of a block, the tampering would be immediately caught due to the records in the blockchain not matching.
Theoretically, while tampering with blockchain records is possible, it requires immense time, resources, and computing power.
2 What are Nodes?
Since blockchain is not controlled by a central authority, it runs on a peer-to-peer network depending on nodes(or participants) to validate the transactions.
Any person can join and view the blockchain records and create new blocks. Such participants are known as nodes in blockchain lingo.
3 The Creation of Blockchain
A node can initiate a transaction using its digital signature. A block is then created for that transaction. Now, the transaction needs to be approved by the peers.
The transaction is sent to other nodes on the network who then create a consensus and validate the transaction. After this process is done, the new block is added to the existing blockchain network.
4 Blockchain and Consensus Mechanisms
We discussed above that any transaction on the blockchain network needs to be approved by the nodes i.e. the nodes should create a consensus.
In blockchain networks, there are certain protocols to validate a transaction. These protocols are known as consensus mechanisms.
Consensus mechanisms are generally of two types- Proof-of-Work(PoW) and Proof-of-Stake(PoS).
PoW is the most widely used consensus mechanism. It involves the process of mining where users try to solve a puzzle with their computers to validate a transaction. However, PoW is often criticized on the grounds that it consumes large amounts of energy and hence, is environmentally unsustainable.
PoS, on the other hand, has recently been growing in popularity due to its feature of less energy consumption. Here, miners are replaced by validators. They are chosen according to their stake for validating transactions and are later rewarded for their efforts.
What is the Purpose of Blockchain?
The purpose of blockchain is to improve access to information. It aims to move away from a world where data and information are controlled by a central authority.
Blockchain is decentralized, open-source, and enables easy verification of information. It is efficient due to eliminating the need for third-party verification.
There are lesser chances of fraud and no possibility of tampering with the records. In a way, blockchain is democratizing access to and analysis of data.
Different Types of Blockchain Networks
Blockchain Networks are generally of four types. They are:
1. Public Blockchain- Public blockchains are completely open to the public. Anyone willing to and having adequate processing power can join the network. There is no central authority and the highest level of transparency is ensured. Anybody can view and verify records though they cannot alter them.
2. Private Blockchain- Private blockchains are smaller in scale. Only selected authorized individuals can join the network and validate transactions. Hence, these networks provide a high degree of privacy.
3. Hybrid Blockchain- As the name suggests, hybrid blockchains combine features of both public and private blockchains. They offer the best of both worlds to users. There is some part of the network that is made private while another is visible to the public. Access to users is generally provided via smart contracts.
4. Consortium Blockchain- It is also known as a federated blockchain. Here, different individuals who each own a private blockchain come together to form a larger blockchain network.
While individuals can only work on their own nodes, information is accessible to everyone on the network.
The key difference between private and consortium blockchain is that the former is owned by a single individual or organization while in the latter, multiple individuals or organizations band together to form a larger network.
What are the Uses of Blockchain Technology?
Blockchain is one such technology that holds the potential to change the way the world functions completely. Apart from its prominent use in the Finance sector, many other fields stand to benefit from integrating blockchain into their functioning. Some applications of blockchain technology are:
1. Banking and Finance- The Banking sector stands to benefit tremendously by adopting blockchain technology. Blockchain promises to reduce transaction costs and the time required to settle claims among other things. Additionally, blockchain due to being a secure tamper-proof ledger can bring down the possibility of banking and insurance fraud.
2. Healthcare- The adoption of blockchain can assure patients that their health records and data will be kept safe and private. Blockchain technology can also help in streamlining pharmaceutical supply chain management. If the rampant sale of spurious drugs has shown us anything, it is that the medical supply chain requires a major overhaul. Blockchain is the solution for that.
3. Maintenance of Records- The government collects and maintains a vast amount of data in the form of birth and death records, land records, electoral rolls, etc. Using blockchain for record maintenance lessens the possibility of tampering and disputes arising from the same. Perhaps that is why the Andhra Pradesh government is keen on adopting blockchain technology for keeping land records.
4. Internet of Things(IoT)- IoT is all the rage these days. Smart homes, smart devices, and smart grids are some examples of IoT. However, like any internet and cloud-based service, IoT elicits concerns about data privacy and security. Integrating blockchain into IoT can help in assuaging such fears.
5. Smart Contracts- One way blockchain has proved to be extremely useful is in the field of business with the help of smart contracts. Smart contracts can eliminate the lengthy procedures associated with contract negotiation and implementation and help in improving the ease of doing business.
6. Agriculture- Blockchain is central to transforming the agriculture sector into a smart agriculture sector. From tracking the distribution of seeds to pesticide usage, blockchain technology promises to revolutionize the way farming is done. One recent example is the state of Punjab which is using blockchain technology to track the journey of organically grown potatoes from farm to fork.
What are the Benefits of Blockchain?
1. Security- The major thing that makes Blockchain such an attractive technology is the level of security it provides. Since it is a decentralized network and tampering is nearly impossible, blockchain assures the safety and security of sensitive data.
2. Efficiency- Blockchain makes asset transfer and transaction settlement faster and easier. Since there is no need to manually verify anything, blockchain is an efficient tool for 24/7 asset transfer.
3. Peer-to-Peer Transactions- Blockchain facilitates transactions between two individuals, thus eliminating the need for any third-party intermediary such as a government or a central bank. This makes blockchain the preferred technology for people valuing privacy above all.
4. Accuracy- Blockchain diminishes the possibility of errors since it requires every transaction to be validated by multiple nodes. The possibility of double records is pretty much nil in blockchain networks.
5. Transparency- Transparency is one of the main pillars of blockchain technology. Since it is a decentralized, distributed, and public ledger technology, any asset or transaction can be easily tracked on the network thus ensuring full transparency.
Are there Limitations to Blockchain Technology?
Like any technology, blockchain has certain drawbacks too. Some of the major ones are:
1. Scalability Issues- While businesses are keen to adopt blockchain technology, there are concerns about whether it can handle a large volume of transactions. According to Zheng et al.(2018), the Bitcoin blockchain can process about 7 transactions per second, which is not enough to fulfill the requirement of processing millions of transactions every day.
2. Environmental Impact- Blockchain technology involves a heavy carbon footprint. According to a White House report, the estimated global electricity usage for crypto-assets exceeds the annual electricity usage of many countries such as Argentina and Australia. An article in Nature Climate Change also reports that the projected Bitcoin usage alone could push global warming above 2*C in less than three decades.
3. Illegal Use- Due to the anonymity of the blockchain networks, it has a history of being used for nefarious purposes. Cryptocurrency, for example, is often linked to money laundering and terror funding operations.
4. Security and Privacy- While blockchain is believed to be safe, it still faces multiple security challenges. It is vulnerable to network attacks and studies indicate that it cannot fully guarantee transactional privacy. Attackers have often been successful in tracking transaction records and revealing the owner’s identity.
Is Blockchain Secure?
Like any emerging technology, blockchain also invites the fundamental question- is it safe and secure? Blockchain functions on the principles of decentralization, consensus, and cryptography. Hence, we can say that security is a core feature of the blockchain network.
The network is divided into blocks. Each block contains a certain quantity of information. Since blockchain is an open and decentralized ledger, any attempt to alter any block of information can easily be detected. This makes blockchain secure in the sense that it would require immense amounts of resources and energy to tamper with the system.
However, if the numerous cryptocurrency leaks have shown us anything, it is that no technology is foolproof. Attackers have been able to exploit vulnerabilities in the system to launch malicious attacks. Phishing, 51% attacks, etc. are common methods by which blockchain networks are compromised.
The bottom line is that while blockchain is a largely safe and secure technology, it is also important to pay attention to best security practices in order to protect oneself from falling victim to malware attacks.
The Role of Blockchain in Cryptocurrency
Cryptocurrency seems to be the buzzword these days. If not the various meme coins, everyone has at least heard of Bitcoin- the most popular cryptocurrency to date. However, what does blockchain have to do with cryptocurrency? A lot of people seem to have that query.
The fact is that blockchain is the fundamental technology upon which cryptocurrency is based. A cryptocurrency is a digital currency that is stored electronically on a blockchain.
Cryptocurrencies use cryptography, the central feature of blockchain, to secure and validate transactions. Hence, blockchain is the foundation upon which cryptocurrencies are built.
It is important to remember that blockchain is the name for a technology that has various uses in different fields. Cryptocurrency is merely one of the applications of blockchain.
Blockchain Vs. Bitcoin: What is the Difference?
Blockchain and Bitcoin are often considered to be synonyms. Perhaps because their origin and application are inherently linked.
After all, Bitcoin is believed to be the first proper application of blockchain technology. However, the truth is that the two are not the same thing.
The key difference lies in the fact that Bitcoin is a digital currency while blockchain is a form of technology.
Bitcoin is merely an example of a product that uses the peer-to-peer network to ensure transparency and security of transactions. There are numerous other currencies such as Ethereum, Dogecoin, Solana, Tron etc. built upon blockchain technology.
Additionally, blockchain is also used in various other sectors such as insurance, real estate, healthcare, and agriculture to maintain a decentralized ledger system.
What is the Future of Blockchain?
The twenty-first century is the age of information. And blockchain is set to revolutionize the way said information is stored and processed.
Blockchain represents a democratization of information as it moves away from the control of a central authority.
Instead, data can be stored on decentralized networks accessible by everyone, thus, ensuring greater transparency in the process.
While cryptocurrencies are the most prominent example of blockchain, it has found use in various other sectors including but not limited to finance, automotive technologies, and agriculture. Blockchain is truly a technology of the future.