What is Blockchain Technology?
Blockchain technology is a distributed, immutable database or ledger that records transactions, track assets, and establishes trust. It is an electronic database that stores information in a digital format. In addition, the stored data is chronologically consistent because the chain cannot be deleted or altered without network consensus.
Furthermore, blockchain is a growing list of records known as blocks that are cryptographically linked to each other to ensure their safety.
Wikipedia reports that the first blockchain-like proposal appeared in 1982. But the cryptographically secured chain of blocks made its debut in 1991. The data blocks had timestamps that couldn’t be tampered with. Later, in 2008, Satoshi Nakamoto developed the first decentralized and peer-to-peer blockchain network. He improved the network by eliminating the need for third-party timestamps verification. Instead, he designed the system to be verified by the nodes connected to the network. This network had a native coin called Bitcoin which could be traded among the connected nodes.
Furthermore, it is crucial to understand that the blockchain network is a distributed system. The native currency of the blockchain network (e.g., Bitcoin, Ether, SOL etc.) exists on it, and no single person owns it. Also, the network’s founders can’t give themselves any currency and will have to do actual ‘work’ to earn it.
Why Is Blockchain Technology Important?
Security is the most desired feature that makes blockchain technology a must-have. Once a transaction gets verified on the network, it can’t be changed.
For example, consider a simple scenario. You wish to buy a house from a builder. After all the negotiations, you make an all-cash deal and deposit the cash to the builder. Later, the builder denies receiving any money from you and holds your possession of the house. In this case, the builder can tamper with its’ ledger to show that you haven’t deposited any money. However, if you had paid the builder using a blockchain network, the builder couldn’t change the ledger, and he will have to give you possession of the house.
Even though blockchain technology is growing by leaps and bounds, it is still in a development phase. Further, many use-cases of the technology are yet to be explored and developed.
Advantages of Blockchain Technology
The blockchain network has many other benefits mentioned below-
- Blockchain technology empowers business relations by reinforcing trust among users via security, privacy and decentralization.
- The data is safe from tampering and theft.
- The overall cost of production is low.
- Transactions take place almost instantaneously across borders.
- The auditing for transactions is easier.
- It has the facility of invocation and tokenization.
- Smart contracts are another feature of blockchain that automates mundane tasks.
Blockchain technology’s benefits are pieces of evidence that the technology is here to stay and revolutionize the digital world. However, it is also necessary to understand the limitations of the same.
Limitations of Blockchain Technology
- The erroneous data is difficult to be modified.
- The storage requirement is higher for large databases.
- If we forget or lose the private key, we can lose access to the data forever.
- The interfaces for the technology are yet to be made user-friendly.
Types of Blockchain Networks
The blockchain networks are of four types-
No single authority controls the public blockchains. They are available for use to everyone public, and the general public (nodes) regulates them. It is trustable, secure, and decentralized but often charges higher transaction costs and slower speed. They are a good option for financial systems, building decentralized apps etc. Example- Bitcoin and Ethereum.
Private blockchains, or managed blockchains, allow only selected nodes to participate in the network and operate in a closed network only. It is more secure, scalable and has more privacy. They are beneficial for voting systems, asset management etc. Example- Ripple.
A hybrid blockchain is a combination of public and private blockchains and has features of both. It may have a permission-less system or a permissioned system. It is beneficial for public records, shelved privately. For example, healthcare and government can use a hybrid blockchain. Its limited use is due to its efficiency, transparency and ecosystem constraints.
A consortium blockchain is the pooling of resources by multiple organizations to utilize the technology for the greater good. Some data may be private, and some may be public. It establishes authority, has faster speed and is flexible. The use of consortium blockchain is for businesses of similar nature like banks, supply chains etc. Example- Global Shipping Business Network Consortium is a non-profit consortium for the shipping industry.
How Does Blockchain Technology Work?
To explain the technology’s working, consider Bob sending a bitcoin to Ron. This process involves multiple steps.
- The transaction is first listed on the distributed ledger and encoded with cryptography.
- Secondly, nodes on the blockchain network verify the transaction by solving the cryptography and confirming the transaction’s validity. The nodes are computers located across the world and connected.
- The valid transactions group together to form a block. Subsequently, a newly created block links to the pre-existing blocks and elongates the chain of blocks. Once the block links to the chain, the transaction completes.
Explanation of Working
In the above example, a block contains the transactions. However, a block may contain other information as well. For example, it may have a list of transactions, usage of the file, and documents. The type of records a block will contain depends upon the purpose and type of that particular blockchain.
The second step of the process involves solving the cryptographic equation. This equation is called a hashing function. A hash function is a complex mathematical function that gives an output by giving it an input. Upon slightly tweaking the hash function’s inputs, a drastically changed hash function appears. The bitcoin blockchain uses the SHA-256 hashing function that always yields 256-digit long output containing only 0 and 1 irrespective of the input’s length.
Every block has a hash function attached to it. Also, every block contains the transaction detail, a timestamp and a hash function of the previous block in the chain. The first block in the chain has only its’ hash function. It is known as the genesis block.
If one wants to change any transaction, one will change the hash function of the block containing that transaction. At that very moment, all the succeeding blocks become invalid as the hash of one block changes. Thus, the hash of all the succeeding blocks will require changes to make them valid. Further, it is nearly impossible to change the hash of all the blocks as it is not worth the time and effort it demands. Therefore, the transactions on the blockchain are immutable and transparent.
Interested in reading more? Check out how BIM is a game changer for construction.