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14 Jan 2021

What is Blockchain Technology and How Does It Work?

CoinSwitch Kuber

“What is now proved was once only imagined.”

          – William Blake

Starting from healthcare to finance, blockchain technology is virtually everywhere. And it is the basis of the complete financial freedom that crypto promises. Yet, the terminology and working of blockchains continue to be hard for many to follow. Here is an attempt to explain things as simply as possible.

blockchain meme

Source: Giphy

Key Takeaways

  • Blockchain technology aims to change the traditional record-keeping methods by adding immutability, security, and openness into the scheme of things.
  • A standard Blockchain product like Bitcoin has Miners, Nodes, and Blocks working in harmony.
  • Blockchain technology ensures faster settlements, minimal transaction costs, and fewer instances of tampering.
  • Crypto projects are ideated using Blockchain technology at the very core.
  • Even government-backed CBDCs like Digital Rupee are relying on Blockchain technology to make the new form of tender more usable and functional. 

What is Blockchain Technology

Blockchain is a distributed ledger technology with the potential of disrupting decades-worth of record-keeping methods.

Unlike Excel or Google Sheets, a supermarket database is arranged in a hierarchical tabular format to speed up searches. Such custom databases are usually owned by a company, or an individual, and a select handful have a view or edit access to them—making them centralized. 

Unlike these common databases, a Blockchain structures data in a chain instead of tier tables, where no one individual or group is in control. And each node/computer on the network can access the ledger and see the changes in real-time. Transparent to the T, it is!

Now that the basics are out of the way, here are the pointers to keep in mind:

  • In Blockchain technology, data is grouped in blocks that have pre-specified storage capacity. 
  • When a block is full, it is chained to the previous block, thus forming a blockchain. 
  • Any further addition ends up in a new block, which is also chained to the last block once it is full.

Yet, the question remains. 

How does a Blockchain Work?

While we would delve into the depths of Blockchain technology further into this discussion, here is how the process actually works at the surface level.

  1. Nodes– Validate Transactions
  2. Miners– Build Blocks, Mint New Tokens, and Develop the Blockchain as a Whole
  3. Blocks- Permanently recorded Transaction Data created by Nodes and Miners

Here is a more detailed analysis of this simplistic process:

Miners will need to install an application on their computer, which allows them to communicate with other miners on the network. Once a computer begins communicating with other miners on the network, it is called a node.

All these nodes communicate and process transactions on the network to add new blocks to the public ledger. As stated above, this network runs 24*7 365 days a year, and verifies millions of transactions worth billions of dollars each day!

Why is Blockchain Technology Popular?

Blockchain

Let’s take a look at why Blockchain is so popular among enthusiasts and some potential use cases of the same. Here is one for you👇

Person A wants to send Person B some money.

In Real-World

Typically, A will have to rely on third-party organizations like a bank. The intermediary will deduct a specified amount from A’s account and transfer it to B’s account in a few working days. This intermediary will also update the transaction history in a passbook issued by the same.

Although the process looks simple enough, here are some probable issues:

  • Vulnerability, due to server issues;
  • Unscrupulous parties requesting funds under aliases;
  • Higher average transaction time and cost.

In a Blockchain

Blockchain was conceptualized to eliminate such vulnerable dealings and optimize the record-keeping process with a focus on:

  • Faster Settlements
  • Consensus-based verification 
  • Improved Security

As we will discuss further, industries requiring absolute control over data handling can benefit massively by incorporating Blockchain into their day-to-day dealings.

Blockchain Technology: How to Use it Well

Blockchain features

Source: Giphy

The best thing about Blockchain Technology is that it creates an irreversible chronological timeline with timestamps for when the data is added. Hence, it is immutable. 

When applied in a decentralized manner, the possibilities of potential use cases are infinite. Here are some of the blockchain-powered manifestations that even the ledger gods would be proud of:

  • Bitcoin, as a cryptocurrency, was the first time Blockchain technology was utilized for creating a crypto asset.
  • Blockchain is being used extensively by supply chain firms to make their databases airtight and immune to vulnerabilities.
  • Central Banks like RBI, have resorted to Blockchain technology for developing their CBDCs (Central Bank Digital Currencies), with a focus on offline payments and simplified cross-border transactions. 

Note: Blockchain as a technology can be equally effective in centralized setups, for instance, CBDCs, Supply Chain resources, and more. Transactions and records will still be transparent. Immutability will continue to be a virtue. It’s just that the discretionary power will belong to a specific yet trusted group. 

On several fronts, you will find that Blockchain offers flexibility where it is required. A built-in part of the crypto landscape, Blockchain technology ensures transparent transactions, minimal network congestion, lighting fast transaction finality, and the flexibility to store and interact with data in whichever way you deem fit.

Blockchain Characteristics

In simple terms, Blockchain makes information storage and deployment way more credible. Still unsure as to how it happens! Here are the tenets that matter:

  • Security

The security of a Blockchain network is determined by how strict its users want it to be. Yes!

Since the electronic ledger is vastly P2P (Peer-to-Peer), the process of authentication and authorization lies in the hands of users.

In the transaction between A and B mentioned above, the network is responsible for answering two questions that, conventionally, banks have answered for them. 

  1. Authentication: Are A and B actually who they claim to be?
  2. Authorization: Are A and B permitted to conduct the transaction that they intend to do?

In centralized systems, authentication is done through KYC documents submitted when you open the account. In the case of Blockchain, authentication is done using an encrypted private and public key. Owning a private key prevents users from sharing personal information with authorities, which also stops exposure to said hackers.

Authorization, on the other hand, is done by a distributed P2P network consensus. Each node on the network verifies and applies the Blockchain protocol to individual transactions. Once at least 51% of the nodes agree on the established truth, the transaction is realized, and information is updated in real-time.

  • Autonomy

A distributed decentralized recording system is the starting point for any trusted digital interaction. It reduces the risk of corruption and botches as everyone is committed to ensuring that safety standards are upheld in digital record-keeping. In a Blockchain, automatic adherence to safety standards and record-keeping norms is maintained by smart contracts. 

Here is how the process pans out:

  1. When the encrypted digital keys are merged with the P2P network, the users (who are also the authority figures) use this unique signature to reach a consensus. 
  2. A mutual accord among its users ensures faster and safer transactions anywhere in the world.
  3. Further, the programmability of a Blockchain also means that developers can set up an automated trigger. 
  4. Once specific trigger criteria are met, the system can be programmed to initiate and complete actions, events, and payments automatically.
  • Transparency

Most Blockchains are completely open-source (compare Linux to Windows or macOS), meaning anyone can view the code running behind the scenes. This transparency further ensures the network’s security, as users can review the code and find out security flaws.

Yet, there is more to blockchain transparency than what meets the eye:

  1. Additionally, users can also suggest code upgrades to optimize the system further. I
  2. If a majority agrees to the change, protocols can be upgraded to enforce the necessary revisions. 
  3.  This transparency and freedom to upgrade the source code keep the ledger network from falling into the hands of authority, ensuring a safe and sound transaction system.

Blockchain Technology Applications

If you have searched for Blockchain technology history on the internet, you will find that the idea was conceptualized back in the early 1990s. However, it was only in 2008 that the technology saw its first real-world application in Bitcoin cryptocurrency—via Bitcoin.

Nodes, miners, blocks

Since then, Blockchain has disrupted several niches and ensured better productivity throughout. Some of the examples include:

  • Blockchain allowed cryptocurrencies like Bitcoin, Ether, XRP, Litecoin, and several others to function without the need for a central authority. 
  • Blockchain mining is a peer-to-peer process in which miners are tasked with verifying transactions and adding new blocks of data to the global public ledger. Miners get rewarded. Blockchain grows, A win-win for everyone.
  • Blockchain miners utilize their extra computational power to solve complex mathematical problems with dedicated hardware, unlike traditional financial services. Since no central authority regulates these services, anyone can set up a dedicated Blockchain mining hardware and start mining cryptocurrencies.
  • Blockchain-based Smart Contracts are useful for developers looking to develop decentralized applications (standard apps but on a Blockchain).
  • Blockchain technology has developed to make crypto wallets (hardware, online, mobile, or any other variant) more secure and functional. 
  • Investing in Blockchain technology via crypto assets has picked up pace in 2022. Users are now focusing more on the utilities of the project instead of the token’s face value. 

With that being said, let’s summarise the advantages and disadvantages of Blockchain technology in brief.

Advantages and Disadvantages of Blockchain

Advantages Of Blockchain Technology Disadvantages Of Blockchain Technology
  • It provides an alternative for the unbanked and people living in countries with unstable or third-world governments.
  • By removing the middleman, Blockchain technology provides better accuracy while verifying transactions on the ledger.
  • Additionally, users can shave off millions’ worth of transaction costs.
  • Transactions on the Blockchain are secure and efficient as it is transparent in its dealings.
  • Decentralization means that the system is secured from hackers and phishers.
  • There’s a steep learning curve associated with using Blockchain technology for day-to-day use.
  • Mining hardware and software are significantly costly for an individual.
  • Network congestion can lead to slower transactions processed per second.

Now that we have summarised the advantages and disadvantages let’s understand how Blockchain helps developing economies accelerate their growth.

Blockchain Use-Cases  – 2022

While Blockchain technology and cryptocurrency are often used interchangeably, there’s so much more to chained record-keeping than macroeconomics. As more and more people have started to learn, Blockchain is slowly transitioning into the next-generation process enhancement application.

Let us take a look at some potential applications of the Blockchain ledger outside economics and with real-life case studies.

  • Financial Services

Not-so Fun fact: Almost half of the world’s population does not have access to banking services. 

The most popular application of Blockchain is in financial services in the form of cryptocurrencies. Encrypted money essentially tries to solve the main pain points in the current economy, such as outdated financial platforms’ superfluous transaction charges, sluggish cross-border transactions, and economic inequality among nations.

I am in

  • Asset Registry

The best application for Blockchain can essentially be in the asset registry. If property transactions are held on a distributed ledger, finding the origins, transfer of ownership, and registering land can become extremely efficient for a municipality.

  • Supply Chain and Tracking Basic Necessities

Given the global application of Blockchain technology, it can be utilized to essentially act as a safeguard against hyperinflation and prevent a shortage of goods and materials during crises while reducing processing time in each step.

Companies like komgo and AURA have already made massive strides in supply chain management by upgrading commodity trade finance to 21st century standards. In countries like Venezuela, Zimbabwe, Argentina, and Sudan, tracking basic necessities can also act as a shield against economic and political unrest.

  • Healthcare

After studying current trends, experts predict that the healthcare industry will suffer from issues like disorganized practices, high hospitalization costs, and data breaches after studying current trends. Blockchain technology has the potential to deflate the current expenditure bubble, thus improving the healthcare experience.

In a country like Estonia, a digital public distributed ledger contains almost 95% of the country’s healthcare information and 99% of prescription information. Pharmaceutical companies like Pfizer and Biogen lead a Blockchain project to improve traceability. Meanwhile, BurstIQ‘s Blockchain implementation is also making strides in eradicating opioid abuse in compliance with HIPAA rules.

  • Content Distribution

Two significant challenges with the current model of content distribution are pirate attacking and middleman charges. Content platforms like Netflix and pirated websites have been under constant scrutiny for cheating content creators of appropriate compensation.

Blockchain technology can directly connect content developers and end-users. Creators can provide content to a niche audience, who pay cryptocurrency tokens to fund the said creators. Examples include Flixxo and Tron, where intermediaries do not interfere in the process of content distribution. 

Where Is Blockchain Going in the Next Decade?

Just like any Generation Alpha kid (10-15 years old), the future potential of Blockchain technology is a blank slate. More and more businesses are employing the technology, ushering its usefulness into 21st century standards.

As we have seen above, Blockchain finds its use in many different fields, be it in bureaucracy, macroeconomics, medicine, identity registry, investing, and content distribution. Further, the technology can potentially disrupt other areas like voting, insurance, forecasting, crowdfunding Kickstarter projects, retail, and real estate.

If correctly implied, we can boldly say that there is a future timeline where most of the fields will start utilizing and trusting frameworks like Blockchain. Blockchain technology will lead the march for precise, efficient, safe, and cheap dealings with fewer intermediaries complicating the process.

Interested in learning more about concepts like these! Learning more about Blockchain and crypto just got easier with CoinSwitch by your side.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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CoinSwitch Kuber

Content Writer

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