Blockchain Technology Explained: What Is It and How Does It Work?

by CoinSwitch Kuber  |  January 14, 2021

What is now proved was once only imagined.” – William Blake

The need for decentralisation has been a long due in various avenues for decades now. This is one of the reasons why people have looked at alternate options where no single entity owns or controls information or a network.

Wikipedia and Tor are probably two of the most evident examples of the demand for decentralised platforms. While both of these applications do not work on Blockchain, these laid the foundations for the need of distributed information registers.

If you have kept track of investment finance or medicine industries in the past few years, you must have come across the terms cryptocurrency and Blockchain. However, given the technicality surrounding these concepts, it can be a difficult topic to discuss and explain to your peers in straightforward terms.

Let us help you out then!

Blockchain Technology Definition: What Is It?

Blockchain is a distributed ledger technology with the potential of disrupting decades-worth of record-keeping methods and streamline supply chains in a way never seen before.

But why do we start with such a bold statement?

Read on to find out more about what it is, how it functions, and how Blockchains will upset the method in which information is shared between open and private organisations.

For people utterly oblivious to the concept, understanding Blockchain technology can be a tad difficult. The easiest way to understand Blockchain is probably drawing parallels with Microsoft Access, i.e. Blockchain is a database.

Unlike Excel or Google Sheets, data in a database is arranged in a hierarchical tabular format so that anyone can search for anything and also filter the searches according to requirements. You can find this evident in supermarkets, where the cashier can search the inventory for a product by filtering his/her query.

Further, such custom databases are usually owned by a company, or an individual and a select handful have a view or edit access to them.

Unlike most common databases, Blockchain structures data in a chain instead of tier tables. Further, it is not owned by any individual or entity, and each node on the network can access the ledger and see the changes in real time.

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 block chain. Any further addition ends up in a new block, which is also chained to the last block once it is full.

You must be wondering why arranging data differently makes Blockchain such a huge phenomenon, right? 

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

Why Is Blockchain Technology Popular?

Let’s start with a scenario. Person A wants to send Person B some money.

Typically, A will have to rely on third-party organisations 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.

The main issue with this system is its vulnerability. Such transactions are really easy to tamper with, leaving the entire system susceptible to fraud on many fronts. Further, multiple intermediaries unnecessarily increase the average transaction time and cost.

Notice the transaction fees your bank charges you over a period?

Blockchain was conceptualised to eliminate such vulnerable dealings and optimise the record-keeping process. 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 Use Cases: How Is It Used?

One of the most significant advantages of Blockchain technology is that chaining together groups of data into a single chain creates an irreversible chronological timeline with timestamps for when the data is added.

When applied in a decentralised manner, the possibilities of potential use cases are infinite. Bitcoin, as a cryptocurrency, was the first time Blockchain technology was utilised for what it intended and brought in massive improvements over the traditional banking system.

First, let’s take a look at why people prefer Bitcoin’s use of peer-to-peer Blockchain over banks, followed by the benefits that Blockchain brings to the table.

Is Blockchain Better Than Banks?

There’s a myth surrounding Bitcoin that it is only used for illegal activities such as tax evasion and money laundering. While that is a possibility, there’s a much bigger picture at play here.

On several fronts, you will find that Blockchain offers flexibility where it is required. Similar to UPI transactions, users can transfer Bitcoins 24*7 on all days of the year.

Bitcoin network also does not charge transaction fees based on the amount. Instead, transaction charges depend on the time taken to transfer the amount and network congestion.

Theoretically, in the open marketplace, a user can transfer a massive sum like $1 Billion and incur transaction charges as low as $0.01.

Bitcoin also does not have strict KYC rules, and the network can be accessed and used anonymously. Governments cannot track the movement of money if cryptocurrencies are sent and received anonymously. Further, the network also does not command how the currency is utilised in any shape or form.

That being said, users are expected to stick to their country’s guidelines and respect the financial laws. If the constituent users are not honest, the entire network loses its credibility.

  • Security

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

Since the electronic ledger is vastly P2P, the process of authentication and authorisation lies in the hands of users and not third party (and often expensive) trust entities.

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. Authorisation: Are A and B permitted to conduct the transaction that they intend to do?

In centralised systems, authentication is done through KYC documents submitted when you opened the account. Central authorities like the Government and even third-party hackers can easily track who is conducting a transaction and their financial history from these KYC documents.

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.

Authorisation, 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 realised, and information is updated in real time.

  • Decentralised Blockchain and Its Autonomy

A distributed decentralised 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 the safety standards are upheld in digital record-keeping.

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. A mutual accord among its users ensures faster and safer transactions anywhere in the world.

Further, the programmability of a Blockchain also means that developers can set up an automated trigger. 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.

Additionally, users can also suggest code upgrades to optimise the system further. If a majority agrees to the change, protocols can be upgraded to enforce the necessary revisions. 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 conceptualised back in the early 1990s. However, it was only in 2008 that the technology saw its first real-world application in Bitcoin cryptocurrency.

Blockchain allowed cryptocurrencies like Bitcoin, Ether, XRP, Litecoin, and several others to function without the need for a central authority. Instead, the DLT was used to create a permanent, unalterable ledger that also authenticated the transactions.

The process of adding new blocks to the Blockchain is termed Blockchain mining. This peer-to-peer process involves ‘miners’ who are tasked with the responsibility of verifying transactions and adding new blocks of data to the global public ledger containing past transactions.

Unlike traditional financial services, Blockchain miners utilise their extra computational power to solve complex mathematical problems with dedicated hardware. Since no central authority regulates these services, anyone can set up a dedicated Blockchain mining hardware and start mining cryptocurrencies.

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!

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

Advantages and Disadvantages of Blockchain

Advantages

  • It provides a banking 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 in transaction costs.
  • Transactions on the Blockchain are secure and efficient as it is transparent in its dealings.
  • Decentralisation means that the system is secured from hackers and phishers.

Disadvantages

  • 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.
  • Blockchain and cryptocurrencies have a history of use in illicit activities.

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

Use-Cases of Blockchain 2021

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.

But how is that happening, you ask

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

  • Banking and Other Financial Services

Fun fact: Almost half of the world 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 out-dated financial platforms’ superfluous transaction charges, and economic inequality among nations.

  • Asset Registry

The best application for Blockchain can essentially be in 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.

There were several pilot projects run in countries like Sweden and Georgia but without significant progress. Haiti suffered a severe loss in per capita GDP following natural calamities post-1980s, and the Government opted for a public distributed ledger to record transactions surrounding immovable properties.

  • Supply Chain and Tracking Basic Necessities

Given the global application of Blockchain technology, it can be utilised to track basic necessities in developing countries and nations with an unstable government. It essentially acts as a safeguard against hyperinflation and prevents 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 the 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 further suffer from issues like disorganised practices, excessive hospitalisation costs, and data breaches. 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 from 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 in bureaucracy, macroeconomics, medicine, identity registry, 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 utilising and trusting decentralised frameworks than centralised ones. Blockchain technology will be leading the march for precise, efficient, safe ad cheap dealings with fewer intermediaries complicating the process.

KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.


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