A simple explainer can be a pretty rare thing in a realm as complicated as the cryptosphere. That’s what we are here to change—one article at a time. And this article will break down one of the most basic concepts out there: blockchain technology.
So, if you have no idea what that is, or if you are simply looking to sharpen your understanding of blockchain technology, this is your chance.
What is Blockchain Technology and How does it Work?
There is no single definition, but there exists a fair amount of consensus on the idea that a blockchain is a digital ledger shared by multiple computer nodes. Like a traditional database, blockchains store and record transactions and track data electronically.
One advantage of blockchains over traditional ledgers is that they’re immutable, which means if any alterations are made to the recorded content in the future, there is always a record of it on the ledger. With immutability, manipulation or theft becomes nearly impossible. Immutability is possible because each node on the blockchain network carries a copy of all recorded and stored transactions. The data on a blockchain network is protected via cryptography.
Bitcoin founder Satoshi Nakamoto is believed to be the pioneer who implemented the first blockchain. But long before him, in 1991, the work of researchers Stuart Haber and W Scott Stornetta gave birth to some of the key ideas that formed the backbone of blockchain technology. Today, there are over 1,000 blockchains with four significant types of blockchain networks.
How does blockchain work, and how is it used?
Since its invention, blockchain technology has inspired countless applications, but the basic workings remained the same. How a blockchain works can be broken down into two steps:
- Recording onto blocks: Every transaction on the blockchain network is recorded in a block of data.
- Connecting the blocks: Data blocks are connected to the ones before and after, linearly and chronologically, creating a chain called a blockchain. All changes in the data—such as the sale of an asset—are added to the blockchain, creating a link from the first input to the last entry.
The interconnectedness of the blockchain makes it close to impossible for any party to tamper with the data. Anyone, anywhere, can access transactions, and no hacker can delete information stored on the computer nodes on the network.
Cryptocurrencies use the blockchain to record monetary transactions without a central authority. Companies have also discovered that blockchains can help improve operational efficiency. There are examples of successful applications in supply, healthcare, insurance, and sales.
Is blockchain secure?
Blockchain technology is secure because the network it creates through connected blocks is immutable. The process by which data is added to the blocks ensures that no malicious parties can get away with changing or manipulating information. A blockchain network can only be hacked if the help of a majority of nodes in the network turns malicious, which is a near impossibility.
What is Blockchain Technology in Cryptocurrency?
Blockchain technology can find applications in many fields, and cryptocurrency is one of the most popular ones. Cryptocurrency networks use the technology to hold distributed ledgers that monitor the sale of coins.
Blockchain and Cryptos
Blockchains find use in cryptocurrencies because they offer a trustworthy and reliable way of recording transactions without a central authority. For example, if you sold a car and received a BTC payment, the transaction is recorded on the blockchain network. If you transact with the coins in the future, a new chain is recorded, creating a link that shows the ownership patterns from the first person that mined the coins to whoever receives the coins.
With the help of blockchain technology, cryptos can also bypass the transaction and processing fees charged by central authorities.
Bitcoin and blockchain technology
One of the biggest Blockchain technology example is Bitcoin – It runs on blockchain. Blockchain technology is critical for Bitcoin transactions. The technology makes it possible for Bitcoin to maintain a public transaction ledger, and it supports the peer-peer connection in Bitcoin transactions.
Properties of blockchain technology
The primary features of blockchain technology include:
- Immutability: Once data is recorded on the blockchain network, it can’t be changed or manipulated.
- Capacity: Because there are many nodes on the blockchain network and their numbers are ever-growing, the technology is well placed to ensure that power use is optimized for improved performance.
- Security: Blockchain technology is secure because it has no single point of failure. Every node on the network works to ensure that transactions are recorded, and data is stored without compromise.
Types of blockchain technology and their differences
There are multiple ways to build a blockchain network. The four types of blockchain technology are:
- Public blockchain networks: This kind of blockchain is accessible to all. Challenges include high energy requirements, privacy concerns, and limited security. An example is the Bitcoin blockchain network.
- Private blockchain networks: This type of blockchain is controlled by an organization that approves who can participate and defines capacities within the network. Private blockchains enjoy better security, trust, and confidence among the peers in the network.
- Permissioned blockchain networks: While this type of blockchain is the one that permits access only to authorized parties. An organization or business that sets up the network issues invitations or permissions to participants.
- Consortium blockchains: These are blockchains that can be formed and governed by multiple organizations. It is a type of permissioned platform that only selected individuals with defined capacities can access.
Pros and cons of blockchain
Like all technology, blockchain has its pros and cons:
|Pros of Blockchain Technology||Cons of Blockchain Technology|
|High security since records can’t be changed||High technology and energy costs|
|Lack of central authority improves trust||Bad actors may have access|
|Creates an alternative to traditional banking||Regulatory uncertainty|
What is a blockchain platform?
A blockchain platform is a network where users can create new uses that utilize blockchain properties to create value.
An example of a blockchain platform with multiple uses is the Ethereum blockchain. Besides supporting cryptocurrency, the network also enables smart contracts, Non-Fungible Tokens (NFTs), and smart contracts.
Use cases for blockchain
Blockchain technology has revolutionized the world, and it is being used to achieve a variety of goals. Some popular use cases for blockchain include:
- Government planning: To reduce corruption, governments are applying blockchain technology and improving transparency.
- Blockchain for Voting processes: Eligible parties can participate in elections within permissioned blockchain networks, which allows verification of vote counts.
- Blockchain technology in Banking & Finance: In investments and global transactions, blockchain technology ensures overall data security, which provides avenues for validation and collaboration in creating data.
- Personal data protection: Blockchain technology can make record-keeping secure through encryption. With blockchain, intrusion and actions of fraudsters can be contained.
- Other use cases include applications in copyright management, property transfer, smart contracts, and supply chain management.