Blockchain technology has been around since 2009 but has only recently started to take the world by storm. It’s seen as one of the most promising technologies in the past decade, with many predicting it will revolutionize how we do business forever. The main reasons for this are the facts that it is:
- Decentralized system
- Secure with Cryptographic hash
- Transparent
But what exactly is blockchain technology? And how does it work? In this article, we’ll cover everything you need to know about this revolutionary technology and why it’s challenging the status quo in multiple industries.
What is Blockchain Technology?
Blockchain is the distributed ledger technology behind cryptocurrencies like Bitcoin. It’s a public ledger of all transactions that have ever been executed. It consistently keeps growing as new blocks are added to it (via mining) with newly recorded data.
A distributed database that holds records of all transactions ever made, similar to how Google keeps track of websites. The blockchain has grown from a simple ledger into an entire ecosystem that includes the currency itself but also other types of data, including smart contracts and smart property ownership rights, with more promising projects announced in the future.
What is a Blockchain Block?
A block is a part of the blockchain which contains recent transactions. After it finishes recording all the changes, they go into the blockchain as a permanent database. Each time someone wants to add to or change something on the database, they must first solve complex mathematical problems for their transaction to be included in one of these blocks by other users who also have access to their computers’ processing power (known as miners).
Once each transaction has been recorded on a block, it cannot be altered retroactively without altering all subsequent blocks and invalidating everyone’s copy of those subsequent blocks.
What is a Blockchain Node?
The whole blockchain network runs through nodes. Each node has its own copy of the database, and they communicate with each other to ensure that everything that happens is correct. It’s one of the reasons why blockchain technology is so secure. Nodes use consensus to ultimately confirm that all the blockchain network changes are legit.
If you’re wondering who can become a node, the answer is simple, anyone can do it. Whoever sets up the particular blockchain solution can become a node in a blockchain network.
How Does Blockchain Work?
Now that we’ve answered the question what is blockchain, it’s time to explore how it works. No matter if we’re talking about public blockchain networks or private blockchain networks, it is a distributed ledger. It’s a chain of blocks that contains transaction information, time-stamped and linked to the previous block in the chain. Each block contains data about the transactions it includes, as well as a link to a previous block.
Each successive block references its predecessor and each transaction must be verified by all nodes on the network before it can be added to any blockchain (therefore giving rise to another name for blockchain: distributed ledger).
This process ensures that every new entry is permanently added only once and cannot be changed retroactively or deleted without also altering all subsequent records—a record that would need to be incorporated into multiple ledgers at once, making it impossible for hackers or malicious parties to pull off such an attack undetected in one central location.
Because it uses complex cryptography algorithms, no single party owns or controls data stored on a blockchain network. Instead, they are spread across every peer connected thereto—hence why we call them “decentralized” systems. The entire network is secure nobody can make changes to the database.
What Does Decentralization Mean in Crypto?
Decentralization is a core aspect of blockchain technology. Decentralized systems might be more trustworthy in some ways than centralized ones, but there are tradeoffs to be considered as well.
To understand decentralization, we must first understand how a digital ledger works. The basic idea is that there’s an ongoing list of transactions stored by many computers around the world—each one owned by different people or companies—and those owners all play a role in maintaining the integrity of the digital ledger (aka a list).
When people want to make changes to this shared blockchain ledger (i.e., write new information into it), they must get approval from other members on the network before making their changes official (or “final”). In order for these changes to be approved, every member of the network needs access to all previous entries so that they can add another entry at the end properly.
Otherwise, any mistakes could cause problems later on down the road when someone else tries accessing information within those old entries and ends up seeing something that’s not matching.
Therefore, the entire blockchain eliminates the need for a third party to check all the transactions. The blockchain network is self-sufficient in that matter as it’s immutable. Distributed ledgers keep all the transaction details that occurs within the peer-to-peer network.
How is Blockchain Transparent?
The blockchain is a distributed ledger technology, meaning the data stored on it is not stored in one central location. Instead, it’s spread across thousands of computers (aka nodes) worldwide.
Each block in the chain contains a hash of itself and of its previous block, as well as transaction information (like who sent what amount to whom). This makes it impossible for someone to change anything without being noticed by everyone else who is using this same database—so what you see when you look at any given block or transaction will always be accurate and transparent.
Anyone can take a look at the financial transactions. As soon as the transaction occurs and it’s recorded, it becomes available in the transaction ledger. All online transactions are publicly available. What’s not available is data about the sender and the receiver of the transaction. We’ll talk more about this in the section below.
Is Blockchain Secure?
Well, it depends on how you look at it. Blockchain is an inherently secure system. It’s a decentralized network of computers that work together to verify and confirm transactions without needing an intermediary.
These groups of computers work together to confirm that the data entered into one computer matches what’s stored in another. If they match, then your transaction will be confirmed as valid by all parties involved.
In terms of security, blockchain networks are not completely hack-proof. However, they do provide a high level of resistance against hacking attempts due to their distributed nature. There’s no single point where hackers can target all at once (like with most centralized databases). That’s why any cryptographically secured chain is significantly more secure than the most used financial services providers we use daily.
The main drawback of blockchain technology is that there isn’t enough computing power available yet (though this will change soon). But even if someone did manage to get hold of some computing power and tried to tamper with data on one node within the network, it would require a huge amount of money and resources, and they’d still have trouble getting away with it. There would always be many other nodes around which could quickly detect whether any changes had been made or not.
Despite the challenges, blockchain technology remains an extremely secure peer to peer network. Network participants create a computer network that keeps the whole system secure. There are several consensus mechanisms that make that possible.
Proof of Work
Powering the Bitcoin blockchain network, Proof of Work is a consensus mechanism that prevents any fraudulent transactions from occurring. To keep things simple, this mechanism relies on the power of the hardware of the network members. They use their computers to calculate the hash of the next block in the chain.
The blockchain network sets the difficulty of the hash, and all the network members participate in figuring it out. It’s one of the most secure types of crypto consensus types.
Proof of Stake
Even though Proof of Work functions flawlessly, it still has its challenges. The primary issue is the power required behind its consensus mechanism. Proof of Stake is a much better alternative that requires significantly less power to run. However, creating a blockchain network that’s secure using it is much more challenging from a software side.
Still, some big players in the crypto industry are switching to Proof of Stake, Ethereum blockchain being one of them. The switch will help the Ethereum network to become much less power hungry, promising a brighter future for the Ethereum cryptocurrency.
Proof of Capacity
The above-mentioned consensus types power the most popular blockchain networks but are not the only options available. Proof of Capacity has been around for quite some time but has only gained popularity recently. This blockchain technology relies on the storage of its network participants to validate transactions.
Will Blockchain Replace Banks?
While there are many things that blockchain technology could replace, it’s not clear whether it will replace banks. Banks have been around for hundreds of years, and they’ve become an integral part of our society.
Blockchain isn’t just a new way to record transactions; it also has the potential to change how we store data and transfer money. But banks will likely still be around in a few decades, even if blockchain technology becomes widespread.
How Does Bitcoin Blockchain Work?
At this point, you’ve probably heard about Bitcoin. You may even own some for yourself. Bitcoin is the first and most popular cryptocurrency in the world. It’s also a decentralized currency—meaning it doesn’t rely on any banks or other financial institutions to operate.
Instead, transactions are processed by “miners” whose computers solve complex math problems in exchange for Bitcoins (similar to how miners dig up gold and silver).
These transactions are then stored in a blockchain database that resides on thousands of computers across the globe (instead of being stored in one central location like your bank). This means there’s no single entity controlling all of your money but rather many copies spread out over multiple networks.
How Can Blockchain Technologies Be Used: Different Blockchain Applications
Blockchain technology is an important part of many different applications and systems. Here are some examples of how blockchain can be used:
Supply Chain Management
Companies are always looking for ways to make internal processes more efficient. Blockchain can help with supply chains. A supply chain blockchain helps by keeping all the records up to date, secure, and accessible by all the members of the private blockchain. That way, internal business network members always know the status of particular goods.
We’ll talk more about private blockchains in another section, but it’s significantly different than any public blockchain.
Data Security
Blockchain technology and data structure security go hand in hand. Businesses can turn storing data into a pain-free experience by relying on a blockchain. Given its security degree, nobody can access sensitive data and make any changes. It’s a much more secure solution than a traditional database which can be easily accessed by experienced hackers.
Voting Systems
Votings systems haven’t shifted to the digital world because there wasn’t a technology available that was secure enough. However, that changed with the arrival of blockchain technology. While everyone saw how effective it was with digital currency, Bitcoin, another important application is the voting system.
A blockchain platform can help with establishing voting systems that people can fully trust. Same as with a digital currency, keeping track of votes is the same as recording transactions. The best part is that the whole society can keep track of results, as the blockchain platform keeps recording transactions.
All it takes is a blockchain implementation in the voting system, and citizens could easily vote for their leaders, knowing their votes won’t be amended in any way. There are already blockchain companies out there that offer this kind of blockchain platform to users.
Healthcare
One of the very useful blockchain applications is in the healthcare industry. A hospital or another healthcare central authority could run a private blockchain and keep all the patient data in one place, completely secure. It would enable a new kind of transparency.
Not only would the patient data be completely secure, but transparency would also eliminate any corruption regarding priority lines for organ donor candidates. Creating legal contracts with blockchain is simple. Blockchain developers can create smart contracts that would apply to every patient. The best part is that they can be fully automated. So when particular conditions are met, a smart contract would execute a chain of events on blockchain.
Therefore, blockchain could completely revolutionize the healthcare industry and make numerous processes easier.
Real Estate
Real estate is another industry that can receive benefits from using blockchain technology. Keeping information about a property becomes much easier and more secure. Any future buyer can see the list of previous owners and all essential data related to their transaction stored on the blockchain.
On top of that, having a smart contract could also help facilitate real estate trading. Whenever someone buys or sells a property, the information gets added to the chain in a new block. Keeping track of every change ever made, without any possibility of being changed.
Banking Sector
The banking sector is another business type that could benefit from blockchain technology. As we’re all familiar with, banks actively work with very sensitive data. We could already see recording information such as transactions is possible with cryptocurrency. Therefore, the technology could prove useful for banks.
Running private blockchain networks would enable them to keep complete control over blocks in the chain in terms of security. However, any changes would be accessible because every block contains all the previous data. The ultimate goal is to keep things transparent and highly secure. Banks work with numerous digital assets that require the best security technology can provide.
Lending
There are already numerous DeFi platforms to completely replace the banking system. While this change will take plenty of time, a notable feature that’s becoming increasingly popular is lending. People can use blockchain technology to easily lend or loan money. The process is seamless, and the fees are extremely low. These kinds of features are what are putting the banking sector at risk.
If any of these projects would become widely used, almost all individuals would prefer lending and loaning with crypto due to the low-interest rates.
Royalties
Artists will love this one. It’s theoretically possible to track who’s the owner of a particular digital asset. For example, if an artist creates a song, the song’s ownership can be recorded on the blockchain so the royalties can be paid out to the rightful owner. This is already being used with NFTs, in which people are massively interested in.
These ownership records of digital assets are still in their infancy, we’ll see which of the existing platforms will go mainstream and allow this change to come to life.
Crypto Exchanges
Crypto exchanges we all know today exist thanks to blockchain technology. Blockchain users can easily exchange their crypto assets instantly without paying any high fees.
What are the Advantages that Blockchain Brings?
Blockchain became a popular idea for a good reason. Here are a couple of benefits that have helped it skyrocket in popularity.
It’s Distributed
Everyone has a copy of the blockchain, so there’s no central server or database to go down and take everyone offline with one hack. Even if someone wanted to mess with the blockchain, they’d have to change every single copy at once—and then it would still be obvious when they did so.
The transparency provided by blockchains provides an opportunity for all parties involved in any given transaction or exchange to see exactly what happened and when it happened, which helps prevent fraud in transactions between parties who don’t know each other well enough for trustworthiness.
It’s Secure
Blockchains are secured through cryptography, which makes them difficult for hackers or malware creators to get through since there must be a consensus among all users before any changes can be made on a blockchain network (see below).
Information is Immutable
Once the information has been entered into a blockchain system, you can’t remove it without rewriting every single entry after that point—which is extremely difficult (if not impossible) because each entry builds upon previous ones as part of its validation process.
It’s a Public Ledger
A public ledger allows anyone access who wants it; you don’t need special permissions from those who run each system individually.
It has a Distributed Database
This means that all copies are identical and continually updated around the clock via peer-to-peer networks. On top of that, all participants have equal access rights but do not necessarily all own copies themselves
Anonymity
While everything is transparent, it’s also anonymous at the same time. It’s easy to see that changes to the ledger have been made. But who made the changes remains a mystery. Take Bitcoin as an example. You can see that BTC has moved from one address to another, but it’s uncertain who’s the owner of that address.
Public Blockchain vs Private Blockchain
Public blockchains allow anyone to become a node. That’s why they’re considered truly decentralized. Anyone with the right software can access the blockchain network and become a node that helps run the whole system. Public blockchain networks are more popular as there’s nobody controlling them.
However, businesses that want complete control over their databases opt for running a private blockchain network. Private blockchains are usually run by a single or multiple businesses. That way, they keep complete control over the data they’re working with.
Even though there have been many ICOs with private blockchain networks, people are less likely to invest in such projects. They are trusted less, as the general public is aware that central authority has control over their direct investments.
Conclusion
Blockchain is a revolutionary technology. It has the potential to change how we do things and help us achieve new heights. Some of these include improving efficiency, saving time, enhancing security, and reducing costs.
It is challenging traditional business networks, as keeping a digital asset secure is much easier with a blockchain platform. While everyone is still talking about its application in the crypto space, the potential is much higher with WEB3. Different companies and groups keep developing different metaverse environments. We’re yet to see the full potential of this technology.
The possibilities are endless when it comes to using blockchain technology in various industries due to the nature of smart contracts. Hopefully, this article has explained everything that you need to know about what is blockchain and how blockchain works. Hopefully, we’ve answered what blockchain technology is in great detail. If you want to learn more, feel free to explore our other crypto-related content.
