What is Blockchain and How Does it Work?

Blockchain is the innovative database technology that powers practically all cryptocurrencies. Blockchain makes it very difficult to hack or cheat the system by spreading identical copies of a database across an entire network. While bitcoin is the most common use for blockchains today, the technology provides the potential to serve a very wide variety of applications.

What is a Blockchain

Blockchain, at its foundation, is a distributed digital ledger that holds data of any form. The blockchains can keep track of bitcoin transactions, NFT ownership, and DeFi smart contracts.

While any traditional database may hold this type of data, blockchains are special in that it is completely decentralized. Rather than being maintained in a single location by a centralized administrator (as in an Excel spreadsheet or a bank database), several identical copies of a blockchain database are stored on several computers distributed over a network. These individual computers are known as nodes.

How Does Blockchain Work

The digital ledger is sometimes referred to as a “chain” made up of discrete “blocks” of data. As new data is added to the network on a regular basis, a new “block” is formed and added to the “chain“. All nodes must update their versions of the blockchain ledger to be identical.

The method by which these new blocks are generated is critical to understanding why blockchain is considered very secure. Before a new block can be added to the ledger, a majority of nodes must check and certify the authenticity of the new data. They might include verifying that new transactions in a block are not fake, or that currencies have not been spent more than once. This differs from a standalone database or spreadsheet, where modifications may be made by one individual with no oversight.

“Once there is consensus, the block is added to the chain, and the underlying transactions are recorded in the distributed ledger”. C. Neil Gray explains,  “Blocks are securely linked together to form a secure digital chain from the ledger’s beginnings to the present”.

Transactions are often protected through the use of cryptography, which requires nodes to solve complicated mathematical equations in order to complete a transaction.

Public Blockchains vs Private Blockchains

Blockchains can be public or private. Anyone may participate in public blockchains, which means they can read, write, or audit the data on the blockchain. Notably, because no single authority controls the nodes in public blockchains, changing transactions is extremely difficult.

Meanwhile, private blockchains is managed by an organization or group. Only it has the ability to change the blockchain and decide who is invited to the system. This private blockchain procedure is comparable to an internal data storage system, but it is distributed among numerous nodes to boost security.

How Is Blockchain Used?

Blockchain technology is used for many different purposes, from providing financial services to administering voting systems.

Usage 01: Cryptocurrency

The most popular application of blockchain nowadays is as the foundation of cryptocurrencies such as Bitcoin or Ethereum. The transactions that users make when they purchase, swap, or spend bitcoin are recorded on a blockchain. The more individuals that utilize cryptocurrencies, the more popular blockchain may become.

“Because cryptocurrencies are volatile, they aren’t widely utilized to buy goods and services”.  However, this is changing as PayPal, Square, and other money service companies make digital asset services widely available to suppliers and retail consumers”.

Usage 02: Banking

Aside from bitcoin, blockchain is being utilized to execute fiat currency transactions such as dollars and euros. Because transactions may be verified and executed outside of typical business hours, this may be faster than sending money through a bank or other financial institution.

Usage 03: Asset Transfers

Blockchain technology may potentially be used to record and transfer ownership of various assets. This is now quite popular with digital assets such as NFTs (Non-Fungible Tokens), which are used to symbolize ownership of digital art and media.

However, blockchain might be used to handle the ownership of physical assets like as real estate and automobiles. The blockchain would be used by both parties to verify that one owns the property and the other has the funds to purchase it; then the sale would be completed and recorded on the blockchain.

They could use this technique to transfer the property deed without having to physically submit documents to update the local county’s official records; it would be instantly updated on the blockchain.

Usage 04: Smart Contracts

Self-executing contracts, sometimes known as “smart contracts”, are another blockchain innovation. When certain circumstances are satisfied, these digital contracts take effect automatically. For example, a payment for an item may be released immediately if the buyer and seller have completed all of the deal’s agreed requirements.

“We see a lot of potential in smart contracts, which use blockchain technology and written instructions to automate legal contracts”.  A correctly coded smart legal contract on a distributed ledger can reduce, or ideally remove, the requirement for third-party verification.

Usage 05: Supply Chain Monitoring

Massive volumes of information are involved in supply chains, especially when products are transported from one area of the world to another. Traditional data storage techniques might make it difficult to pinpoint the cause of issues, such as which vendor supplied low-quality items. Storing this data on the blockchain would make it easy to go back and check the supply chain, as IBM’s Food Trust does with blockchain technology to trace food from harvest to consumption.

Usage 06: Voting

Experts are investigating methods to use blockchain to avoid election fraud. In principle, blockchain voting would allow users to submit votes that couldn’t be tampered with while also eliminating the need for someone to physically collect and check paper ballots.

Advantages of Blockchain

  1. Higher Accuracy of Transactions: This can decrease mistakes since a blockchain transaction must be confirmed by many nodes. If one node makes a mistake in the database, the others will notice and catch the issue. In comparison, if someone makes a mistake in a traditional database, it is more likely to be accepted. Furthermore, each asset is uniquely identifiable and recorded on the blockchain ledger. Eliminating the possibility of double-spending (like a person overdrawing their bank account, thereby spending money twice).
  2. No Need for Intermediaries: Using blockchain, two parties in a transaction can confirm and execute a transaction without the involvement of a third party. This reduces the time and money spent on a middleman, such as a bank.
  3. Extra Security: In theory, a decentralized network, such as a blockchain, makes fraudulent transactions extremely impossible. They would need to hack every node and modify every ledger in order to enter fake transactions. While this is not strictly impossible, many cryptocurrency blockchain systems utilize proof-of-stake or proof-of-work transaction verification procedures. That make adding fraudulent transactions difficult, as well as not in the best interests of participants.
  4. More Efficient Transfers: Blockchains are available 24 hours a day. Consumers may perform more efficient financial and asset transactions, particularly globally. They no longer have to wait days for a bank or government agency to manually check anything.

Disadvantages of Blockchain

  1. Limit on Transactions per Second: Given the blockchain relies on a broader network to authorize transactions, its speed is limited. For example, Bitcoin can only handle 4.6 transactions per second, but Visa can process 1,700 transactions per second. Furthermore, an increase in the volume of transactions might cause network performance concerns. Scalability is a difficulty till this improves.
  2. High Energy Costs: Having all of the nodes trying to validate transactions consumes far more power than a single database or spreadsheet. This not only raises the cost of blockchain-based transactions but also imposes a significant carbon load on the environment. As a result, several industry leaders are beginning to abandon blockchain technology. Such as Bitcoin: For example, Elon Musk recently announced that Tesla will no longer take Bitcoin, citing environmental concerns.
  3. Risk of Asset Loss: Some digital assets, such as cryptocurrencies in a blockchain wallet, is protected by a cryptographic key. This key must be properly guarded. “If a digital asset owner loses the private cryptographic key that provides them access to their item. There is currently no way to retrieve it—the asset is gone forever”. Because the system is decentralized, you cannot contact a central authority, such as your bank, to request access.
  4. Potential for Illegal Activity: The decentralization of blockchain increases privacy and confidentiality, which regrettably makes it appealing to criminals. Illicit transactions on the blockchain are more difficult to monitor than bank transactions that are linked to an identity.

Conclusion

That’s all for this article, if you have any confusion contact us through our website or email us at [email protected] or by using LinkedIn. In the next article, we will see how to create your own blockchain with Javascript and node.js.

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