TL;DR
- A blockchain is a decentralized digital ledger that distributes encrypted data among the associated computer networks worldwide. Blockchains are of four types- public, private, consortium, and hybrid.
- Transactions on blockchains are incredibly secure and involve hash encryptions, a consensus mechanism, and the validation of new blocks.
- Blockchains are highly secure, time-efficient, decentralized, independent of third parties, immutable, and they record transactions accurately.
- They are also more secure than traditional databases owing to the lack of a centralized authority with a single entity server that can be tampered with.
- Banking and healthcare are two sectors benefiting greatly from blockchain technology. Its use cases include cryptocurrencies, smart contracts, asset transfers, etc. The risks include potential hacks, high energy consumption and cost of setting up, and the lack of a long track record.
Introduction
Blockchain, the underlying technology on which cryptocurrencies function, has become the talk of the town. It is a digital ledger that shares information in encrypted language among the associated computer networks worldwide. Blockchain technology is based on avoiding a single entity having the sole authority over data.
While blockchain has become a popular concept in tech, many still find it hard to understand– ‘what is blockchain?’ This blog will help you uncover everything related to it, so let’s get started.
What is Blockchain and How Does It Work?
The year 2008 was the year of disaster, with the world facing the biggest financial crisis. Big institutions, including the central banks, were the cause of this crisis. The bottom of the problem was the mismanagement of money supply by central banks. Which came at the expense of millions of common people worldwide losing their money.
To come up with a solution for having no reliance on a central authority, Satoshi Nakamoto (pseudonym) invented Bitcoin in 2008. A decentralized form of money. Bitcoin does not have sole ownership because it is based on blockchain. Thus, it is safe to say that cryptocurrency is the reason behind the invention of blockchain and its first application too.
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What is Blockchain? It is a decentralized digital ledger that allows two parties to make transactions and record them in real-time securely. This decentralized ledger distributes this data to the nodes (computers) of the network across the globe.
In simple words, as its name suggests, Blockchain is made of a chain of blocks. Each block stores data related to transactions, so a blockchain is a chain of data. When new data gets added to the system, it leads to a new block being added and attached to the previous chain of blocks. And all computers within the network update this information, making it hard for anyone to forge data.
For the computer network to add a new block of data, they must confirm and verify the credibility of the data entered. As a result, no single person has the sole authority over adding or removing data, making blockchain a safer technology.
What is a Blockchain Transaction?
Blockchain transactions are encrypted and are based on a distributed ledger across a global network of computers. To process new transactions, these computer nodes or networks are required to solve a complex maths equation. To add one more layer of security, these transactions can only be accessed by particular private and public keys. It is the same as your house keys. Only you have your keys, and thus, it gives you a sense of security. These keys are also known as digital signatures when it comes to cryptocurrencies.
The typical blockchain transaction process includes the following:
Hash encryptions
The way a blockchain safeguards the data is by implementing hash encryptions. This encryption is based on the algorithm called SHA256, which enables data security by allowing the transfer of public keys, private keys, the address of the receiver, and the transaction in an encrypted format.
Proof of Work
Proof of Work (PoW) can be defined as blockchain miners trying to resolve a maths equation with a predetermined condition to be rewarded when resolved. To process every transaction, miners need to solve complex math equations. It includes the previous Hash (to identify the previous block), transaction information, Nonce (a random cryptographic number to provide a differentiated hash address), and the hash address. The address includes every detail related to the transaction. It has a length value of 64 characters and 256-bit.
Bitcoin uses PoW to process transactions on its blockchain. However, various other ways to process transactions have emerged over time, such as Proof of Stake, Proof of History, etc. Each of the consensus mechanisms follow a different way to add blocks to the blockchain.
Mining
Mining is called mining when new data or information is added to the existing ledger. This includes building a hash address to secure transactions’ overall safety and security. The process of validating transactions on a blockchain is mining.
What Are the Types of Blockchain Networks Available?
There are four types of blockchain networks.
1. Public blockchain networks
Cryptocurrencies such as Bitcoin, Ethereum, etc., are based on public blockchains. They are permissionless networks and allow anyone to participate. Public blockchain networks are essential to reduce the risk of having a single authority control data and its security. It is spread across peer-to-peer networks worldwide.
2. Private blockchain networks
These blockchain networks are permissioned and helpful for private companies and institutions. Because a private blockchain network is based on a closed fence, it lets companies customize their preferences and parameters over authorization, safety, and overall accessibility. Unlike the public blockchain, the authority is managed by a single entity.
3. Consortium blockchain networks
The consortium blockchain network offers a mix of features from public and private networks. More than one organization has the authority to manage this network. Establishing this blockchain network can be a complex task for companies, but it has its own merits. It is better at offering high-level security offer cross-company collaboration.
4. Hybrid blockchain networks
Like consortium blockchain, a hybrid network is also a mix of public and private networks. A hybrid network is a private setup with the provisions to provide access to authorized users. It is structured in a way that one organization has controlling power to allow others to see or participate in selective transactions.
What Are the Features and Benefits of Blockchain?
Blockchain is a decentralized virtual ledger that provides the facility of secured transactions. Some key features or benefits of using blockchain technology are as follows.
1. Highly secure
Blockchain technology doesn’t allow any single entity to have the sole authority over the data. It also requires a majority of computer nodes to validate a transaction, making it highly secure.
2. Time saving
Blockchain is a digital ledger and offers a faster turnaround time for transactions. A transaction that can possibly take days can be executed within a few minutes using blockchain. The key reason behind this speed is the fact that blockchain operates 24X7 and doesn’t rely on central authorities like banks or governments to approve transactions, even for international transfers.
3. Decentralized system
Sometimes, too much authority by a single entity can open up opportunities for fraudulent activities. This is not the case with blockchain because the core principle of this technology is decentralization.
4. Higher accuracy of transactions
In a blockchain, the transaction process includes verification of transactions on a larger peer-to-peer computer network. If there is an error in the transaction verified by one node, the other nodes will rectify it, making the process more accurate than the traditional database process.
5. No dependency on third party
Blockchain is a distributed virtual ledger relying on a vast range of computer networks across the globe to verify transactions. The process is done manually and runs all day at all hours. It does not rely on any third party and has no dependency on traditional institutions.
6. Immutability
There are no chances of data tempering when it comes to blockchain technology. If there is an anomaly in one of the nodes, to make it universally accepted, the same has to be verified by all nodes, which is a very difficult task.
How is Blockchain more Secure and Different than Traditional Databases?
A traditional database is typically based on the network of clients-server, and because the authority is with a single entity (server), the data can easily be tempered, modified, or even deleted. In simple words, it has centralized authority and thus lacks safety compared to blockchain.
On the other hand, blockchain has a different structure for data addition and modification. When new information or data is added, it adds a new block to the blockchain, creating a string of blocks. All computers running that blockchain network have a copy of all the transactions on the network. A transaction once made on the blockchain cannot be reversed, and if anyone were to tamper with the existing records, they would be caught immediately.
While a database is just a simple table structure, this is not the case with blockchain. As a result, blockchain is more secure than conventional databases.
Let’s take an example to understand it better. Imagine your company’s IT department handles all the data in 500 computers situated at a single office premise. Your IT head manages them. The IT head can access all the data, which he can tamper with, leak, share, sell, or delete. This can jeopardize your company’s future if there is any misconduct on his part.
However, let’s think that instead of having this sole ownership or access to data, you have a system in place that stores your company data across computer networks in your offices based in different states of the country. Each computer has an encrypted and unique combination of passwords. Thus, while the same data is stored in all computers, making changes in one computer will not make changes in others. Thus, even if your IT head tampers data at one office, he will have to do the same with all the computer networks across the country and know their unique passwords to do so.
This makes it clear how a traditional database works vs. blockchain.
What Are Some Use Cases for Blockchain?
While blockchain’s usage in digital assets is well-known, its application is not limited to that. With this technology spreading at the speed of light, there are many sectors where blockchain is making a difference.
1. Cryptocurrency
The most prominent use case of blockchain is cryptocurrency. With the invention of Bitcoin in 2008, blockchain too became a known name in the tech world. Cryptos are based on blockchain technology when any crypto transaction takes place, the blockchain records and validates it.
2. Smart contracts
Smart contracts are self-executing contracts that execute themselves once the predefined conditions are fulfilled. They are created by blockchain-based computer codes. Smart contracts can help companies to reduce and eventually nill their dependency on third parties.
3. Supply chain and logistics
The supply chain is a data-heavy space and requires constant updating of the information on a real-time basis. It can be a tedious and exhausting task to do that with a traditional database. Using blockchain in this field can help companies to minimize their man-hours and achieve efficiency in tracking their goods. It stores data and makes it available when needed more quickly than a traditional database.
4. Banking
Banking is one of the industries that can significantly benefit from blockchain technology. Its entire transaction processing and settlement process could become more rapid with blockchain. Users need not wait for operating bank hours or days to settle a transaction. Blockchain makes the transaction verification process instant, as it runs daily at all hours without interference from any third party.
5. Healthcare
In the healthcare domain, blockchain has numerous applications and benefits. The healthcare database, like the supply chain, is vast. It is also crucial for health professionals and institutions to easily access patients’ medical records in crucial hours of need. For this, blockchain can help generate records and share them across the hospital networks, which can be accessed by those with authority and private keys.
6. Asset transfers
Asset transfer is a tedious task and involves heavy paperwork at each stage. It starts with having the physical copy of the asset’s ownership proof, followed by reconciling the same with the government records at the time of transfer. Any change or error in the record implies more paperwork and hours. By implementing blockchain in this space, this burdensome process can be fastened with less paperwork and more accuracy.
7. Voting
Voting is one of the most important political events where threats of fraudulent activities and dummy voting are always high. Blockchain-based voting provides faster results, transparency, the ballet’s safety, and ensures no errors. Blockchain was implemented in West Virginia’s midterm election in November 2018.
How to Invest in Blockchain?
Given all these features and benefits, if you wonder how you can take advantage from the growth of blockchain by investing in it, here is your answer.
There are two ways in which you can invest in blockchain.
1. Investing in Cryptos or Digital Assets
Cryptos and other digital assets, including NFTs, are based on blockchain. By investing in them, you can indirectly invest in blockchain. So download Mudrex and start investing! We offer a range of Coin Sets, essentially crypto baskets based on themes like blue-chip cryptos, newly launched tokens, etc.
You can also buy the stocks of the company associated with digital assets.
2. Investing in blockchain-developing Start-ups
This makes you invest directly in blockchain technology. This provides an opportunity to investors to put their money in potential start-ups that are developing blockchain-based solutions or apps from an early stage and reap the benefits.
What Companies are Using Blockchain?
With more individuals and companies realizing its value, by 2026, the total market size of blockchain technology is likely to be $67.4 billion. While this is a forecast, some gigantic companies are already using this technology.
1. Alibaba
Alibaba is a Chinese conglomerate. It uses its ANT Financial Blockchain platform for its Alibaba Cloud BaaS (Blockchain as a Service). Alibaba also uses the same blockchain platform for international remittance. Blockchain has helped this company manage its overall finances, logistics, and registration process more efficiently and faster.
2. Walmart
To overcome the issues of data discrepancies in the payment and invoicing process, retail giant Walmart in Canada has deployed blockchain technology for its supply chain management. By automating the entire process, the company has increased its efficiency.
3. IBM
IBM has been a leader in providing blockchain-based solutions via its blockchain platform to many players across sectors. For example, during Covid-19, IBM helped the government and healthcare department with its blockchain platform to manage and track data for resources and help patients.
4. Microsoft
Microsoft’s operating system has become a household name, and the company has been trying to do the same for its blockchain platform. Microsoft’s Azure blockchain is a cloud platform that allows transparency and safety of data to its users and provides them with BaaS, just like Alibaba. Recently, Microsoft announced that it would use Ethereum blockchain for its cloud services.
5. Goldman Sachs
In April this year, Wall Street investment banking giant Goldman Sachs became the first in its space to offer its high-net-worth clients Bitcoin-based solutions. It also joined JP Morgan & Co’s blockchain network to repurchase a digital version of USD via smart contract. Blockchain provides safety, privacy, and, most importantly, speed in the financial domain.
What Are Some of the Disadvantages/Risks of Blockchain Technology?
Well, every coin has two sides, and so does blockchain technology. Here are the potential disadvantages or risks of using this new-age tech.
1. Potential for illegal activity
Data security and confidentiality are the two key features of blockchain that attract users. However, the same features also make it a haven for fraudsters and criminals. Blockchain makes it harder to track any illegal activities.
2. High energy consumption
Blockchain requires miners to solve maths equations to add data blocks. This process consumes very high energy. And since the process has to be repeated for each update in the data, frequent mining is not ideal for the environment, given the higher energy consumption. However, energy-efficient blockchains are being developed to solve this issue.
3. Implementation is expensive
Blockchain is an expensive affair for the company developing or funding it. It includes various costs such as hiring miners, experts, etc. While it can be a free lunch for users, building blockchain is a considerable cost on the developer’s part. Additionally, the maintenance cost is also involved.
4. Data is immutable, hence cannot be reversed
While data immutability is an advantage of blockchain for various industries, the same can be a disadvantage for many. Once data is added, no one can remove it. In a traditional database, if you want your name or details removed, you may do it. However, as a user, if your data or personal details are listed on a database that runs on the blockchain, you can not wipe it off. This can be a significant threat to the right to privacy.
5. Not yet matured
It’s just been a decade since blockchain became an executable technology, and it is still developing, with new solutions being tried almost every day. You can take the example of Hyperledger or Ripple here. Thus, for a business to trust this tech completely, it will take its own sweet time as it is yet to enter its maturity stage.
What Will the Future of Blockchain Be?
There is no doubt that blockchain is a reliable technology with ample benefits. Many nations, including India, have started to accept it widely, and innovations in this area are awaited.
As per a report by Gartner, blockchain revenues are likely to reach $3.1 trillion by 2030. Its application would not be limited to the field of finance and cryptos. For instance, the Indian government has already mentioned 44 areas where blockchain can be most beneficial, including pharma, education, energy, cross-border payments, transports, healthcare, charity, public service delivery, supply chain, and more.
The future will have a wider adoption of blockchain, improving international trade and management of data with efficiency.
Conclusion
Developed just a few years back, blockchain technology has shown the world its potential. When deployed, every new technology has its fair share of skeptical eyes, but there are no doubts about blockchain. Blockchain will likely play a crucial role in the future for many sectors, not only from a tech perspective but also from an investment and employment perspective. This is evident from the fact that most nations have already started to recognize this tech, and it is just a matter of time before its adoption would know no bounds.
FAQs
1. What is blockchain?
Blockchain is a digital, decentralized ledger that offers secure and faster transactions. It stores data as blocks that are encryption protected. There is no central authority that controls this data. Cryptocurrency, NFTs, etc., are use cases of blockchain technology.
2. Who invented blockchain technology?
Blockchain technology has no known name as its creator. However, Satoshi Nakamoto (pseudonym) invented Bitcoin in 2008, using distributed ledger technology, aka blockchain. That was the first instance of blockchain application.
3. Who owns the blockchain?
Not one single person, but a blockchain is owned by a network of computer nodes. Blockchain is a decentralized distributed ledger. Decisions are made only when there is formal voting from each node and a majority agrees.
4. Which are the biggest blockchain companies?
Some big names in providing blockchain technology solutions include Ripple Labs Inc, Blockchangers, ScienceSoft, Techracers, and LeewayHertz.
5. How many blockchain network types are there?
There are four types of blockchain networks: i) Public blockchain network ii) Private blockchain network iii) Consortium blockchain network, iv) Hybrid blockchain network.
6. Can you invest in blockchain?
Yes, you can invest in blockchain by investing in cryptocurrencies and NFTs ( based on blockchain), or blockchain stocks (Stocks of publicly listed companies contributing to blockchain projects). You can also invest in or fund start-ups that make blockchain-based solutions.
