With cryptocurrencies gaining more popularity, chances are you’ve heard of blockchain technology a couple of times. But, what exactly is this thing called blockchain and how does it work?
Blockchain technology is a decentralised and immutable ledger that records transactions and tracks assets in a business network.
This makes blockchain technology highly secure and transparent as a means of data storage. This article explores all you need to know about blockchain technology.
Blockchain technology is most commonly associated with cryptocurrencies, such as Bitcoin and Ethereum. Cryptocurrency is a digital or virtual currency that uses cryptography for security. It operates independently of a central bank and can be transferred directly between individuals without intermediaries.
The rise of cryptocurrency has led to the development of decentralised finance (DeFi) applications, which aim to create a more open and accessible financial system.
There are different types of blockchain technology that you can use, depending on your needs. Blockchain technology can be classified into four main types: public blockchain, private blockchain, hybrid blockchain, and consortium blockchain.
1. Public Blockchain
A public blockchain is a decentralised network where anyone can participate. It is open source and transparent, meaning anyone can view the transactions on the network. Public blockchains are anonymous, and participants can remain anonymous if they choose to.
This type of blockchain is helpful for applications that require a high level of decentralisation, transparency, and security. Popular examples of public blockchains are the Bitcoin and Ethereum blockchains.
2. Private Blockchain
3. Consortium Blockchain
A consortium blockchain is a permissioned network where organizations control the network. This type of blockchain is helpful for applications that require a high level of trust between participants. Consortium blockchains are often used in finance and supply chain management industries.
4. Hybrid Blockchain
A hybrid blockchain is a combination of public and private blockchains. It allows for the benefits of both types of blockchains, such as decentralisation and privacy. A hybrid blockchain can be used in applications that require a balance between transparency and control.
Within every block contained in a blockchain, there are details of transactions performed on that blockchain; these details could include things like unique details of the sender, the receiver and how much was sent. Blocks also have something called a Hash. A Hash is like a digital fingerprint used to identify a block.
A hash is generated by a cryptographic hash algorithm that hashes the block and transforms it into a string of alphanumeric characters of a fixed length. In the case of bitcoin, the hash function used is the Secure Hash Algorithm 256 (or SHA-256); thus, the output is always a 256-bit hash (i.e. a 32-byte hash). Along with the data stored in blocks and the hash, every block has the hash of the previous block.
The first block in a blockchain is called the Genesis block because it has no predecessors, but all succeeding blocks have data, their unique hash and the Hash of the previous block. This seemingly small feature of the blockchain is actually powerful and is what keeps the information within it safe and secure from attackers. Take the case of four blocks in a blockchain: Say an attacker is able to break through the strong walls of the blockchain and manages to tamper with the information in Block 3, automatically since changes have occurred the Hash of Block 3 changes but the hash for Block 3 recorded on Block 4 does not change and this invalidates all the blocks after the altered block.
While Hashes are a great security measure for the blockchain, owing to the speed of computers these days, a hacker can quickly calculate thousands of hashes for all the blocks after changing the information in one. This is why blockchains use consensus algorithms to verify blocks added to the chain.
Consensus algorithms are a way to ensure that the transaction details added to the blockchain are genuine; it is an ingenious way implemented by Satoshi Nakamoto with the bitcoin blockchain to uphold the integrity of the blockchain. While several other consensus algorithms have been developed, the most popular one is Proof of Work (PoW) which is the one Bitcoin as well as other notable cryptocurrencies currently use.
Proof of work is a complex computational problem that is required for verifying each block. Blocks in the blockchain network for Bitcoin require about 10 minutes to solve. If a hacker wanted to tamper with any of the four hypothetical blocks above, they would have to perform proof of work for all the blocks in order to validate the entire chain of blocks. However, there is no guarantee that they would be selected to solve for 4 consecutive blocks
The final layer of security of blockchain lies in its peer-to-peer network. Rather than allow a central entity to manage the system, blockchain makes use of a peer-to-peer network of people from around the world. When a new block is created, it is sent across to all the people on the distributed network. Each of them will then verify the block to ensure it hasn’t been tampered with before adding it to the chain. And, since the more blocks added to the blockchain the harder it gets to alter previous blocks already existing in the blockchain, consensus algorithms with peer-to-peer network make it difficult for data to be altered on the blockchain.
The creation of a block starts from a transaction:
The importance of blockchain keeps growing as more and more companies adopt the technology worldwide.
One of the major purposes of blockchain is that it is used for security. Every day databases can be tampered with, and information changed or stolen. Due to its distributed nature and multiple security mechanisms, however, blockchain helps keep databases and data safe and almost permanent.
A blockchain is a form of open technology. Transactions are visible to every user on the blockchain network, and whatever changes are made are public. This makes it harder for someone to cheat or defraud the system.
In financial cases, blockchain is very helpful in cutting down the time of verification of transactions. Transactions take a shorter time to complete because the blockchain has solved the problem of lengthy verification and settlement periods through its peer-to-peer network. In minutes, transactions backed by blockchain technology can be verified.
Blockchain takes out the involvement of middlemen, therefore, cutting down the costs incurred due to using middlemen to facilitate transactions, especially in scenarios like digital payments. By eliminating the need for middlemen and reducing costs, blockchain helps institutions to maximise efficiency.
Prevention of fraud
The transparent nature of blockchain makes detecting fraudulent activities in companies and institutions easy. Unlike traditional ledgers or databases based on centralised management, blockchain's open technology allows fraud to be easily detected and stopped.
Many people only recognise blockchain with cryptocurrencies like bitcoin. However, it is used and can be used for far more than cryptocurrencies. Blockchain could be used for several things, including peer-to-peer trading, smart contracts, digit currencies, voting, crowdfunding, healthcare, and record-keeping, among many others.
The transparent nature of the blockchain network also ensures that there is little room for failure. This means that even if one node in the network is compromised, the data on the network can remain secure.
The invention of blockchain technology was a game-changer not just for the financial world with the creation of cryptocurrencies but also to various sectors that had previously relied on centralised management. Blockchain’s essential features, such as decentralisation, transparency and improved security, make it a viable solution for several real-life situations.
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