Blockchain Technology Explained : TechXplained.
Blockchain is one of the most leading technologies today when it comes to Cryptocurrency. It is literally the base of Cryptocurrency. Blockchain is what made Cryptocurrency possible. It is known for it's high-level security for transactions. Tyler Winkelvoss said,
"We have elected to put our money and faith in a mathematical framework that is free of politics and human error."
Blockchain is an innovative way to secure your details, be it any transaction or private information. So, let's get some information about blockchain technology.
What is Blockchain?
In general, Blockchain is a new way of storing digital files that is unique and transparent and these files can be replicated anywhere on the planet without ever being lost. Blockchain technology allows transactions and record-keeping to be updated anywhere in the world at any time. When the process works, all transaction records are stored on a peer-to-peer network and it can only be modified if all copies are updated simultaneously and all signatures can be verified. If this process goes wrong, there can be no change. What is Blockchain Technology Useful For? Blockchain Technology is used by Cryptocurrencies such as Ethereum, Bitcoin, and Litecoin.The Origins of Blockchain Technology
Back in 2009, a person by the name Satoshi Nakamoto (a pseudonym for an unknown person) published a research paper that explained about Bitcoin (BTC). This was later renamed to the blockchain. Bitcoin is only one of the main blockchain technologies. There are many other possible uses for blockchain. For example, there are the likes of: Distributed network ledger, Machine-to-machine (M2M) transactions, Rip-off of counterfeit products, A way to make payments through an anonymous method, Safety from government and third-party interference, and Data security.How Does Blockchain Work?
When you have read this article, you should now know what blockchain is, how it works, and a lot more.
How Does Blockchain Work?
There are two basic types of blockchain: Public and Private. Both have the same basic function of protecting users' data and preventing any sort of tampering with it. The difference is the accessibility of the data. If the data is accessible to all users, it is a public blockchain, and if the data is restrained to a specific user, it is called a private blockchain. Blockchain is a form of a decentralized database. This means that there is no centralized database. Instead, there are many small blocks in a chain that can be read by anyone. Each transaction is then added to one of these blocks. Users in a chain can also decide which nodes they want to join. If a user wants to add his/her transaction, it will go into a set of blocks that are distributed across the network.Let's say you and your friends Anthony and John went to have dinner. You decide to split the bill among all three but Anthony and John don't have money with them. So, they promise to give you their money the next day. Now, let's observe a scenario where all of you are using the bank transfer method to send and receive money. Now, it might happen that some of your transactions are being observed by the bank or any third-party app. This is not good if you carry out important transactions online. To understand Blockchain better, let's have a look at how online payment works.
When you pay for something online, there are three main steps involved in the process:
- A request is sent by the receiving bank to the payment gateway.
- The payment gateway sends the request to your bank.
- Your bank transfers money to receiving bank after confirming the credentials.
Let's continue the problem discussed above. Anthony and James now give you money in the form of bitcoin. Each of them gives you three bitcoins. Now, as soon as they initiate their transactions, a block is formed for each of them on a decentralized network that consists of all the information about the transaction. Each block consists of the data, the hash of the block, and the hash of the previous block. Hash is a unique id for each block. Hash of the block changes if even one piece of information in the block is changed. Now, for the above problem, two blocks are created, one for Anthony and one for James. Each block takes a reference from the previous block in order to maintain the track of bitcoins you have. So, they are linked together using the hashes. This chain of blocks that just formed is called a ledger and is shared with the people on the network. Each person on the network can be referred to as a node.
Now let's see why this method is so secure. When a hacker will try to steal your credentials over the blockchain, he will alter the information in one of the blocks in the ledger. As stated above, the hash of the block changes if the information in it is changed. But, this step will be prohibited since the block ahead of the hacked block will no longer contain the hash of it's previous block. Also, since every block is shared with all the people in your network, other users will mark this change as invalid and prevent it from executing. To further enhance the security of this system, blockchain have something called Proof of Work. So, to hack your transactions, the person will have to change the hash information in all the blocks, share the changed blocks to all the nodes on your network, and change the Proof of Work for each block. Not to forget the high-security encryption protocol for each of the blocks! All these securities make it almost impossible to hack your transactions.
Uses of Blockchain:
Blockchain has a lot of uses. One of the most popular ones is cryptocurrency. It can be safely said that blockchain is the heart of every cryptocurrency. Along with cryptocurrency, there are a lot of applications of blockchain.
1) Digital Currencies and Payment Systems.
Blockchain is widely used to secure digital transactions. While traditionally done through the Bitcoin network, payment systems will probably remain the main use of the blockchain for a few more years. With the introduction of better blockchains such as Ethereum (which also supports payment systems), distributed digital payments are increasingly made easier, faster and cheaper. Blockchain gets rid of transaction fees. I have already stated above how blockchain secures transactions through the decentralized network.
2) Smart Contracts.
According to Wikipedia, a smart contract is a computer program or a transaction protocol that is intended to automatically execute, control, or document legally relevant actions according to the terms and conditions of the contract. Smart contracts can be considered as the building blocks of modern blockchain applications. Most traditional contracts could potentially be partially or fully implemented in a smart contract. The more objective the evaluation of the outcome is, the easier it is to draft such a contract. A classic example would be an online advertising agency selling search engine optimization services, with the promise that the client’s website will appear on the first page of a specified search engine for a given keyword within 30 days. Such services generally appear very suspicious because they are often provided on the web by unknown companies based in a foreign country, but an example implementation of such a contract only requires a few rules:
- Start contract when both parties have sent agreed bitcoin amount to an account managed by the smart contract (stored in the blockchain). If no amount is received within 7 days, cancel the contract and send back all money received.
- After 30 days, check the search engine’s URL that corresponds to the selected keyword. If the given website is in the URL’s source code, send all the money of the contract’s account to the agency; otherwise, send it all back to the customer (including the penalty for failed execution).
More advanced and larger scale contracts can easily take place, especially in the financial sector where trust plays a central role and allows intermediaries to justify hefty commissions in all trades. A multi-signature escrow account, futures contract, any financial derivative or commodity trading with completely eliminated counterparty risk can be implemented just as easily using a similar stratagem; here the trust would be reduced to one agent only: the stock exchange that publicly displays the stock prices on its website, used as the source of truth when the contract triggers the settlement.
Smart contracts not only eliminate enforcement costs, they also get rid of ambiguity and make all business dealings instantaneous: if a specified condition is met, the blockchain immediately releases the fund and all other digital assets as specified by the contract.
3) Online Privacy.
Blockchain technology is really good at securing data. As stated above, even a small change in your information is cross-checked with every node on your network, which makes it difficult for anyone to alter the information in the block. This has a big application in online privacy. In today's world, your data is shared publically through your social media, the internet, and online platforms. However hard you try to maintain your privacy, you eventually end up giving your information to a website, or to a social media platform. Even the voice assistant is constantly hearing you. This lowers your privacy and can be dangerous if your important data gets shared online. But, blockchain allows you to take advantage of the new technologies, like cloud storage of personal biometric information or important documents, while still maintaining complete control over your data due to cryptographic encryption.
Cons of Blockchain
There are many pros and cons when it comes to blockchain technology, however, it can be considered as the solution for all the problems when it comes to banking and transactions. The blockchain system or the system of cryptocurrency is an open-source, global public ledger, which uses cryptography to secure the transaction and hence the data stored within the ledger. Also, the data can be altered by either party of the transaction. The blockchain can also be implemented for the retail chain stores, or, it can be used for the online shopping industry. Who Uses Blockchain Technology? As of this time, over 2,000 organizations from various sectors and industries are using blockchain technology. The companies like Microsoft, IBM, and Amazon are trying to use blockchain for their businesses. Let's have a look at some major disadvantages of blockchain.1) Reduced Control:
Blockchain is a pretty attractive technology because of it's high-level security. It will protect your data from anything that tries to change it. But, it will stop you too, if try to change your own data, even if you are totally aware of what you are doing. Once a transaction or a smart contract is released into the blockchain, no one can stop it. If by mistake you forgot to add a clause that indicates where to send the funds back when the contract is canceled, the money will stay forever lost in the blockchain. Worse, if you design a harmful contract that incentivizes illegal behavior (e.g. by automatically remunerating individuals who publish terrorist content) and equip it with large financial resources, neither remorse nor an injunction will be of any effect to stop it. You must have heard about the news that a man in
San Fransisco lost 7002 bitcoins, which is worth $220 million just because he forgot the password to his account. Along with the transaction details, your account information is also saved in the blockchain, and because of it's high security, it is not possible to change it. Even your account credentials like your username or password cannot be changed, as they are a part of the blockchain.
2) Need for high storage:
Now, you may not notice it, but every time you make a transaction on a blockchain, you are creating a block for the transaction and sending it to all the nodes on your network. Since it has to conserve the history of your transaction with you as well as all the nodes on your network, it uses up a lot of storage doing that. In addition, its distributed nature requires thousands of nodes to make copies of the entire blockchain and to store it on a well-connected computer with high bandwidth. Taking into consideration the fact that blockchain has more than 68 million users, this problem easily scales up to a considerable amount of money being paid to the storage. As a result, storage costs are thousands of times higher than any other solution, making it largely impractical at the moment to store more than a few bytes of text, let alone images or videos.
Other limitations of blockchain include Difficulty in mitigation and recovery, probability of Sybil attacks, and Mining costs and risks.
Conclusion
Blockchain is the most comprehensive collection of principles and ideas to manage and organize transactions, property, and smart contracts in a decentralized network. Not only its growing popularity in the digital era but also blockchain technology has grown many folds in terms of impact.What do you think about blockchain? Let me know in the comments.
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