What is Blockchain and How Does It Work?
Cost-effectiveness
Blockchain technology has transformed and enhanced the way we transact, share data, and establish trust. As of 2021, the overall blockchain transactions reached 620.37 million and it’s predicted to boost the global GDP by over $1.76 trillion (by 2030).
Let us dig deeper into the origins of the Blockchain network. The history of Blockchain’s creation dates back to 2008, when a developer (or developers) with the pseudonym of Satoshi Nakamoto introduced a white paper, discussing the model of blockchain.
Later on, in 2009, the first blockchain was implemented as a public ledger used for Bitcoin transactions. However, earlier efforts were made in 1991 as well, when Stuart Haber and W Scott Stornetta described the cryptographically secured chain of blocks for the first time.
Blockchain explained
Blockchain refers to a secure way of recording information. As the name of the term “Blockchain” suggests, the data is stored in blocks, which are linked together, forming a chain. In other words, the blockchain securely stores records related to transactions, (blocks) in databases (chain) within a network that is connected via peer-to-peer nodes. Moreover, there is no centralized authority or management system, as the blockchain network is decentralized, ensuring trust and validity.
When the number of transactions increases, the blockchain also grows. Each transaction happening within the decentralized network is authorized by the owner’s digital signature, authenticating and protecting it from any fraudulent actions. This means that your data is secure in the digital ledger.
The blockchain provides immutability. That is to say, it’s impossible to alter any block or insert a block between the two already existing blocks, making the blockchain tamperproof and hack-resistant.
In simple words, you can think of a digital ledger as a Google spreadsheet that is shared among various computers within a network, which stores the transactional records based on actual purchases. However, in this case, everyone can see this information, but no one can corrupt it.
Key terms of blockchain technology
To have a clear idea of how blockchain works, you should be aware of these essential terms:
Block
The collection of data, containing a timestamp, as well as other encrypted data concerning the recent transactions, which is to be validated by the network before it is added to the chain.
Nodes
Computers within the network that maintain copies of transactions and have a tamper-resistant nature
Hash
Serves as a digital footprint, confirming all the transactions within the blockchain network.
Mining
The process of verifying and adding a block to the ledger.
Distributed Ledger
The database shared among the participants of the decentralized network.
Cryptography
A way of securing the data against unauthorized access and ensuring that only the intended recipient can process this information.
Block Reward
An incentive earned by miners for verifying transactions on the blockchain and maintaining the security of the network.
Consensus Mechanism
A method used to validate entries into a distributed database and ensure the security of the database.
Proof of Work
A cryptocurrency consensus mechanism that validates the transaction, when network validators or miners solve a mathematical puzzle, and then, a new block is added to the chain. Those miners who are quicker in solving complex mathematical problems regarding the hashed data get a certain amount of cryptocurrencies as a reward when the new block is added to the blockchain network.
Proof of Stake
A cryptocurrency consensus mechanism in which network validators stake cryptocurrencies to have a chance of validating blocks and getting rewards. The selection of validators to verify transactions is done in a random way. This consensus mechanism requires less amount of computational work.
Smart Contracts
A digital agreement, signed and stored on the blockchain. Smart contracts are automatically executed when the contract’s terms and conditions are met.
What are the benefits of the blockchain network?
Blockchain offers numerous benefits, such as:
Accuracy
Blockchain transactions are confirmed by thousands of devices, as well as computers, preventing human errors and providing an accurate record of information.
Cost-effectiveness
Usually, you have to pay your bank to verify transactions or a notary to sign documents. Blockchain has no central authority, which means it eliminates all the costs associated with the third-party verification processes. Furthermore, the blockchain transaction fees are limited.
Decentralization
Blockchain has a decentralized system and doesn’t rely on the government or any other central regulating authority to verify transactions, as it’s a peer-to-peer network, minimizing any fraudulent actions.
Security
Blockchain is considered to be one of the most secure technologies, as all the blocks within the network are encrypted and linked to the previous ones through a cryptographic hash function, making them tamper-resistant.
Transparency
All the transactions are recorded on a public ledger and this information is available for the network members, providing increased transparency. In other words, you can easily verify the authenticity of transactions.
Immutability
When transactions are recorded on the blockchain, it’s impossible to delete or change anything. Your information stored on the blockchain is immutable, offering a high level of trust and credibility.
Fraud elimination
Since all the transactions are recorded on the public ledger, this minimizes the risk of any hacks or frauds, as the transaction is traceable. The traceability of blockchain is especially crucial for the financial sector.
Efficiency and speed
Transactions requiring third-party mediation may be time-consuming. With blockchain, you can initiate transactions more efficiently and rapidly. All your transaction-related details are stored within the network and you can access this information whenever you want.
Why is the blockchain network secure?
- Blockchain is a highly secure network, as the decentralization of its block database system can prevent any tampering attempts. Hackers can’t alter any information on the blockchain, as it has an immutable nature. They won’t be able to duplicate any digital asset because the distributed ledger transaction system is a hard obstacle for them. The records stored on the blockchain are unchangeable and organized in a chronological way.
- Another important security element is a cryptographic hash. This code does the following: a) inputting data of any length and b) outputting an alphanumeric string, which serves as a digital fingerprint. Each blockchain uses its own hash algorithm.
- A crucial security feature is the use of digital signatures that include public and private keys. All the transacting parties have private and public keys. A public key is like an email address or bank account number. Users need it to send you digital assets, while a private key is “a secret key” and you shouldn’t disclose it to anyone.
Future applications of blockchain technology
Blockchain is an emerging and innovative technology with the potential to embrace various technologies in the future. Here are some examples:
Healthcare
Blockchain is an efficient network for healthcare providers to store the patient’s medical records in a secure way. When medical records are generated and signed, they are recorded on the blockchain, offering patients improved security, as these records are unchangeable. Such health records can be encoded and stored on the blockchain and may be accessible with private keys and only certain individuals may have access to them.
Elections and Voting
Blockchain can be the key to facilitating an advanced voting system, by minimizing election fraud and providing enhanced voter turnout. It can have a positive impact on the electoral process in general, making it more transparent. Such an attempt already happened during the midterm elections in West Virginia (in 2018).
Insurance
Blockchain technology can offer a dynamically growing insurance sector an efficient solution to detecting and reducing fraudulent activities and enhancing policies related to cyber insurance. This network can be effective in understanding various financial risks because it provides secure information storage and faster data-sharing among different parties involved in the insurance ecosystem. Blockchain creates trust and credibility between entities.
Supply chain
Supply chain management usually deals with a very large volume of complex data. Keeping records may cause various problems, and paper-based record-keeping is still typical of different sectors. Thus, digital transformation may improve the productivity of supply chain management.
The application of blockchain can enhance information-sharing processes, offering increased accessibility and security. Leveraging smart contacts can be helpful, as it may improve the automation and efficiency of the overall supply chain operations.
Wrapping up
In today’s rapidly evolving technological landscape, blockchain stands out as an innovative and revolutionary force with a huge potential to change the entire world. It provides secure, transparent, scalable, and efficient solutions, attracting more and more industries, such as healthcare and chain management.