Tuesday, January 31, 2023

What Is Blockchain? How Does It Work? Everything You Need To Know

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What Is Blockchain?

Blockchain Technology is probably the best invention since the beginning of the Internet itself. You must have continuously heard about this technology over the past few years in regard to cryptocurrency, like Bitcoin. You must be asking yourself questions regarding this technology and must have put yourself in turmoil.

Blockchain has over time continued to advance and become more suitable and handy to users. The work of learning and gaining knowledge about blockchain technology is on you for your better future.

What Is Blockchain Technology?

A blockchain is described as a decentralized, distributed or public ledger system that is shared among all the nodes in a network. It stores the data of ownership of digital assets and transactions in blocks that are firmly linked together with the help of cryptography.

Any information saved on the blockchain network is difficult or almost impossible to edit or hack, which makes it a leading technology for different businesses.

Blockchain is constantly mentioned as distributed ledger technology (DLT), which consists of a growing list of records. Blockchains are known for their essential role in the creation of cryptocurrencies such as Bitcoin, Ethereum, etc for maintaining a decentralized and immune or secured record of transactions.

The modernization of this technology is that it assures the allegiance and protection of the information stored in it and establishes confidence without the requirement of another person or individual.

A blockchain consists of blocks that store information inside it. Blocks have a certain storage space capacity and when they are filled with data, they are closed and are connected to the previous block that is already full, forming a chain of information or data.

Whenever any information arrives, it is saved into a new block. As soon as this new block is occupied with information, it is linked to the former block. Due to this the information is stored and linked with each other in sequential order.

These blockchains are immutable in nature. Due to this property, the information entered cannot be changed. For cryptocurrencies like Bitcoin which run on this technology, means that the transactions are recorded permanently and are viewable to anyone.

Why Is Blockchain Important?

Features Of Blockchain

Blockchain is chiefly an auspicious and life-changing technology because it helps reduce fraud and security risks and brings clarity or transparency in an expandable way.

It was first implemented by Satoshi Nakamoto in 2008 to create Bitcoin, from then it has become a leading factor in many industries for administrative solutions.

Nowadays, this technology is providing clarity in various fields such as blockchain gaming, health care, handling data, and much more.

A blockchain network can track transactions, production, and other things too. You can view all the details of transactions point to point, giving you greater assurance, as well as new capabilities and convenience.

Suppose you want to transfer money to someone, you would transfer the amount to that person using their bank details. When that transaction is complete, your bank adds that transaction to your records.

It seems quite transparent and simple enough but there is a likely concern that most of us ignore. These types of bank transactions can be easily tampered with.

Users who are familiar with this fact are often attentive and cautious using these types of transactions to transfer money. Due to this susceptibility, this technology was created.

How Does A Blockchain Work?

In this decade, you might have observed many businesses and organizations around the world accommodating this technology. But there has always been confusion about how does blockchain work?

The growth of Blockchain is still youthful and it has lots of potential to change the world in the future. The main idea behind it is to allow digital information or transactions to be stored and shared, but impossible to alter.

This technology was first proposed as a research program in 1991 and was first implemented to create a cryptocurrency, Bitcoin in 2009.

Since then the use of this technology has increased rapidly for the creation of various cryptocurrencies like Ethereum, Cardano, and much more, NFTs (non-fungible tokens), smart contracts, and Defi (decentralized finance) applications.

Blockchain is basically based on three technologies:

  • Cryptographic Keys (Public Key & Private Key)
  • Peer-to-Peer network
  • To store the data, records and transactions on the network by a means of computing.

Public Key and Private key are the two cryptographic keys. With the help of these two cryptographic keys, a person can perform transactions successfully. Both individuals have a private key as well as a public key. These keys are associated with each other.

They can produce a secure digital identity with the help of a private key and a public key.  This secure digital identity is known as a ‘digital signature’ in cryptocurrency and is used for the approval and regulation of transactions happening on the blockchain. Blocks store every transaction happening on the blockchain.

These transactions show the movement and certain information of a digital product. The blocks in the network containing information can record the data according to your needs. For example- In healthcare, the details of a patient.

Each block is connected to one block before it and one following it. These connected blocks form a chain of blocks, collectively called a blockchain. These blocks affirm the time at which the transaction was made and the sequence of transactions.

These blocks are connected securely with each other to avoid tampering with data or any block from being changed or modified or any malicious node or block from being inserted between two existing blocks. 

Each additional block strengthens the authentication of the preceding blocks and the complete blockchain in the network. This makes the blockchain immutable, making it tamper-proof. 

This eliminates the certainty of tampering with any data by a malicious person and builds a list of transactions that members of the network can trust.

What Is Decentralization In Blockchain?

The main idea behind the whole scenario of blockchain is decentralization. No individual can possess the chain as it is a ledger, distributed to all the nodes in the network connected to the chain.

Every single node in the network has its replica of the blockchain and the network must approve any newly mined block algorithmic procedure to update, verify and trust the chain.

Being of transparent nature, every activity in the ledger can be easily recognized, creating inherent blockchain security. Every individual is given a unique alpha-numeric identification number that displays their transactions.

Is Blockchain Secure?

Freshly mined blocks that are sequentially and continuously stored are added after the last mined blocks. It is almost impossible for anyone to revert and tamper with or modify the details inside the block. To perform these things a large number of representatives of the network are required to reach a consensus.

The reason behind this is that every block consists of its individual hash, plus the hash of the previous block. These algorithmic hash codes are created mathematically that turns information into a string of alphanumeric characters. If that information is changed or edited even slightly then the hash will also change respectively.

If there is any bad actor, who wants to steal information or any digital assets from everybody by altering the chain they would first change their own single copy of the chain therefore, that replica would no longer match with that of others.

When every other node on the network will cross-check their copies of the chain against each other, they would see your copy as different from the others. Then that copy of the chain of the hacker would be cast away as invalid.

To be successful with such a kind of malicious activity, the bad actor would require more than 51% of the network computing power or more replicas of the blockchain so that their illegitimate copy becomes the greater one and everyone agrees upon it. This type of illegal attack would require lots of money.

The members of the network would see such harsh changes on the network, as this thing would not go unseen. The members on the network would then accept the newer version and discard the older one. This act would cause the attacked token to crash in value.

Blockchain vs Banks

Banks and blockchains are extremely distinctive.

FEATUREBANKSBITCOIN
Working DaysBanks are open from 09:00 am to 5:00 pm daily. But they are closed on weekendsBitcoin is open 24/7, 365 days a year. Bitcoin never sleeps.
Transaction FeesVery high.Very less comparatively.
PrivacyBank’s private servers hold the information of the accounts and are held by the user. Accounts of the user are limited to the bank’s server.One can trace Bitcoin but it is impossible to tell who is the owner of Bitcoin if it was purchased without disclosing it.
SecurityIf the user practices strong security measures then also the account of the user is limited to the bank’s server. Bitcoin network becomes more and more secure as it keeps getting bigger. The security of the user’s Bitcoin depends on himself.
Account SeizuresWith the help of KYC laws, governments can easily track users’ bank accounts and might put a hold on the capital within them for several reasons.Since Bitcoin is used anonymously, it is almost impossible for governments to track and seize it.

Types Of Blockchain

It is divided into four groups. They are as follows –

Public Blockchain

Public blockchain falls into the first category of blockchain. Cryptocurrencies like Bitcoin originated on a public blockchain. It eliminates the problem of centralization. It is distributed across a peer-to-peer network. 

Public blockchain is permissionless and no one can restrict it. Anyone can become an authorized node by signing onto a blockchain platform if they have internet access. All the nodes in the network have the right to access or create new blocks or validate the blocks on the blockchain.

This type is primarily used to exchange digital assets such as cryptocurrency and to mine them. The public blockchain is completely anonymous.

Private Blockchain

Private blockchains are also referred to as managed blockchains. These are permissioned blockchains administered by a single organization or private businesses. In a private blockchain, the central force chooses whom to select as a node.

It is not necessary that the central authority grants every node equal rights to perform actions. This type of blockchain is not fully decentralized because the access of this blockchain to the public is restricted.

It uses peer-to-peer connections and decentralization exactly like public blockchain networks. Private blockchains are more sensitive to fraudsters.

Consortium Blockchain

Consortium blockchain is also acknowledged as a federated blockchain. This type is administered collectively by lots of institutions. The case here is not the same as that of a private one where a network is governed by a single entity.

This one has more decentralization than that of a private blockchain, which results in increased security. However, organizing consortiums can be a difficult process as it requires unity between a number of organizations.

This brings operational challenges and antitrust risks. This type of network is administered by one entity, but it is protected against domination. This administrator can make their own rules, make changes in data, and abort transactions that are full of faults.

The consortium blockchain has a high level of privacy as the information in it is kept away from the public. However, if someone is a member of this blockchain network can easily access it.

Hybrid Blockchain

These types of blockchains are controlled by a single institution. To achieve certain transaction validations, a level of lapse is executed. This is executed by a public blockchain. Institutions have the authority to create a private permission-based system along with a public permissionless system.

This allows them to regulate who can access any particular information, and the information that will be opened up publicly that is gathered in the blockchain. In this type, transactions and records are not made public but they can be verified when required, with the help of smart contracts.

Private information is kept inside the network and it can be verified too. If any private entity has ownership of the network, it cannot modify or change transactions. New users who join this type of blockchain, have full accessibility to the network.

The user’s identification is protected from others unless he or she engages in a particular transaction.

Blockchain Applications

Applications Of Blockchain

We know that all monetary transactions are stored in the block on Bitcoin’s blockchain. Today, there approx. 12,000 other cryptocurrencies running on this technology. It brings out that this technology is a dependable way of saving information about other activities.

Banking and Finance

Banking benefits a lot from integrating blockchain into them. No industry or organization stands a chance against banks on the matter of blockchain integration. Financial institutions only operate from 09:00 am to 05:00 pm only on weekdays whereas this technology never rests.

By accommodating this technology into banks, users can experience fast transactions. Banks will find it convenient to exchange assets between different institutions securely and faster.

Currency

Blockchain forms a strong base for cryptocurrencies like Bitcoin. The U.S. Dollar is controlled by the FED (Federal Reserve). Under this central force, users’ information and currency are technically at the impulse of their bank or the government.

The user’s private information is at risk if his bank is hacked. If the user’s bank disintegrates or if he or she is living in a country where the government is not stable, then their currency is in danger. In the 2008 financial crisis, several banks collapsed.

Due to these reasons, Bitcoin was developed. This technology allows cryptocurrencies like Bitcoin or Ethereum to operate without the need for government or central authority. This reduces risk and also eliminates most of the transaction and processing fees.

Supply Chains

Blockchain is used to store the information of the goods that the suppliers have purchased. This helps in the authentication and verification of the products or goods and also common labels.

The food industry is gradually adopting this technology to record and track the passage along with the safety of food throughout the journey, from the farm to the user. 

Healthcare

This technology can also be used in healthcare to securely store the details and medical records of a patient. Whenever a medical record is generated and authenticated, it can be saved in the blockchain.

This gives all the patients confidence that their records will not be altered. A private key is used to access the data saved in the network. No one can access the data except the authorized one which ensures privacy.

Voting

Blockchain technology can also be implemented to conduct a modern voting system. By implementing this the potential of election fraud and boost in voter turnout will cease to end. Using blockchain this way would make votes impossible to tamper with.

With the help of this technology, we could see transparency in the process of voting, as it reduces the number of individuals to conduct an election and provides management with quick results. Therefore the need for recounts or any other heed that might occur will be eliminated.

Property Records

If you know about Real Estate, you will know that the process of storing all the details and rights of the property is sloppy and difficult. In today’s time, a physical deed must be delivered to an individual working under the government, who will manually enter into the country’s centralized directory as well as a public index.

This process is prone to human blunders, pricey, and time-consuming. If there is any single inaccuracy it will make tracking the data hard. If we use blockchain in real estate, owners can easily put faith that their deed is correct to the point and is stored permanently.

Pros and Cons of Blockchain

Since there are lots of benefits of blockchain we also have a few drawbacks of blockchain too. Here are the pros and cons of blockchain technology.

BLOCKCHAIN PROSBLOCKCHAIN CONS
High-quality dataRedundant Performance
Cost reductionsLow transactions per second
Transactions are private, secure, and efficientUsed for illegitimate actions
Immutability and TransparencyData storage limitations
Durability and SecurityLarge energy consumptions
Improved accuracyComplex signature verification process

Conclusion

We have learned about blockchain, and its potential applications in this article, the potential in the field of blockchain is growing aggressively. This article was basically on blockchain for dummies where we, Crypto Tips explained everything about the blockchain in simple words.

Blockchain FAQs

Q1. What is Blockchain in Simple Terms?

Blockchain Technology is a decentralized, shared, public ledger system that is difficult to alter. Information is stored in blocks and each individual in the network has a copy of the full chain.

Q2. How Many Blockchains Are There?

Private blockchains, Public blockchains, Consortium blockchains, and Hybrid blockchains are the four categories.

Q3. What is the Difference Between a Private Blockchain and a Public Blockchain?

Private blockchains are only open to selected people within a particular organization, whereas public one is open to everyone, anyone can join the network freely and establish a node.

Q4. What is a Blockchain Platform?

Any type of platform that allows developers or individuals to create innovative ideas on top of blockchain technology. Ethereum is one example of a blockchain platform.

Q5. Who Invented Blockchain?

Blockchain was first researched in 1991 by Stuart Haber and W. Scott Stornetta. It was first put into application by Satoshi Nakamoto in 2008 to create a digital currency known as Bitcoin.

Q6. What is Blockchain used for?

This technology is mostly used for digital assets called cryptocurrencies like Bitcoin. But it is also used in different sectors to shield data and documents.

Mark Davis
Mark Davis
Mark Davis, blockchain and crypto content writer, experienced in creating informative and engaging content. Background in finance, economics, and tech. Aim to be accurate, objective, and thorough. Capable of writing in various styles, and simplifying complex topics for different audiences.

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