For several years now, Bitcoin, Ethereum, and many other cryptocurrencies have been in the spotlight, as everything is becoming more virtual. Blockchain technology is changing industries worldwide. Organizations, governments, financial institutions, and other platforms are being introduced to a new digital age. Everything around us is being revolutionized. Yet despite the fact that everyone is already familiar with cryptocurrencies, not everyone knows what blockchain technology is or how it works.
Blockchain consists of a chain of blocks. It is a network of computers that must approve every transaction before it can be verified and documented. By using data encryption or cryptography to secure transactions, blockchain provides a decentralized account book. Blockchain is the technology that enables the operation of cryptocurrencies. Without it, cryptocurrencies would not exist as they are today.
One of the key features of this technology is that it has a distributed decentralized database. This database is located in many identical copies that are stored on many computers. Computers, known as nodes, together form the point-to-point network, meaning that there is no central server or database.
How Did Blockchain Start?
1982 was the year when the idea of blockchain was first introduced and proposed by David Chaum. In 1991, a similar idea was brought by Haber and Stornetta. However, the first distributed blockchain was conceptualized in 2008 by Satoshi Nakamoto the mysterious creator of Bitcoin.
After its establishment, blockchain would be implemented as a part of Bitcoin, where it functions as a public accounting register for all transactions. Through the use of a peer-to-peer (P2P) network along with a timestamping distributed server, a database could be managed independently.
The implementation of blockchain has allowed Bitcoin to become the first cryptocurrency that can solve the problem of double-spending. This happens without the requirement of a presence of an administrator or a third party.
How Does Blockchain Technology Work?
On the internet, anyone can publish information, and then others can access it anywhere in the world.
Similarly, a blockchain allows someone to send and receive something valuable worldwide, where other people can access it. However, in order to do that, a cryptographic key is required to only access the blocks owned by you. By giving away this private key to someone else, you are transferring the value of everything stored on that part of the blockchain.
Blockchain also fulfills a secondary role, creating trust and identity. As mentioned above, no one can modify or access a block without being provided with the appropriate key. The key objectives of a bank are to verify identities in order to prevent fraud and then record legitimate transactions. Now, with blockchain, these key objectives can be performed more quickly and accurately.
Blockchain is a complex concept, made up of a mix of different technologies. Each of these technologies is a fundamental part of making blockchain revolutionary. Every aspect of it plays a key role, not only allowing blockchain to perform its functions securely and efficiently, but also in supporting and maintaining the network.
Instead of needing intermediaries, blockchain would enable individuals, organizations, machines, and so on, to interact with each other independently. This was already seen with Bitcoin. For example, if two individuals want to exchange Bitcoin with each other, or any other cryptocurrency, they don’t go to the bank and pay a significant fee for the transaction. However, they perform this transaction with each other through blockchain.
Mining
Bitcoin mining is significantly different from traditional mining.
In Bitcoin, mining is the process by which new blocks are created in the blockchain. In Bitcoin, a new block is mined every 10 minutes. It is important to note that also a Bitcoin transaction takes a maximum of 10 minutes to process.
Some cryptocurrencies form the block faster, and some more slowly. Moreover, every transaction in the blockchain is verified through mining. To accomplish this task, the miner (computer or processor that does the mining) has to solve a difficult mathematical problem, which needs tremendous computing power.
Transaction Blocks
Every block in the blockchain holds a list of transactions and a header (upper part) of the block. Headers contain three sets of metadata:
Through these three types of metadata, each block is linked to the previous block. Hence, the name is blockchain.
Transaction Block and Hash to Previous Block. Source: ResearchGate
Is Each Blockchain Associated With A Cryptocurrency?
When we talk about Bitcoin as a currency, we also think of it along with blockchain as an inseparable pair. Every Bitcoin is a digital currency, it has no value in itself but is given by the offer, demand, or interest of the community or people.
In general, what we call “currency” with few features in most circumstances, is a digital symbol that serves to operate the network. Each time we present a record in the network, we present several characters. Blockchain works with tokens and the reasons are various. One of them is precisely the reward of the nodes that manage it in a decentralized way.
Cryptocurrencies are used as money and they can be bought and sold. If a blockchain is exceptionally beneficial or offers an innovative solution to a problem, valuable goods become intangible. In other words, they become vital parts and are absorbed in some manner into daily life.
Advantages & Disadvantages Of Blockchain Technology
Based on the numerous benefits that technology has to offer, blockchain has the potential to change a variety of sectors.
- Greater transparency
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- As a result of the adoption of this technology, transaction histories are becoming more transparent. Due to the fact that blockchain is a form of distributed book, all network users share the same documentation as opposed to individual copies.
- Extended security
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- Blockchain is more secure than conventional methods of data storage. Before registering a transaction, it should first be approved. After a transaction is approved, it is encrypted and connected to the preceding transaction. This, combined with the fact that data is kept on a network of computers rather than a single server makes it difficult for hackers to corrupt transaction data.
- Reduced costs
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- Customers frequently pay a bank for transaction verification and a notary for document signing. The blockchain technology eliminates the need for third-party verification, as well as the costs associated with it.
- Decentralization
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- Blockchain’s data is not saved in a single location. Instead, a network of computers copies and distributes the blockchain. Each computer in the network updates its blockchain to reflect the addition of a new block. As a result, rather than keeping that information in a central database, it is disseminated over a network.
Like a cryptocurrency, blockchain technology also has two sides. Here are some of the disadvantages of it:
- It is not 100% safe
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- This technology can and does become hacked. Although this system is more difficult to attack than other types of financial networks, the value shifts caused by security failures are huge.
- Offers non-refundable transactions
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- A transaction cannot be returned once if it has been included in a block in the longest chain. This property is what allows chains and cryptocurrencies to function as they do.
- Requires a massive amount of energy
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- Running a blockchain is a time-consuming and resource-intensive process. It requires a significant amount of money since it needs a lot of devoted hardware resources to be successful. This, especially if mining is involved.
- Can provide very slow transaction times
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- When beginning a transaction using Bitcoin, the time it takes to complete the transaction might be more than 40 minutes.
The Future Of Blockchain Technology
There is a lot of excitement in the blockchain industry right now. Every day, new blockchain start-ups emerge. Many observers relate this trend to the early 90s internet revolution, when corporations fought to capitalize on the potential of this new discovery (the internet). However, some question if the blockchain has the potential to alter the globe.
With the advancement of blockchain technology, a big number of current institutions will be replaced once it is completely operational. It is expected to gain popularity amongst economic experts, with around 66% of banks anticipating blockchain solutions in the near future. Furthermore, the future of this technology will allow us to handle transactions 24/7.
Takeaways
- Blockchain is a network of computers that must approve all transactions before verification.
- Blockchain consists of a chain of blocks.
- One of the key features of this technology is that it has a distributed decentralized database.
- Mining is the process by which new blocks are created.
- Every block holds a list of transactions and a header (upper part) of the block.
- Bitcoin has the potential to revolutionize various industries.
- A large number of institutions will be replaced by blockchain once it is fully operational.
