Blockchain is a system of recording information.
Technically speaking, it is a distributed database shared between the nodes of the network mainly through internet. As a database, stores information electronically in digital format.
One key difference between a typical database and a blockchain is how the data is structured. A database usually structures its data into tables, whereas a blockchain, like its name implies, structures its data into chunks, called blocks.
This data structure inherently makes an irreversible timeline of data when implemented in a decentralized nature. When a block is filled, it is set in stone and becomes a part of this timeline. Each block in the chain is given an exact timestamp when it is added to the chain.
Cryptography is used to connect the blocks. A cryptographic hash of the preceding block, a timestamp, and transaction data are all included in each block. The timestamp verifies that the transaction data was there at the moment the block was released, allowing it to be hashed. Because each block contains information about the previous block, they create a chain, with each new block strengthening the previous ones.
As a result, blockchains are resistant to data tampering since the data in any one block, once recorded, cannot be changed retrospectively without affecting all subsequent blocks.
The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
Origin
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two mathematicians who wanted to implement a system where document time stamps could not be tampered with. In the late 1990s, cypherpunk Nick Szabo proposed using a blockchain to secure a digital payments system, known as bit gold (which was never implemented).
How does blockchain work?
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. In this way, a blockchain is the foundation for immutable ledgers, or records of transactions that cannot be altered, deleted, or destroyed. Therefore, blockchains are also known as a distributed ledger technology (DLT).
Private vs public blockchain
A public blockchain, also known as an open or permissionless blockchain, is one where anybody can join the network freely and establish a node. Because of its open nature, these blockchains must be secured with cryptography and a consensus system like proof of work (PoW).
A private or permissioned blockchain, on the other hand, requires each node to be approved before joining. Because nodes are trusted, the layers of security do not need to be as robust.
Uses
Blockchain technology can be integrated into multiple areas. The primary use of blockchains is as a distributed ledger for cryptocurrencies such as Bitcoin; there were also a few other operational products which had matured from proof of concept by late 2016.
- Cryptocurrencies: Most cryptocurrencies use blockchain technology to record transactions.
- Smart contracts: Blockchain-based smart contracts are proposed contracts that can be partially or fully executed or enforced without human interaction. One of the main objectives of a smart contract is automated escrow. A key feature of smart contracts is that they do not need a trusted third party to act as an intermediary between contracting entities -the blockchain network executes the contract on its own. This may reduce friction between entities when transferring value and could subsequently open the door to a higher level of transaction automation.
- Financial services: Many banks have expressed interest in implementing distributed ledgers for use in banking and are cooperating with companies creating private blockchains.
- Anti-counterfeiting: Blockchain could be used in detecting counterfeits by associating unique identifiers to products, documents and shipments, and storing records associated to transactions that cannot be forged or altered. It is however argued that blockchain technology needs to be supplemented with technologies that provide a strong binding between physical objects and blockchain systems.
- Healthcare: In response to the 2020 COVID-19 pandemic, The Wall Street Journal reported that Ernst & Young was working on a blockchain to help employers, governments, airlines and others keep track of people who have had antibody tests and could be immune to the virus. Hospitals and vendors also utilized a blockchain for needed medical equipment.
Advantages of blockchain
- Accuracy of the chain: Transactions on the blockchain network are approved by a network of thousands of computers. This removes almost all human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. For that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network’s computers
- Decentralization: Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading that information across a network, rather than storing it in one central database, blockchain becomes more difficult to tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the information, rather than the entire network, would be compromised.
- Cost Reductions: Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage. Blockchain eliminates the need for third-party verification — and, with it, their associated costs
- Immutable: Any validated records are irreversible and cannot be changed.
- Anonymous: The identity of participants is either anonymous or pseudonymous.
- Efficient transactions: Transactions placed through central authority can take up to few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. Whereas financial institutions operate during business hours, usually five days a week, blockchain is working 24 hours a day, seven days a week, and 365 days a year.
Disadvantages of blockchain
- Technology cost: Although blockchain can save users money on transaction fees, the technology is far from free. For example, the PoW system, which the Bitcoin network uses to validate transactions, consumes vast amounts of computational power. In the real world, the power from the millions of computers on the Bitcoin network is close to what Denmark consumes annually.
- Speed and data inefficiency: Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s Pow system takes about 10 minutes to add a new block to the blockchain. At that rate, it’s estimated that the blockchain network can only manage about seven transactions per second, (TPS). Legacy brand Visa, for context, can process 24,000 TPS.
- Illegal activity: While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network.
