If you’ve been tracking banking, investment, or cryptocurrency for the past decade, you may have heard the term “blockchain”, the record-keeping technology behind the Bitcoin network.
Basic concepts Blockchain is a specific type of database. It differs from a typical database in the way it stores information; Blockchains store data in blocks that are then chained to each other. As new data arrives, it is entered in a new block. After the block is filled with data, it is chained to the previous block, which allows the data to be chained together in chronological order. Different types of information can be stored on a blockchain, but by far the most common use is as a ledger for transactions. In Bitcoin’s case, the blockchain is used in a decentralized way so that no single person or group has control – instead, all users collectively retain control. Decentralized blockchains are immutable, which means the data entered is irreversible. For Bitcoin, this means transactions are saved permanently and can be viewed by anyone.
What is a blockchain?
Blockchain looks complex and can certainly be, but its basic concept is really simple. Blockchain is a type of database. To understand blockchain, it first helps to understand what a database actually is.
A database is a collection of information stored electronically in a computer system. Information or data in databases is typically structured in a tabular format to allow for easier search and filtering of specific information. What’s the difference between someone who uses a spreadsheet to store information instead of a database?
Spreadsheets are designed for one person or a small group of people to store and access a limited amount of information. In contrast, a database is designed to contain a significantly larger amount of information that can be quickly and easily accessed, filtered, and changed by any number of users simultaneously.
Large databases achieve this by hosting data on servers made up of powerful computers. These servers can sometimes be built using hundreds or thousands of computers to have the necessary computing power and storage capacity for many users to access the database at the same time. While a spreadsheet or database can be accessed by any number of people, it is usually owned by a business and managed by a designated person who has full control over how it works and the data in it.
So how is a blockchain different from a database?
One key difference between a typical database and a blockchain is the way the data is structured. A blockchain collects information in groups, also known as blocks that hold information sets. The blocks have certain storage capacities, and when filled, they are chained to the pre-populated block, forming a data chain known as a “block chain”. All new information following the newly added block is compiled into a newly created block and added to the chain after it is filled.
While a database structures its data into tables, a blockchain, as the name suggests, structures its data into chunks (blocks) chained to each other. This ensures that all blockchains are databases, but not all databases are blockchains. This system also creates an inherently irreversible data timeline when implemented in a decentralized situation. When a block is filled, it is placed in stone and that becomes part of the timeline. Each block in the chain is given an exact timestamp when added to the chain.
In order to understand blockchain, it is instructive to examine it in the context of how it is implemented by Bitcoin. Like a database, Bitcoin needs a set of computers to store the blockchain. For Bitcoin, this blockchain is a specific type of database that stores every Bitcoin transaction ever made. In the case of Bitcoin and unlike most databases, these computers are not under one roof and are run by each computer or group of computers, a unique person, or a group of people.
Imagine a company has a server of 10,000 computers with a database that holds all of its customers’ account information. This company has a repository that gathers all these computers under one roof and has full control over each of these computers and all the information it contains. Similarly, Bitcoin consists of thousands of computers, but each computer or group of computers holding the blockchain is in a different geographic location, and they are all run by separate individuals or groups of people. These computers that make up Bitcoin’s network are called nodes.
In this model, Bitcoin’s blockchain is used decentrally. However, there are private, centralized blockchains that are owned and operated by a single entity by the computers that make up its network.
In a blockchain, each node has a complete record of data stored in the blockchain since its inception. Data for Bitcoin is the entire history of all Bitcoin transactions. If a node has an error in its data, it can use thousands of other nodes as a reference point to correct itself. That way, no node in the network can change the information held in it. Therefore, the history of transactions in each block that makes up Bitcoin’s blockchain is irreversible.
If a user interferes with Bitcoin’s transaction log, all other nodes can cross reference each other and easily identify the node with incorrect information. This system helps to establish a precise and transparent sequence of events. For Bitcoin, this information is a list of transactions, but it is also possible for a blockchain to hold various information such as legal contracts, state definitions, or a company’s product inventory.
To change the way this system works or the information stored in it, the majority of the computing power of the decentralized network must agree on those changes. This ensures that the changes that occur will benefit the majority.
Due to the decentralized nature of Bitcoin’s blockchain, all transactions can be viewed transparently, either by having a personal node or using blockchain explorers that allow anyone to see the transactions happening live. Each node has its own chain copy that updates as new blocks are confirmed and added. This means you can follow Bitcoin from anywhere.
Is Blockchain Safe?
Blockchain technology explains security and trust issues in a number of ways. First, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you look at Bitcoin’s blockchain, you will see that each block has a position on the chain called “elevation”. As of November 2020, the height of the block had so far reached 656,197 blocks.
Once a block has been added to the end of the blockchain, it is very difficult to go back and change the content of the block unless the majority agree to do so. This is because each block contains its own hash, along with the hash of the previous block and the timestamp specified earlier. Hash codes are created by a math function that converts digital information into a sequence of numbers and letters. If this information is organized in any way, the hash code will also change.
Here’s why this is important for security. Let’s say a hacker wants to change the blockchain and steal Bitcoin from everyone. If they change their single copy, it will no longer be compatible with everyone’s copy. When everyone cross-references their copy, they will see that this one is featured and that the hacker will be thrown away on the grounds that the version of this chain is illegal.
Succeeding with such a hack will require the hacker to simultaneously check and modify 51% of the copies of the blockchain so that the new copies become the majority copy and hence the agreed chain. Such an attack would require a tremendous amount of money and resources as they would have to rebuild all the blocks, as they will now have different timestamps and hash codes.
Due to the size of Bitcoin’s network and how fast it is growing, the cost of achieving such success will likely be insurmountable. Not only would this be very expensive, but it would probably be fruitless.
Bitcoin vs Blockchain
The purpose of the blockchain is to allow digital information to be recorded and distributed, but not regulated. Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be changed. However, with the launch of Bitcoin in January 2009, blockchain had its first real-world application.
The Bitcoin protocol is built on a blockchain. In a research paper introducing the digital currency, Bitcoin’s creator Satoshi Nakamoto (its pseudonym) referred to it as “a completely peer-to-peer, new electronic cash system that is not a trusted third party.”
The most important thing to understand here is that Bitcoin only uses as a tool to transparently save a payment book, but blockchain can in theory be used to literally save any number of data points. As discussed above, these transactions can take many forms, such as votes in an election, product inventories, state descriptions, house deeds, and many more.
Currently, there are a wide variety of blockchain-based projects that want to implement blockchain in ways that will help the community beyond simply recording transactions. A good example of this is the use of blockchain as a way to vote in democratic elections. The nature of the blockchain immutability means that fraudulent voting will be much more difficult to happen.
For example, a voting system might work so that each citizen of a country is given a single cryptocurrency or coin. Each candidate would then be given a specific wallet address and voters would send their tokens or crypto to the address of the candidate they wanted to vote for. The transparent and traceable nature of the blockchain will eliminate the need to count human votes and the ability of bad actors to change physical ballots.
How to Use Blockchain?
As we now know, the blocks in Bitcoin’s blockchain store data related to monetary transactions. However, it turned out that the blockchain is actually a reliable way of storing data about other types of transactions as well.
Some companies already incorporating blockchain include Walmart, Pfizer, AIG, Siemens, Unilever, and a number of others.
Banking and finance
Perhaps no industry would benefit more from integrating blockchain into business operations than banking. Financial institutions operate only during business hours, five days a week. This means that if you try to make an EFT at 5:00 PM on Friday, you will most likely have to wait until Monday morning to see the money reflected in your account. Even if you make your deposit during business hours, it can take one to three days to verify the transaction due to the huge transaction volume banks have to pay. Blockchain never sleeps.
By integrating blockchain with banks, consumers can see that their transactions are processed in as little as 10 minutes. With blockchain, banks also have the opportunity to exchange money between institutions in a faster and more secure way. For example, in the stock trading business, the clearing and clearing process can take up to three days (or longer if trading internationally), which means that money and shares are frozen during this time.
Blockchain forms the basis of cryptocurrencies such as Bitcoin. The US dollar is controlled by the Federal Reserve. Under this central authority system, a user’s data and currency are technically at the whim of their banks or governments. If a user’s bank is hacked, the customer’s private information is at risk. If the customer’s bank collapses or lives in a country with an unstable government, the currency’s value may be at risk.
Blockchain spreads its operations across a network of computers, allowing Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates most of the transaction and transaction fees. It can also provide those in countries with unstable currencies or financial infrastructures, a more stable currency with more applications and a wider network of people and institutions to do business both domestically and internationally.
Using cryptocurrency wallets for savings accounts or as a means of payment is especially important for those without a government ID. Some countries may suffer from war, or there may be governments that lack real infrastructure to provide identification. Citizens of such countries may not be able to access savings or brokerage accounts and therefore may not have a way to store assets securely.
Healthcare providers can leverage blockchain to securely store their patients’ medical records. Once a medical record is created and signed, it can be written to the blockchain, providing patients with evidence and confidence that the record cannot be changed. These personal health records can be encoded and stored on the blockchain with a private key so that they can only be accessed by certain individuals, thus ensuring privacy.
A smart contract is a computer code that can be built into the blockchain to facilitate, validate or negotiate a contract agreement. Smart contracts operate under a set of conditions that users agree to. When these conditions are met, the terms of the agreement are automatically executed.
For example, let’s say a potential tenant wants to rent an apartment using a smart contract. As soon as the landlord pays the security deposit, he agrees to give the tenant the door code of the apartment. Both the tenant and the landlord will send the relevant parts of the deal to the smart contract and keep the door code for the security deposit on the date this contract starts and change it automatically. If the landlord does not provide the door code by the date of the lease, the smart contract will return the security deposit. This will eliminate the fees and processes typically associated with the use of a notary, third-party mediator or attorney.
As mentioned, blockchain can be used to facilitate a modern voting system. Voting with blockchain has the potential to eradicate election fraud and increase voter turnout, as tested in the November 2018 midterm elections in West Virginia. The blockchain protocol will also preserve transparency in the selection process, reduce the staff required to make choices, and provide almost immediate results to authorities. This will eliminate the need to recount or any real concern that fraud could threaten the choice.
Blockchain’s Pros and Cons
Despite all its complexity, the potential of the blockchain as a decentralized form of record-keeping is almost limitless. From more user privacy and increased security to lower transaction fees and fewer errors, blockchain technology can see applications beyond those mentioned above very well. However, there are some disadvantages.
- Improved accuracy by removing human intervention in verification
- Cost reductions by eliminating third-party verification
- Decentralization makes tampering difficult
- Transactions are safe, private and efficient
- Transparent technology
- Provides a banking alternative and way to secure personal information for citizens of countries with unstable or rudimentary governments
- Significant technology cost associated with Bitcoin mining
- Low number of transactions per second
- History of use in illicit activities
Advantages of Blockchain
Transactions on the blockchain network are confirmed by a network of thousands of computers. This eliminates almost all human involvement in the verification process, resulting in less human error and accurate information recording. Even if a computer on the network makes a calculation error, the error is only made to a copy of the blockchain. For this error to spread to the rest of the blockchain, it must be done by at least 51% of the computers on the network, which is almost impossible for a network of Bitcoin’s size and growth.
Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to make a marriage. Blockchain eliminates the need for third-party verification as well as their costs. Business owners, for example, charge a small fee when they accept payments using credit cards, as banks and payment processing companies have to handle these transactions. Bitcoin, on the other hand, does not have a central authority and has limited transaction fees.
Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread over a computer network. When a new block is added to the blockchain, every computer on the network updates the blockchain to reflect the change. By spreading this information across a network rather than storing it in a single central database, it becomes more difficult to tamper with the blockchain. If a copy of the blockchain falls into the hands of a hacker, only one copy of the information is compromised rather than the entire network.
Transactions carried out through a central authority can take several days to complete. For example, if you try to cash a check on Friday night, you may not be able to see the money in your account until Monday morning. While financial institutions operate five days a week, during business hours, blockchain runs 24 hours a day, seven days a week, 365 days a year. Transactions can be completed in as little as ten minutes and can be considered safe after a few hours. This usually takes much longer, especially due to time zone issues and the fact that all parties need to confirm payment transactions. cross border useful for trades.
Many blockchain networks operate as public databases, meaning that anyone with an internet connection can view a list of the network’s transaction history. Although users can access details about transactions, they cannot access identifying information about users who perform these transactions. It is a common misperception that blockchain networks such as Bitcoin are only anonymous even though they are hidden.
So, when a user makes public transactions, public key Its unique code, called it, is saved on the blockchain rather than personal information. If a person has purchased Bitcoin on an exchange that requires identification, that person’s identity is still linked to their blockchain address, but a transaction does not reveal any personal information, even if it is linked to a person’s name.
Once a transaction is registered, its authenticity must be verified by the blockchain network. Thousands of computers on the blockchain are rushing to confirm the details of the purchase are correct. After a computer verifies the transaction, it is added to the blockchain block. Each block in the blockchain contains its own unique hash, along with the unique hash of the previous block. When the information on a block is edited in any way, the hash code of that block changes – however, the hash code in the next block does not change. This discrepancy makes it extremely difficult to change information on the blockchain without notice.
Most blockchains are entirely open-source software. This means that anyone and everyone can view its code. This gives auditors the ability to review cryptocurrencies like Bitcoin for security. This also means that there is no real authority on who controls Bitcoin’s code or how it is edited. Because of this, anyone can suggest changes or upgrades to the system. If a majority of the network users agree that the new version of the code with the upgrade is sound and worthwhile then Bitcoin can be updated.
Perhaps the deepest aspect of blockchain and Bitcoin is the ability of anyone to use it, regardless of ethnicity, gender, or cultural background. According to the world bank, there are about 2 billion adults who do not have a bank account or means of keeping their money or wealth. 5 Almost all of these individuals live in developing countries where the economy is in its infancy and is completely dependent on cash.
These people usually earn very little money paid in physical cash. They then need to hide this physical money in secret places in their home or in their living quarters, subject to robbery or unnecessary violence. The keys of a bitcoin wallet can be stored in a piece of paper, in an inexpensive mobile phone, and even memorized if necessary. For most people, these options are more likely to hide more easily than a small pile of cash under a mattress.
Blockchains of the future are looking for solutions not only as a unit of account for wealth storage, but also for storing medical records, property rights, and various other legal contracts.
While the blockchain has significant advantages, there are also significant challenges in its adoption. Nowadays, the obstacles to the implementation of blockchain technology are not just technical. The real challenges are the thousands of hours (read: money) required to integrate the blockchain into existing business networks, to say nothing about custom software design and backend programming are mostly political and legal. Here are some of the challenges facing the widespread adoption of blockchain.
Although the blockchain saves users on transaction fees, the technology is far from free. For example, the “proof-of-work” system that bitcoin uses to validate transactions consumes large amounts of computing power. In the real world, the power of millions of computers in the bitcoin network is close to what Denmark consumes annually. Assuming electricity costs are $ 0.03 ~ $ 0.05 per kilowatt hour, mining costs are around $ 5,000 ~ $ 7,000 per coin, excluding hardware costs.
Despite the Bitcoin mining costs, users continue to increase their electricity bills to validate transactions on the blockchain. This is because when miners add a block to the bitcoin blockchain, they are rewarded with enough Bitcoin to make their time and energy valuable. However, in the case of blockchains that do not use cryptocurrencies, the miners will need to be paid or otherwise encouraged to verify transactions.
Some solutions to these problems are starting to emerge. For example, bitcoin mining farms are set up to use solar energy, excess natural gas from crushing fields, or power from wind farms.
Bitcoin is an excellent case study of the possible inefficiencies of the blockchain. Bitcoin’s “proof of work” system takes about ten minutes to add a new block to the blockchain. At this rate, it is estimated that the blockchain network can only manage about seven transactions per second (TPS). While other cryptocurrencies like Ethereum outperform bitcoin, they are limited by the blockchain. Legacy Visa can handle 24,000 TPS in terms of context.
Solutions for this issue have been developed over the years. There are currently blockchains that process more than 30,000 transactions per second.
The website allowed users to browse the website without being tracked using the Tor browser and make illegal purchases in Bitcoin or other cryptocurrencies. Current US regulations require financial service providers to obtain information about their customers when they open an account, verify the identity of each customer, and confirm that customers do not appear on any list of known or suspected terrorist organizations. This system can be viewed as both a professional and a con. It gives everyone access to financial accounts, but also allows criminals to take action more easily. Many argued that good uses of cryptocurrency, such as banking in the unbanked world, outweigh the misuse of cryptocurrency, especially when most illegal activities are conducted with untraceable cash.
Many in the crypto space have expressed concern about government regulations on cryptocurrencies. As the decentralized network grows, it becomes increasingly difficult and almost impossible to finish something like Bitcoin, while governments could theoretically make it illegal to own or join cryptocurrencies.
Over time, this concern became smaller as large companies like PayPal began to allow the ownership and use of cryptocurrencies on their platforms.
With many practical applications for technology currently being implemented and being discovered, blockchain is finally at the age of twenty-seven, making a name for itself without a small part due to bitcoin and cryptocurrency. Blockchain, a buzzword in every investor’s language in the country, stands to make business and government operations more accurate, efficient, secure and cheaper with fewer middlemen.
As we prepare to enter the third decade of blockchain, it is no longer about “whether the old companies will catch up with the technology” but “when will they catch it”.