Blockchain technology has been around for many years, but recently its importance has grown exponentially. The reason behind this growth can be attributed to several factors like increasing demand from different industries as well as an increased interest among people.
In order to understand what exactly is blockchain we need to first look at some basic terminologies related to cryptocurrencies. Cryptocurrencies are basically virtual currencies which use cryptography (i.e., secure data structures) to regulate their generation, authentication, and transfer. It’s very similar to cash where you simply put coins into a slot machine and press “spin” to get more money. In case of cryptocurrency, there isn’t any central authority responsible for authenticating these transactions. Instead, they’re verified using peer-to-peer networks. This verification process is known as consensus mechanism. Consensus mechanisms ensure that every transaction gets authenticated before being added on to the chain. There are multiple types of consensus mechanisms used today such as proof of stake, Delegated Proof of Stake (DPoS), etc. We’ll dive into what is blockchain technology.
What is the Blockchain and How Does it Work?
So now that we have established why blockchains exist let’s discuss what exactly is one. Blockchains are essentially databases made up of blocks containing information about transactions. Each block consists of links between other blocks. These linked blocks are called “hashes” because each block contains a hash value instead of real addresses. A hash function converts human readable text—like an IP address—into a string of letters and numbers so that machines can easily track them. When new transactions occur, miners solve complex mathematical problems which verify if those transactions were valid. Once validated, these transactions become part of the next block and all subsequent blocks thereafter. Miners who successfully validate the transactions receive rewards in form of tokens. Now that we know the basics, lets talk about how the blockchain works.
The most significant characteristic of decentralized systems is that they don’t require a centralized entity to run smoothly. Decentralized applications (or DApps) utilize protocols based upon smart contracts to execute processes without involving third parties. For example, when someone sends a payment through PayPal, both sender and receiver must trust the company. But with bitcoin, users do not need to worry about trusting anyone else since everything runs autonomously via blockchain protocol. Every time a user wants to send $1 million dollars worth of bitcoin, he/she only needs to sign off on a few lines of code and wait until the entire process completes.
This brings us to another important question. What happens if a hacker manages to change the source code of the blockchain? Since everyone would eventually see the changes once the system restarts, hackers could potentially steal millions of dollars. That’s precisely where Bitcoin excels. Its design prevents malicious individuals from altering or tampering with the blockchain itself. Whenever a miner tries to add a new block onto the chain, his mining rig will automatically reject the new block unless he agrees to it via majority vote. If even 50% of miners agree to a certain transaction then it goes ahead and gets included in the blockchain. So, whenever someone wants to make a fraudulent transaction, there is no easy way out due to high computational power required to mine bitcoins. Similarly, Ethereum also uses a similar approach where miners compete against each other to build a list of blocks. However, unlike Bitcoin, Ethereum allows users to customize rules within the platform itself.
Now that we’ve discussed how blockchains work, it is imperative to mention that they aren’t limited to just financial services. They can be implemented across various sectors like healthcare, manufacturing, supply chains, logistics, education, entertainment, gaming, advertising, media, insurance, government operations, etc. Some examples include Uber Technologies Incorporation and Walmart Incorporated whose goal was to create platforms independent of intermediaries. Even popular apps like Facebook Inc. allow users to post messages directly to friends’ walls bypassing moderators. As mentioned earlier, blockchains are distributed ledgers where updates happen simultaneously and permanently. Thus, there is no chance of getting caught lying in your account statement. Additionally, businesses can leverage the benefits of transparency, accountability, traceability, auditing, security, and integrity.
What is the Main Purpose of Blockchain?
As previously stated, the primary objective of what is the blockchain tech is to replace traditional trusted authorities with automated procedures. Unlike banks, blockchains eliminate single points of failure and offer enhanced privacy features for customers. Currently, companies spend billions of dollars annually managing customer records, processing payments, fraud detection, credit decisions, identity management, etc. With blockchain, these issues don’t arise since everything takes place directly between two parties involved in a deal. Moreover, blockchains enable developers to build solutions faster than ever before since there are fewer steps and manual approvals involved. Another benefit of having a transparent database is that users always remain aware of their personal finances. Not only that, but they can monitor spending patterns over time. Also, blockchains provide greater visibility, accessibility, authenticity, reliability, scalability, efficiency, speed, cost reduction, and better control. And lastly, you know what’s best about blockchains? No downtime!
What is Blockchain Technology
It may sound complicated, but blockchains actually consist of three key components. Firstly, there’s a public blockchain shared by everyone. Secondly, there’s a private blockchain consisting of sensitive details regarding individual accounts. Lastly, there’s a permissioned blockchain built specifically for a business. Permissionless blockchains are open to everyone whereas permissioned ones operate under specific conditions and policies.
According to Vitalik Buterin — co-founder of Ethereum — approximately 80 percent of global GDP relies on finance and banking institutions. He believes that disruption won’t come from startups like Zelle. Rather, it’ll originate from emerging technologies like blockchains. Eventually, banks and governments will adopt blockchain tech to transform their current practices.
If you enjoyed reading this article, please share it with others. To learn more about what is blockchain technology and related issues, You can follow on Twitter here.