With cryptocurrency setting its foot in 2008 with the launch of Bitcoin, you must have come across the term ‘blockchain technology’ quite often.
Bitcoin has become one of the famous decentralized currencies in this modern digital era. In simple terms, Bitcoin is a cryptocurrency that can be sent from one user to another without any formal permission from the central bank or government.
The transaction takes place on a peer-to-peer bitcoin network globally without involving any intermediary.
Blockchain technology is the underlying foundation behind these cryptocurrencies. With cryptocurrency coming into the limelight in recent years, we have seen blockchain technology gain immense popularity.
However, there are digital taboos behind the understanding of blockchain technology and it is often viewed as a complicated technical term that only tech-savvy brains can comprehend.
Contrary to the prevalent complexity of blockchain technology, it is quite a simple system to understand.
Understanding blockchain technology also opens doors for us to understand how this technology works and what is the future that it holds.
If you want to upgrade your ideas about blockchain technology, here is everything you need to know!
Understanding the concept of Blockchain Technology
Blockchain technology is a global online database, often known as a Distributed Ledger System, that records the history of all digital asset transactions on different networks of computers. It is a decentralized digital ledger that can be accessed by anyone at any time from anywhere using an internet connection. Every transaction is authenticated by the cryptographic signature of the owner, known as the hash. This digital hashing secures the transactions from being altered in the future.
Blocks are the collection of multiple digital transactions throughout the world. Every transaction that takes place gets added in the form of a block in a chronological manner. The formation of one block after another creates a chain of blocks, hence naming the technology ‘blockchain’.
A simple metaphor to understand blockchain technology is Google Docs or Google Spreadsheets. When a Google Doc or a Google Spreadsheet is shared with an individual or a group, it gets decentralized and is accessible by every member of the group. It must be noted that neither is the document copied and nor is the data of the document transferred somewhere else. Hence, every member can access the document from anywhere using an internet connection. At the same time, any changes in the document are visible to everyone on a real-time basis. Moreover, the members of the group cannot tamper with the data present in the document in any form. However, blockchain technology is far more broad and complicated, it can be understood using this simple analogy.
How does Blockchain work?
One of the major reasons for blockchain gaining popularity in recent times is for the security of information it provides to its users. A blockchain consists of the following features which make it unique:
- The blocks follow a decentralized system and are available at various locations at the same time.
- The blocks follow the transparency of data to everyone who is accessing the system.
The question that arises here is how does blockchain technology works and why is it difficult to hack. A blockchain consists of three major elements: blocks, miners, and nodes. As we already know, blocks consist of the data of every digital transaction. A block consists of a cryptographic signature known as the hash and an automatically generated block header hash known as the nonce. After the creation of a block on the chain, the nonce generates a digital signature that seals the data and secures it from future tampering. Hence, once a block is added to the chain, it can only be altered once it is mined.
Mining is the process of creating new blocks on the chain. Every block consists of its unique nonce and hash, as well as the references of the hash of all other blocks that were previously added to the chain. Hence, to add a block, miners have to go through a complicated mathematical computation to find a nonce with an acceptable hash. While adding a block to the chain requires such lengthy mathematical solving, altering a previously added block is more complicated as it requires re-mining all the blocks present on the chain. There are around four million combinations of nonce and hash that the miners might have to undertake to change an existing block. The process requires an immense amount of capital and human labor. Thus, hacking a blockchain becomes nearly impossible.
Another important feature of a blockchain is a node. A node is any electronic device that carries the information of a blockchain. Since blockchains are not owned by any particular person or device, they can be accessed via the nodes connected to the chain. The transparent nature of blockchain ensures the updates of every transaction get recorded and verified on the chain automatically using digital algorithms. Hence, it maintains the integrity of information amongst its users at any given second.
Pros and Cons of Blockchain
Every coin has two sides and blockchain is no different when it comes to its usage. While there are numerous benefits of investing in a blockchain, there are certain cons to this advanced technology as well.
As we already know, blockchain comes bearing multiple benefits including:
- Security of information
- Tamper proof and safe
- Speedy transactions at the convenience of the users
- Creating transparency and trust amongst the users
- No interference of any third-party organization
One of the major cons of using blockchain is the cryptographic keys. The digital signature used to secure the data in a block comes with two keys – a private key and a public key. Every individual uses these two keys to transfer cryptocurrency securely. However, losing the private key can cause a ruckus and delay the transactions. Another disadvantage includes the transaction limit per node, which sometimes makes it time-consuming for the users, causing huge inconvenience.
Future of Blockchain
Bitcoin has been an important aspect of blockchain since its inception. Blockchain and Bitcoin are often seen interchangeably in the eyes of a common individual. However, blockchain is bigger than every cryptocurrency combined. Over the last few years, we have seen blockchain reaching heights and it is predicted that it is not slowing down anytime soon!
Deloitte’s 2021 Global Blockchain Development Survey stated that almost 76% of the executives believe that digital currencies will replace the traditional fiat currencies in the upcoming 5 to 10 years in global finance. The Dubai government announced in 2016 to shift its supply chains to blockchains by the end of 2020. In the light of the Covid-19 pandemic, blockchain has stood out as a key player in storing and maintaining the security of medical data. Blockchain has achieved major milestones to date and showcases a revolutionary future in the world of finances. Some emerging trends that will affect the future of blockchain are:
- The emergence of Non-Fungible Tokens or NFTs as a new digital collectible that is unique and can be traded only by the original owner. NFTs are emerging at a fast rate and soon are expected to be used for day-to-day transactions.
- The usage of faster transactions in banks by having blockchain solutions in 66% of banks in the upcoming three years.
- Replacing the 45 days time-consuming Know Your Customer (KYC) process with the smart contracts of blockchain/ Blockchain is expected to revolutionize the loaning process, identity verification, and real estate investments in the coming future.
- Entering the healthcare sector and keeping a check on the privacy of patients’ details. Blockchain is expected to improve the medical supply chain and monitor health insurance premiums. A 63% growth from 2019 to 2028 is expected in blockchain in the healthcare segment with global market size of USD 231.0 million by 2022.
- Cryptocurrency is expected to spread its wings even wider and create a digital arena where valuable transactions will no longer require traditional money. The world is expected to buy houses, cars, and artworks using crypto money at the convenience of a click!
Blockchain has always stayed ahead of its time and grabbed huge attention in a short period. It promises its users the benefits that no other platform can guarantee even to close proximity. Blockchain technology is dynamic and constantly expanding with technological advancements. While we can see blockchain setting its foot in the majority of the valuable transactions, it would be interesting to see if cryptocurrency can change the financial world and replace traditional money in totality. I hope this article gives you a fair idea about blockchain and how it works.