Every information added to this ledger is compiled in the form of a block. Every new block added to this ledger connects with the previously added block, forming a chain of information blocks. Thus, this chain of blocks is called a blockchain.
Blockchains work in a decentralized system. This means that blockchain operates without a central authority that governs it. These central authorities could be banks, governments, etc.
A decentralized system is achieved through computer nodes that voluntarily keep track of every transaction or service being conducted in the blockchain. These computer nodes, also known as miners, collectively verify that these services and transactions are valid. This verification is done through a series of mathematical problems solved by any computer node. Consequently, when the transaction or service is verified, a block of information is added to the chain of other blocks.
The term ‘blockchain’ is known to people who are aware of cryptocurrency, specifically Bitcoin (BTC), the first cryptocurrency in history to successfully implement the decentralized system in the market.
However, blockchain technology is not only used in the crypto market, but also for different purposes, such as launching and running decentralized applications, known as dApps. This was achieved through smart contracts.
How did Blockchain Start?
But how did such a simple, yet very complex system initially start?
The idea of a decentralized system had existed for a while because of the need to eliminate third parties, such as banks since third parties impose unnecessary transaction fees and other conditions that aggravate the positions of buyers and sellers.
However, such ideology did not come to its realization until 2008, when a mysterious person with the pseudonym of Satoshi Nakamoto proposed the creation of Bitcoin, a cryptocurrency that involved a purely peer-to-peer system of completing transactions. Satoshi Nakamoto and his team went on to successfully integrate Bitcoin into the market without revealing his identity. Consequently, the blockchain system was also successfully put into practice for the first time.
Bitcoin and blockchain technology revolutionized the crypto market (not limited to) to a point where the world’s economy has become reliant on it.
How Does Blockchain Works?
It is easier said than done when it comes to explaining the whole process of blockchain.
When a transaction is completed, it is signed with a private key from the person completing the transaction. In order to be verified, the transaction is signed with public keys from other computer nodes. In this way, the information is then processed and added to the ledger in a form of a block. Each block is categorized with a specific algorithm (reference number), known as a hash. A new hash is added on top of the previous hash, forming a chain in the network.
In order for this verification to occur, computer nodes need to solve advanced mathematical problems, which require technological resources, such as electricity. After the information is added to the blockchain, the computer node is rewarded a certain amount of crypto tokens for its services. This process is known as mining.
Since hash blocks are added on top of one another, it is almost impossible to go back to a previous transaction block and change its information, unless the majority of people involved in contributing to the blockchain agree to do that. This increases the safety of the blockchain enormously because it makes it practically impossible for a hacker to manipulate data in the blockchain. Hence, blockchains are reliable in terms of security.
There are two types of blockchains: public and private blockchains :
- Public blockchains allow anyone to have access to its network.
- Private blockchains are usually controlled by a higher authority that decides who is allowed to join the network. This contradicts the whole nature of blockchain and decentralized systems.
Differences Between Blockchain And Banks
While blockchain and banks both store information about their respective users, there are vast differences that you might not have known between blockchain operations and banks.
The first major difference is the complexity of bank transactions in comparison with blockchain. There are a lot of legal documents, processes, and additional fees needed to complete a transaction through banks. In blockchain technology, all you need to have is a smart device and secured internet to access your virtual account and do the transactions.
Moreover, bank transactions may take hours or even days to be completed. In blockchain technology, time is a very valuable asset due to the constant change in the crypto market. As such, blockchain technology offers relatively fast transactions when compared to bank transactions. When it comes to time, it is also worth mentioning that banks offer their technical services only at limited hours of the day, while blockchain is accessible any time of the day.
Blockchain security is indeed secure, and systems operating in it consistently update to prevent data from being stolen. Bank accounts, on the other hand, depend on the bank’s servers. If the servers go down, clients are also vulnerable to have their data stolen.
Advantages And Disadvantages Of Blockchain
The most exciting innovations often lead to various advantages, but also to unexpected disadvantages.
So here are some of the biggest pros and cons we encounter when dealing with Blockchain.
Advantages
- Decentralization
- The removal of third parties from transactions is certainly one of the biggest reasons why blockchain technology has become so important in recent years.
- Transaction speed
- Transaction speeds may vary depending on the market crowding, but they are relatively quick and efficient for everyone.
- Security
- Blockchain technology is built in such a way to protect the people of its network and their data. Transactions are safe and not prone to be misused by hackers. Since every transaction requires a consensus of many computer nodes, it reduces the likelihood of the data being manipulated.
- Easy access
- Blockchain technology offers the simplest steps for a person to access his/her account. It can be done whenever the person has access to the internet through his/her smart device
- Many services
- Blockchain has developed so much that it is possible to have access to different online services besides money transactions.
Disadvantages
- Cost
- Electricity bills might become unbearable for someone if he/she is mining cryptocurrencies at larger rates.
- Market Traffic
- Because of the many transactions being done at a single time, it might take some time until a person can complete a transaction. Additionally, if someone has a lot of Bitcoins, it would take him a while until the network would find him potential buyers for the former to sell it all.
- Misuse
- There have been cases where blockchain was used to do illegal transactions in the black market. While this might not affect directly another person who uses blockchain, it might stimulate a government to take action on blockchain technology by banning it in that specific country.
Future Of Blockchain
We are witnesses of the rise in importance of blockchain technology, and the world is becoming more reliant on it every day. But what to expect for the future of this virtual, revolutionized database/ledger?
The addition of smart contracts played a huge role in determining the power of blockchains, making many people wonder about other ways that blockchain technology can expand. Thus, it is no surprise that some people expect to find new ways to utilize the decentralized system besides the already established programs and services in the blockchain.
Additionally, every blockchain user will be hoping that the drawbacks of blockchain technology to be resolved as time progresses
The crypto market is very active, so major changes in value for some of the cryptocurrencies operating in blockchain are inevitable.
It is safe to say that blockchain is becoming one of the most important systems in the world’s economy.
Takeaways
- Blockchain is a virtual database that records every service that occurs in a decentralized system.
- Blockchain was first implemented with the invention of Bitcoin, the first decentralized cryptocurrency.
- Computer nodes verify transactions and add that information to the blockchain.
- We have two types of blockchains: public and private
- While both banks and blockchain keep track of money transactions, they also have their differences.
- Blockchain technology is one of the most exciting technologies in the world, but it also has its flaws.
- The importance of blockchain technology is expected to increase in the future.