What Is Blockchain and How Does It Work?
A blockchain is a decentralized database that is shared across computer nodes in a network and keeps data in digital form. Cryptocurrency systems like Bitcoin rely on blockchains to keep track of transactions in a safe and decentralized manner. The novelty with blockchain technology is that it ensures the integrity and security of data records without the need for a third party, hence, generating trust.
The structure of the data on a blockchain is a major difference if compared to a regular database. A blockchain is a digital ledger that stores data in units called ‘blocks’. Whenever a block is filled, it is closed and connected to the preceding block, producing a chain of data known as the blockchain. That newly added information in the block is combined into a new block that will be then added to the chain once it’s full of new information.
The data in a database is typically organized into tables, but the data in a blockchain is organized into chunks (blocks) that are then linked together. Using this data structure in a decentralized manner creates an irreversible timeline. As soon as a block is filled, it is added to this timeline. When a new block is added to the chain, a unique timestamp is assigned to each block.
Using blockchain, digital information may be recorded, stored, and distributed, but it cannot be altered. So a blockchain is a basis for immutable ledgers, or records of transactions that can’t be edited, erased, or destroyed. As a result of this, blockchains are also referred to as a DLT (distributed ledger technology).
Before Bitcoin became widely accepted in 2009, the concept of a blockchain was introduced as a research project in 1991. Many cryptocurrencies, DeFi (decentralized finance) apps, NFTs (non-fungible tokens), and smart contracts have been built on blockchains in the years thereafter.
Decentralization and Transparency
Now let’s look into how decentralization works in a blockchain. Let’s say some company owns a server with 10,000 computers running a database that contains all of a company’s customers’ account information. These computers are all placed in a single warehouse facility, and this company has complete authority over all of them and the information they hold. However, what will happen if the power goes out at that location? What will happen if the Internet connection is cut off? What if it all goes up in flames? What if a hacker deletes all of their data with a single click? Whatever the scenario, the data will be lost or damaged.
Blockchain allows distributing the data in the database among network nodes located in different places. Additionally, if a hacker attempts to modify data in one database node, the other nodes will not be affected and, therefore, will prohibit them from doing so. This ensures the integrity of the data contained within. Because all other nodes would cross-reference each other, it would be easy to identify the tampered node. Using this technique, it is possible to establish a precise and clear sequence of events. This ensures that no node in the network can modify the data stored on it.
This is what makes data and history (transactions of a cryptocurrency) irreversible. Other types of information may be stored on the blockchain in addition to transactions, including legal contracts, state IDs, etc.
It is necessary for a majority of the decentralized network’s computer power to agree to validate new records in a block. Consensus mechanisms such as PoW (proof of work) or POS (proof of stake) are used to ensure that bad actors cannot validate double-spends or fraudulent transactions. Even if no single node is in control, these methods ensure that consensus may be reached.
Due to the decentralized nature of blockchain, there are two ways to observe transactions on the Bitcoin network: either running your own node or utilizing blockchain explorers that allow anybody to see transactions taking place in real-time. When a new block is confirmed and added, the chain on each node is automatically updated. As a result, it’s possible to keep track of Bitcoin wherever you want.
For instance, when exchanges were in the past, people who held their currency there lost everything. Even if a hacker is completely anonymous, the stolen crypto may be tracked. This information would be available if some of the stolen Bitcoins were transferred or spent.
Encryption is standard practice for data kept in the Bitcoin blockchain, as well as for the vast majority of other decentralized ledgers. In this case, only the user who owns a record may decrypt it to expose their identity (utilizing a public-private key pair). This allows blockchain users to maintain their anonymity still preserving transparency.
In a variety of ways, blockchain technology attains decentralized security and trust. All new blocks are kept in chronological order. In other words, they’re always tacked on to the “tail” of the chain. Blockchains cannot be changed once they have been added to the chain and cannot be changed until a majority of network members agree to do so. In addition to the hash of the preceding block and the time stamp, each block carries its own unique hash. Digital information is transformed into a string of numbers and characters using a mathematical formula. The hash code will be altered if the data is changed in any manner.
So, let’s imagine that someone wishes to change a blockchain to steal crypto from other nodes on the network. Because of this, if someone were to edit their own copy, it would no longer be in sync with the rest of the copies. This one copy will stand out when everyone compares their copies, and the hacker’s version of the chain will be cast away as invalid.
Assuming that the hacker is able to control and change 50% or more of the blockchain copies, their new copy will become the majority copy and the agreed-upon chain, therefore. Because the blocks will need to be redone as they possess new timestamps and hash codes after such a procedure, it will cost a lot of money and resources.
Many cryptocurrency networks are so large and fast-growing that it would be nearly impossible to pull off such a thing. This would not only be truly expensive, but it would also be a waste of time and money. Members of the network would be alarmed to witness such severe changes to the blockchain if they were attempted. Also, members of the network would then be forced to switch to an unaffected version of the chain. Tokens that have been targeted by the bad actor will lose value, making the attack a waste of time and resources. The same thing would happen if a hacker attacked the new Bitcoin fork.
Industries That Use Blockchains
More than 10,000 additional cryptocurrency systems are already running on the blockchain. However, blockchain can be used to store data about other kinds of transactions as well.
Such famous companies as Pfizer, Siemens, Walmart, and AIG are just a few of the many that use blockchain.
The Federal Reserve is in charge of the value of the dollar in the United States. The user’s data and cash are at the mercy of their bank or government under this centralized authority arrangement. The personal information of a user is jeopardized if their bank is hacked. The value of a user’s money is at huge risk if their bank fails or if they reside in a country with an unstable government. Several failed banks were bailed out in 2008, with some of the funds coming from taxpayers. These are the concerns that sparked the creation of Bitcoin.
All cryptocurrencies are built on the blockchain. Blockchain technology allows Bitcoin and other cryptocurrencies to operate without the need for a central authority because of its distributed nature. In addition to lowering the chances of an error, this also removes a significant portion of the transaction costs. It can also provide a more stable currency with more uses and a bigger network of individuals and organizations with whom to conduct business both locally and globally to nations with unstable financial infrastructures or currencies.
When it comes to saving money or making payments, individuals without a government-issued ID may make perfect use of crypto wallets. The governments of certain countries may be ripped apart by a war conflict or lack the infrastructure to be able to provide identification. And citizens of the countries where savings and brokerage accounts are not accessible may not be able to safely keep their funds.
Finance and Banking
Banking is perhaps the most well-positioned industry to gain from the adoption of blockchain technology. On business days, banks and other financial institutions are only open for a limited amount of time.
To put it another way, you’ll likely have to wait until Monday morning to see the money you deposited on Friday afternoon. If you deposit during business hours, it may still take one to three days for the transaction to be verified because of the enormous amount of transactions banks have to handle. But blockchain operates 24/7.
Even if the money is just in transit for a few days, the risks and costs for banks are enormous because of the large amounts involved. With the introduction of blockchain technology to financial institutions, customers may expect their transactions to be completed as quickly as in 10 minutes. This is usually the time it takes to add a block to the blockchain. Using blockchain technology, banks may now proceed with financial operations more rapidly and securely.
Smart contracts are computer codes that may be used to facilitate, verify, or negotiate contracts on the blockchain. Users agree to a set of rules that govern the use of smart contracts which are automatically fulfilled if certain requirements are met.
In the case of an apartment lease, for example, a smart contract may be used by a tenant. A landlord agrees to provide the apartment door code to the tenant after the security deposit is paid. Smart contracts can hold onto and automatically swap a security deposit for a tenant’s door code the day the lease contract enters into effect. The smart contract returns the security deposit if the landlord fails to provide the door code by the lease start date. This eliminates the need for a third party and extra funds that need to be spent to solve the dispute.
Blockchain technology may be used by healthcare professionals to securely store patients’ medical records. It is possible to save medical records on the blockchain, which gives patients proof and assurance that the records cannot be altered. To ensure anonymity, these documents may be encoded with a private key and kept on the blockchain, where they can be accessed by only those having the private key.
IBM has developed the Food Trust blockchain to track how food reaches its destination. What’s the point? There have been many salmonellae, E. coli, and listeria outbreaks in the food sector, as well as inadvertent inclusion of hazardous compounds into food products. In the past, tracing the outbreaks and their source could take weeks.
The use of blockchain enables food manufacturers to follow a product’s journey from the place of its origin all the way to the place of its final delivery. If food is contaminated, its way may be tracked back to the point where it originated.
In addition, these companies can now see everything else this food comes into touch with, allowing the problem to be identified far more quickly and, as a result, save lives. With the use of blockchain technology in the food sector, authenticity labels like “Local”, “Organic”, and “Fair Trade” might be checked, as well as the food products themselves.
Recording property rights is a tedious and time-consuming procedure. A physical deed is handed to a government officer at the local recording office, where it is manually put into the county’s central database and public index. Property claims have to be reconciled with the public index in the event of a dispute.
Inaccuracies that occur from time to time due to the human factor can make it more difficult to track property ownership. In the future, blockchain technology might eliminate the need to scan papers and locate actual files in a local recording office. With blockchain, owners may be assured that their property ownership is correctly and permanently recorded.
The ownership is virtually hard to verify in war-torn nations or locations with no government or banking infrastructure and no Recorder’s Office. Using blockchain technology, a group of residents may create clear and transparent timelines of property ownership.
A contemporary voting system might be made possible through the use of blockchain. During the November 2018 midterm elections in West Virginia, blockchain voting was used to minimize election fraud and increase voter turnout. With this approach, it would be practically difficult to tamper with the results of the voting process. Due to the blockchain protocol, the electoral process would be more transparent while requiring fewer people and providing officials with results almost instantly. This would also eliminate the necessity for a recount or any actual fear of electoral fraud.
Many other industries have already implemented blockchain technology into their business processes and have already been using it quite efficiently. The above are just some of the examples.
Final Words: The Future of Blockchain
Blockchain technology is to stay and prosper, thanks to many potential real-world use cases, like smart contracts and pretty rapid cross-border transactions.
There is a lot of potential for blockchain. Trustless, decentralized internet, transaction transparency, and many more possibilities are now closer than ever thanks to recent advancements in blockchain technology. This means only one thing: many more use cases of blockchain will arise as more businesses start understanding that the technology can benefit them.