What is Blockchain, What Does It Mean? Blockchain Technology
Blockchain is most simply defined as a decentralized, distributed ledger that records the origin of a digital asset. So, what is Blockchain?
Cryptocurrencies such as Bitcoin and Ethereum are backed by a technology called blockchain. Basically, the blockchain is a list of transactions that anyone can view and verify. For example, the Bitcoin blockchain contains a record for each time someone sends or receives bitcoin. Cryptocurrencies and the blockchain technology that creates them make it possible to transfer value online without the need for intermediaries like a bank or credit card company.
What is Blockchain?
Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset immutable and transparent through decentralization and the use of cryptographic hashing.
To use a simple analogy to understand blockchain technology, it’s like a Google Doc. When we create a document and share it with a group of people, the document is distributed rather than copied or transmitted. This creates a decentralized distribution chain that gives everyone access to the document at the same time. On the other hand, all changes made in the document are recorded in real time, making the changes completely transparent, while no one is locked out waiting for changes from another party.
Of course, blockchain is more complex than a Google Doc, but the analogy is apt because it illustrates three critical ideas of the technology:
Blockchain is a particularly promising and revolutionary technology because it helps reduce risk, eliminates fraud, and brings transparency in a scalable way for myriad uses.
How Blockchain Works?
The purpose of the blockchain is to allow the recording and distribution of digital information, but it cannot be edited. In this way, a blockchain is the basis of immutable ledgers or transaction records that cannot be changed, deleted or destroyed. This is why blockchains are also known as distributed ledger technology (DLT).
First proposed as a research project in 1991, the concept of blockchain preceded its first widespread application in use. Since then, the use of blockchains has exploded with the creation of various cryptocurrencies, decentralized finance (DeFi) applications, non-tradable tokens (NFTs) and smart contracts.
Imagine a company has a server farm of 10,000 computers used to maintain a database containing all of its customer’s account information. This company has a warehouse building that brings all these computers under one roof and has full control over each of these computers and all the information they contain. However, this provides a single point of failure. What happens if the electricity in that place goes out? What happens if the internet connection is lost? What if a bad actor deletes everything with a single keystroke? In any case, the data is lost or corrupted.
What a blockchain does is allow the data held in that database to be spread across several network nodes in various locations. This not only creates redundancy, but also preserves the fidelity of the data stored there — if someone tries to change a record in one instance of the database, the other nodes are not modified, thus preventing a bad actor from doing so. If a user tampers with Bitcoin’s transaction record, all other nodes will cross-reference each other and easily identify the node with false information. This system helps to establish a precise and transparent sequence of events. In this way, no node in the network can change the information held in it.
Therefore, information and history (like the transactions of a cryptocurrency) are irreversible. Such a record could be a list of transactions (like a cryptocurrency), but it’s also possible for a blockchain to hold various other information, such as legal contracts, government IDs, or a company’s product inventory.
To validate new entries or records to a block, the majority of the decentralized network’s computing power must accept it. To prevent bad actors from verifying bad transactions or double spending, blockchains are secured by a consensus mechanism such as PoW or PoS. These mechanisms allow negotiation even when a single node is not responsible.
Is Blockchain Secure?
Blockchain technology provides decentralized security and trust in several ways. To begin with, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. Once a block has been added to the end of the blockchain, it is extremely difficult to go back and change the contents of the block unless the majority of the network agrees to do so. This is because each block contains its own hash along with the hash of the previous block and the timestamp mentioned earlier. Hash codes are generated by a mathematical function that converts digital information into a string of numbers and letters. If this information is edited in any way, the hash code also changes.
Let’s say a hacker operating a node in a blockchain network wants to modify a blockchain and steal cryptocurrency from everyone. If they replace their single copy, it no longer aligns with everyone else’s copy. When everyone referenced their copy against each other, they would see that copy stand out and the hacker’s version of the chain would be dismissed as illegitimate.
Achieving such an attack would require the hacker to simultaneously check and replace 51% or more of the copies of the blockchain, so that their new copy becomes the majority copy and hence the agreed chain. Such an attack would require enormous amounts of money and resources, as they would now have to have different timestamps and hash codes and would have to redo entire blocks.
Because of the size of many cryptocurrency networks and how quickly they grow, the cost of achieving such a feat would likely be insurmountable. Not only would this be extremely expensive, but it would probably be fruitless. Doing something like this would go unnoticed as network members would see such drastic changes to the blockchain. Network members are then forced into a new version of the unaffected chain. This causes the hacked version of the token to be devalued and ultimately renders the attack pointless as the bad actor has control of a worthless asset. The same would happen if the bad actor were to attack Bitcoin’s new fork. It is built this way so that taking part in the network is much more economically encouraged than attacking it.
Pros and Cons of Blockchain
Despite all its complexity, the potential of blockchain as a decentralized form of record keeping is virtually limitless. From greater user privacy and higher security to lower transaction fees and fewer errors, blockchain technology can very well see applications beyond the aforementioned. But there are also some disadvantages.
Improved accuracy by eliminating human involvement in validation
Cost reduction by eliminating third-party verification
Decentralization makes tampering difficult
Transactions are secure, private and efficient
It provides a banking alternative and a way to secure personal information for citizens of countries with unstable or underdeveloped governments.
Significant technology cost associated with bitcoin mining
Low transactions per second
History of use in illegal activities such as the dark web
Regulation varies by jurisdiction and remains unclear
Data storage limitations
What’s Next for Blockchain?
With many practical applications for the technology already being implemented and being explored, blockchain is finally making a name for itself in no small part because of bitcoin and cryptocurrency. As a buzzword on the tongue of every investor in the country, blockchain aims to make business and government operations more accurate, efficient, secure and inexpensive with fewer intermediaries.
As we prepare to enter the third decade of blockchain, it is no longer a question of whether legacy companies will catch up with the technology, but when. Today, we are seeing the proliferation of NFTs and the tokenization of assets. The coming decades will be a period of significant growth for blockchain.
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