What is Blockchain and Why Do I Care?
One of the most highly anticipated inventions of the twenty-first century is blockchain technology. Blockchains, which were originally designed to support Bitcoin, are now being used in a wide range of industries, including medical, art, and finance.
Understanding how blockchain works, why it has value, and how it differs from other internet technologies will help explain the increased interest.
Part 1: What is Blockchain?
A blockchain is a distributed database of digital transactions that is nearly impossible to change or hack. Individuals can trade directly with each other without the need for a third-party middleman like a government, bank, or other institution.
Blocks are connected together using cryptography to create a growing list of records. Computer networks verify each transaction independently and time stamp it in a developing chain of data. Data that has been recorded cannot be changed.
Even while blockchain technology was first popularized by the rise in the usage of cryptocurrencies such as bitcoin and ethereum, it has a wide range of applications in the legal, medical, and real estate industries.
How the Blockchain works
Blockchain, also known as distributed ledger technology (DLT), is a system that uses the bitcoin system as an example.
When buying or selling bitcoins, transactions are entered and broadcast to nodes (computers with a lot of processing capacity).
Using computer algorithms, this global network of tens of thousands of nodes competes to verify the transaction. Bitcoin mining is a term for this activity. Those that mine a new block first are given bitcoin as a token of appreciation. The buyer and seller share in the network fees that are used to pay for these incentives, which are made up of freshly issued bitcoins. According on the amount of transactions, fees might either climb or decline.
When a transaction has been cryptographically verified, it is then added to the distributed ledger as a block. Finally, the transaction must be approved by an overwhelming majority of network members.
All prior blocks of bitcoin transactions are linked together using a cryptographic fingerprint called a hash, and the transaction is completed.
Part 2: Why Do I Care?
The advantages and disadvantages of blockchain technology
Some of the advantages and disadvantages of using blockchain technology in the context of cryptocurrencies are as follows:
Pros
Decentralization
While the Federal Reserve issues the US currency, no government entity oversees or issues bitcoin or other cryptocurrencies. As a result, no government or agency will be able to dictate the future of a public blockchain. The absence of middlemen saves costs, while third-party transaction fees are also reduced. Another benefit of the blockchain’s operation is its time efficiency; unlike banks and other middlemen, the blockchain is available 24 hours a day, 365 days a year.
A combination of openness and secrecy
There are machines on the Bitcoin network that record all transactions on the blockchain. Anonymous and unrecorded owners of the wallets linked to these public addresses ensure that transactions are totally transparent.
Accuracy and safety
Errors are less likely to occur since there is less human involvement. Because a majority of the network nodes must validate and record each transaction, it is very impossible to falsify or modify the data. This also stops someone from reusing a bitcoin.
Applications for the blockchain, both public and private.
To put it another way, blockchain technology has the potential to revolutionize industries well beyond the realm of digital currency. Anyone may join the Bitcoin blockchain network because it is a public one. On the other hand, private blockchain networks allow businesses to regulate who joins and establish a wide range of commercial applications:
- IBM Blockchain, for example, is already selling private network solutions that use blockchain technology to better track goods and supply chains. Recalls of tainted food goods may be promptly tracked down with the use of this cutting-edge technology, for example.
- An electronic medical records blockchain network may increase efficiency and facilitate improved health outcomes for patients
- If certain criteria are met, the terms of a smart contract can be automatically altered or updated. This is possible because of blockchain technology.
- Blockchain technology is being developed for use in digital elections by several developers.
- Real estate, cars, and investment portfolios are all examples of asset sales that may benefit from blockchain technology, according to advocates.
Underserved populations
Cryptocurrencies based on the blockchain system allow the transmission and storage of currency without the involvement of countries who may be dishonest or corrupt in their dealings.
Cons
Cryptocurrency is popular with criminals
Some of the early users of new technology have been criminal organizations. Because of the anonymity that cryptocurrencies like bitcoin offer, criminals exploit them both as a means of payment and as a means of scamming those who own them. Customers of Silk Road, a black market online shopping network for illegal narcotics and other unlawful services that the FBI shut down in 2013, utilized bitcoin as an example of this use case for bitcoin. It cost Colonial Pipeline $4.4 million in cryptocurrencies to unlock its computer systems during a recent ransomware assault.
As a result, the number of bitcoin investment frauds has increased. From October 2020 to March 2021, the Federal Trade Commission stated that about 7,000 people lost $80 million in schemes promising rapid profits, an increase of recorded losses of nearly 1,000% year on year.
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The price of a blockchain cryptocurrency is extremely unstable
“Is blockchain a good investment?” Your investment objectives and risk tolerance play a role in your decision. Cryptocurrency’s popularity skyrocketed in 2021, when the price of bitcoin touched a record high of $65,000. However, the price of bitcoin plunged roughly 50% by early June, then began to rise again showing its intrinsic volatility.
The number of people using cryptocurrency is still rather small
Payment programs like PayPal and Microsoft, as well as a growing number of other businesses who take bitcoin as a payment method, are all now accepting the digital currency. Bitcoin purchases are still the exception, not the rule, in the world of digital currency. Users who utilize payment applications like PayPal to buy goods and services with bitcoin must now pay capital gains taxes on the bitcoins they sell, in addition to any state and local taxes that may already have been paid.
The process of mining bitcoins uses a lot of power
Bitcoin mining relies on a large network of high-performance computers that take a lot of electricity to operate. Based on data from the University of Cambridge’s Electricity Consumption Index, bitcoin would be the world’s 34th largest user of electricity, behind only the Netherlands and outpacing the Philippines. Until bitcoin can discover solutions to lessen its carbon impact, Elon Musk, Tesla’s CEO, declared in May 2021 that the automaker will no longer accept bitcoin. Other blockchain developers have come up with less energy-intensive methods.
Bitcoin is sluggish
About seven new transactions are added to the bitcoin blockchain every second. It is estimated that Visa processes 24,000 transactions each second, the credit card corporation claims. As a result, the Bitcoin network faces a scalability issue. This issue is being addressed by other blockchain-based cryptocurrencies. It is estimated that Ethereum 2.0 would be able to process 10,000 transactions per second, up from the current 30 transactions per second.
Blockchain technology’s prospects for the future
Even though the Bitcoin system is the most well-known implementation of blockchain technology, many more cryptocurrencies are built on this technology. There’s no guarantee that bitcoin will take over traditional payment systems, but blockchain applications are expanding quickly and proponents think they will have a profound impact on many sectors.
