Blockchain Technology (All you need to know)
Sequel to my previous article on Introduction to Web3. Blockchain Technology plays an important role in the web3 space, let’s take a look at;
- What Blockchain is
- How it works
- Types
- Advantages and disadvantages
What is Blockchain?
IBM describes Blockchain as a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network, while;
Investopedia describes blockchain as a distributed database or ledger that is shared among the nodes of a computer network.
Whichever definition you have or know is basically telling you that, Blockchain is a system of recording information in a way that makes it difficult, impossible to change, hack, or cheat (Decentralization).
The way data is organized in blockchain is different from how it is organized in a typical database. In blockchain, data is gathered in groups called blocks, each of these blocks contain a set of information.
Blocks have specific storage capabilities, and when full, they are closed and connected to the block that came before them to create the data chain known as the blockchain. Every additional piece of information that comes after that newly added block is combined into a brand-new block, which is then added to the chain once it is full.
Blockchain is designed to make it possible to share and record digital information without editing it. A blockchain serves as the basis for immutable ledgers, or records of transactions that cannot be changed, removed, or destroyed. This is why Blockchains are also referred to as distributed ledger technology (DLT).
The blockchain idea was first proposed as a research project in 1991, after which Bitcoin became a widely used application in 2009. Since then, the introduction of numerous cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts has led to an exponential rise in the use of blockchains.
How Does Blockchain Technology Work?
In recent years, you may have noticed many businesses around the world integrating Blockchain technology. The advancements of Blockchain are still young and have the potential to be revolutionary in the future.
Blockchain is a combination of three leading technologies:
Cryptographic keys
Cryptography key are made of two keys: A Private key and a Public key. These keys aid in the execution of successful transactions between two parties. The two keys are unique to each person and are used to create a secure digital identity reference. The most significant component of Blockchain technology is this secured identity. This identity is known as a “digital signature” in the world of cryptocurrencies and is used to approve and manage transactions.
A peer-to-peer network containing a shared ledger
The peer-to-peer network and the digital signature are combined; numerous people who act as authorities use the digital signature to agree on transactions and other matters. As soon as they approve a transaction, it is mathematically verified to ensure that it is valid, which leads to a successful secured transaction between the two network-connected parties. In conclusion, cryptography keys are used by Blockchain users to conduct various kinds of digital exchanges across the peer-to-peer network, and A means of computing, to store the transactions and records of the network.
Types of Blockchain
There are four different types of blockchains. They are as follows:
- Private Blockchain Networks; Private blockchains allow businesses to set network parameters, accessibility and authorization preferences, and other crucial security features. On closed networks, private blockchains function well for private corporations and organizations. A private blockchain network is controlled by a single authority.
- Public Blockchain Networks; Public blockchains, which were the source of Bitcoin and other cryptocurrencies, also helped spread awareness of distributed ledger technology (DLT). Public blockchains also help in eliminating some challenges and issues such as centralization and security weaknesses. Rather than being stored in one place, data is spread throughout a peer-to-peer network using DLT. The authenticity of information is verified by a consensus algorithm; proof of stake (PoS) and proof of work (PoW) are two popular consensus techniques.
- Permissioned Blockchain Networks; Permissioned blockchain networks, sometimes referred to as hybrid blockchains, are private blockchains that grant approved users exclusive access. These kinds of blockchains are frequently set up by companies in order to achieve the best of both worlds. They provide better structure when determining who can join in the network and in what transactions.
- Consortium Blockchains; Similar to permissioned blockchains, consortium blockchains feature both public and private components; however, a single consortium blockchain network will be managed by numerous companies. Though initially more difficult to set up, these blockchains can provide superior security once they are operational. Consortium blockchains are also the best for working with various organizations.
Let’s take a quick look at some advantages and disadvantages of Blockchain;
Advantages
- Accuracy of the chain; Transactions on the blockchain network are approved by a network of thousands of computers. This removes almost all human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. For that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network’s computers — a near impossibility for a large and growing network the size of Bitcoin’s.
- Cost Reduction; Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage. Blockchain eliminates the need for third-party verification — and, with it, their associated costs. For example, business owners incur a small fee whenever they accept payments using credit cards, because banks and payment-processing companies have to process those transactions. Bitcoin, on the other hand, does not have a central authority and has limited transaction fees.
- Decentralization; Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading that information across a network, rather than storing it in one central database, blockchain becomes more difficult to tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the information, rather than the entire network, would be compromised.
- Efficient Transactions; Transactions placed through a central authority can take up to a few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. Whereas financial institutions operate during business hours, usually five days a week, blockchain is working 24 hours a day, seven days a week, and 365 days a year. Transactions can be completed in as little as 10 minutes and can be considered secure after just a few hours. This is particularly useful for cross-border trades, which usually take much longer because of time zone issues and the fact that all parties must confirm payment processing.
- Private Transactions; Many blockchain networks operate as public databases, meaning that anyone with an Internet connection can view a list of the network’s transaction history. Although users can access details about transactions, they cannot access identifying information about the users making those transactions. It is a common misperception that blockchain networks like bitcoin are anonymous, when in fact they are only confidential.
Other Advantages include; Secure Transactions, Transparency, Banking the Unbanked.
Disadvantages
- Technology Cost; Although blockchain can save users money on transaction fees, the technology is far from free. For example, the PoW system which the bitcoin network uses to validate transactions, consumes vast amounts of computational power. In the real world, the power from the millions of computers on the bitcoin network is close to what Norway and Ukraine consume annually. Despite the costs of mining bitcoin, users continue to drive up their electricity bills to validate transactions on the blockchain. That’s because when miners add a block to the bitcoin blockchain, they are rewarded with enough bitcoin to make their time and energy worthwhile. When it comes to blockchains that do not use cryptocurrency, however, miners will need to be paid or otherwise incentivized to validate transactions.
- Speed and Data Efficiency; Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s PoW system takes about 10 minutes to add a new block to the blockchain. At that rate, it’s estimated that the blockchain network can only manage about seven transactions per second (TPS). Although other cryptocurrencies such as Ethereum perform better than bitcoin, they are still limited by blockchain. Legacy brand Visa, for context, can process 65,000 TPS.
- Illegal Activity; While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network. The most cited example of blockchain being used for illicit transactions is probably the Silk Road, an online dark web illegal-drug and money laundering marketplace operating from February 2011 until October 2013, when it was shut down by the FBI. The dark web allows users to buy and sell illegal goods without being tracked by using the Tor Browser and make illegal purchases in Bitcoin or other cryptocurrencies. Current U.S. regulations require financial service providers to obtain information about their customers when they open an account, verify the identity of each customer, and confirm that customers do not appear on any list of known or suspected terrorist organizations. This system can be seen as both a pro and a con. It gives anyone access to financial accounts but also allows criminals to more easily transact. Many have argued that the good uses of crypto, like banking the unbanked world, outweigh the bad uses of cryptocurrency, especially when most illegal activity is still accomplished through untraceable cash.
- Regulation; Many in the crypto space have expressed concerns about government regulation over cryptocurrencies. While it is getting increasingly difficult and near impossible to end something like Bitcoin as its decentralized network grows, governments could theoretically make it illegal to own cryptocurrencies or participate in their networks. This concern has grown smaller over time, as large companies like PayPal begin to allow the ownership and use of cryptocurrencies on its platform.
Conclusion
Blockchain is finally establishing itself, in no little part thanks to bitcoin and cryptocurrencies, with several real-world uses for the technology now being implemented and researched. Blockchain, a buzzword on everyone’s lips in the industry, promises to reduce middlemen while increasing accuracy, efficiency, security, and cost-effectiveness in commercial and government activities.
It’s no longer a question of if legacy organizations will adopt blockchain technology — it’s question of when, as we get ready to enter the third decade of the technology. NFTs are becoming more and more prevalent today, and assets are being tokenized. Blockchain will experience significant growth in the coming years.
Although it’s been a chunk of information in this article, the career potential in this field is growing exponentially. Getting ahead of the game is always a good strategy for any professional.
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