For the last few years, cryptocurrencies have been gathering headlines on different media portals. With the introduction of Bitcoin in 2009, cryptocurrencies never looked back, and their popularity soared. Many people often confuse Bitcoin with blockchain technology, and some even do not have the idea that the backbone behind cryptocurrency is blockchain technology. However, blockchain technology’s applications are not limited to cryptocurrencies. Continue reading further to learn about the fundamentals of blockchain technology and what the future holds.
What Is Blockchain Technology?
Blockchain technology refers to a protocol where data recording is designed in such a way that it becomes impossible to manipulate, hack, or change it. It implements distributed ledger technology (DLT), a digital format where transactions and related details are recorded at the same time at multiple locations. The computers present in the blockchain network preserve duplicate files of the ledger, which gets validated and updated continuously to prevent any kind of failure.
History Of Blockchain
The history of blockchain can be traced back to 1982, when David Chaum, an American cryptographer and computer scientist, introduced a proposal similar to a blockchain technology in his dissertation. In 1991, the idea took solid shape when Stuart Haber and Wakefield Scott Stornetta introduced the concept of blocks or chains of records secured through cryptography. In 2008, a person or group of persons going by the pseudonym of Satoshi Nakamoto developed the design for the blockchain, which made use of the hash method for timestamping blocks. A year later, Satoshi Nakamoto made the first Bitcoin transaction with Hal Finney, a computer scientist. In 2011, 1 BTC became the same as 1 USD, and by 2013, the $1 billion market cap was surpassed by BTC. 2014 saw the integration of Bitcoin by Paypal and the first NFT got minted, while in 2016 cloud-based business solutions using blockchain technology were introduced by IBM. In 2019, the New York Stock Exchange created a wallet by the name of ‘Bakkt’ that allowed crypto trading. In 2021, the market value of Bitcoin crossed $1 trillion, but due to the economic crisis, market crashes occurred in 2022. But investors and analysts believe that the market will again come back strongly.
Structure Of Blockchain
When you break down blockchain technology, it consists of two important components: blocks and chains. Each block consists of a certain amount of data that is linked in a linear and chronological fashion to other blocks in a virtual chain. Blockchain is similar to trains, where multiple compartments are linked together and can only accommodate a limited number of passengers. Each block has its own timestamp, which shows when the data was recorded and stored. Blockchain is both decentralized and transparent; the ledger does not have a master copy; rather, everyone who contributes to the network (nodes) has a copy of their own, which they always check with others to maintain the same record of data. The layered security that blockchain technology comes with makes it impossible for hackers to tamper with data.
How Does Blockchain Technology Work?
To understand how blockchain technology works, let us take the example of Bitcoin. When a person sends an amount of bitcoin, a transaction message is created with the receiver’s as well as the sender’s address along with the amount of the transaction. This data is then taken by the sender, and by adding their private key to it, they create a permanent fixed-length code called the ” hash”. The process helps in the formation of a digital signature, which confirms that the person owning the bitcoin wants to send it. After this, the sender broadcasts a bundle of things to the network, which consists of the transaction message, the digital signature, and the public key. The package is then sent to a waiting pool known as the “mempool,” where all the unconfirmed transactions await being added to the blockchain. Miners, who are responsible for creating new blocks through the process of mining, use proof-of-work to accept a batch of transactions from the mempool. After taking the batch, the first thing they do is verify the amount of the transaction to see if the sender has the amount in their wallet, after that they use software to check the legitimacy of the package’s content (the transaction message, public key, and digital signature), and then they broadcast it to the network for cross-checking by other miners on the network. The whole process occurs continuously by adding new blocks, and this makes the protocol extremely hard to tamper with while providing a massive amount of security.
Types Of Blockchain
Ideally speaking there are 4 types of blockchain, namely:
Public Blockchains Networks: As the name suggests, everyone can participate in the public blockchain, as it operates on an open network. To verify the authenticity of the information, public blockchains either use proof of stake or proof of work consensus mechanisms and are decentralized in nature. Cryptocurrencies like Bitcoin and Ethereum follow this protocol, which has been monumental in popularizing DLT.
Private Blockchain Networks: Private blockchains operate on a closed network (peer-to-peer) and are centralized in nature. If someone wants to join a private blockchain, they have to get permission from the administrator. They are mostly used by private organizations and businesses.
Hybrid Blockchains Networks: Hybrid blockchains are also known as consortiums and are an amalgamation of private and public blockchains. They share both centralized and decentralized features, and a single blockchain is managed by multiple organizations. Though they are a bit complex to set up initially, they offer better security once they are up and running.
Permissioned Blockchain Networks: These are similar to private blockchain networks where users have to obtain a permit in order to participate. Surprisingly, public blockchains can also be permissioned blockchains, with restrictions.
Advantages Of Using Blockchain
The rise in demand for Blockchain technology is understandable, as it comes with several advantages. Some of them are:
Trustworthy And Unstoppable: Transactions occur between users who necessarily do not need to know each other and only happen if they both meet the transaction conditions. Once the transaction process is started, it cannot be changed, stopped, or undone. This enhances identification security, and one does not have to stay at the mercy of third parties or the government for the process.
Decentralized And Immutable: The mathematical problems associated with the addition of new blocks are so complex that blockchain has never been breached, making tampering and changing data impossible. Also, like a centralized bank, no single organization maintains the blockchain, and decisions are made via the users’ consensus.
Transparent And Lower Cost: As blockchain is an open-source technology, anyone can access and view the transactions but not change them. They also reduce the cost of transactions by eliminating third parties used by banks while processing users’ transactions.
Universal Banking And Peer-To-Peer: A massive number of people around the world do not have bank accounts because they are scared of multiple formalities. Blockchain can be used to bank these people universally. Through the blockchain, users can directly send money to the person they want to and do not have to depend on intermediaries.
Disadvantages Of Using Blockchain
Like two sides of a coin, blockchain also comes with its fair share of disadvantages. Some of them are:
Personal Responsibility: Your crypto wallet is your own bank account, which is great as you have sole control over it. But if you lose any information or key regarding the wallet, your account will be lost forever.
False Narrative: From using crypto to buy drugs to using it to launder money, these are illegal activities that are practiced rampantly. Though traditional banking is also used for such activities, it is not on the scale of crypto, and this has delayed the adoption of this technology.
Inefficient Scalability: Decentralization is one of the most important factors that make blockchain technology superior to the traditional banking system. But when it comes to global scalability, it is decentralization that hampers the speed of scalability.
Use Cases Of Blockchain Technology
Blockchain technology has already found its usage in several industries other than creating cryptocurrencies.
Smart Contracts: It is a transaction protocol without the need for an intermediary that automatically documents, controls, or executes once the conditions are met.
Peer-To-Peer Energy Trading: The buying and selling of energy among consumers, generators, and prosumers can be done directly without the help of an intermediary.
Healthcare Optimization: Remember how the AIIMS server was breached and data was stolen? Using blockchain technology to store medical data and records will prevent them from getting into the hands of hackers and also speed up the health insurance payments of patients.
NFT Marketplace: NFTs are digital tokens that can be bought and sold as assets, and every token is unique in its own way. Blockchain technology is at the heart of it.
Real Estate Processing: Traditional databases of property records can be easily changed or deleted, but no such thing can be done when records are created using blockchain technology.
With increasing practical applications for real-world usage, blockchain technology is exploring varying fields and is here to stay for the long term. As time goes on, many organizations will start implementing more time, money, and resources into this venture. Like most other innovative technology, it is still in its nascent stage, but it will make businesses more secure, cheap, efficient, and accurate in the coming days.