If you have been hearing the word “Blockchain Technology” but doesn’t fully understand it yet, this guide will help you out. For almost ten years now, there has been an increased awareness in the public ledger behind the operations of Bitcoin and many other cryptocurrencies. The general definition may be too complex to understand, but we will delve deeper into the technology to explore its meaning, uses, how it works, benefits, challenges, and applications.
So, let’s get started!
Why Blockchain Technology is Important
Blockchain is a ledger where business networks can record transactions and track assets in an easy and efficient manner. In the general definition of blockchain technology, you will find words such as “Public,” “Decentralized,” and “Immutable.” All these words aim at giving a comprehensive explanation of what blockchain is and what it does. So, breaking it down in simpler terms, it means that blockchain is:
- A public ledger; means that anyone around the world can participate in the blockchain network.
- Decentralized; this means that there is no central authority overseeing the transactions on the blockchain
- Immutable; it means that no one can change or edit any records on a blockchain network
after uploading it.
You can see that blockchain is a vast network where anyone can carry out different activities securely and automatically. Assets that users can track on the Blockchain network include both tangible and intangible assets such as cash, house, copyrights, intellectual property, etc. By using the network to track and trade, users reduce the costs and risks which define the traditional methods of transactions.
However, the reason behind the growing dependence on the network is its features, such as immutability. No one can access records on a blockchain network unless they have the permission to do so. Also, this feature increases the level of confidence amongst members because they can see every transaction’s details end-to-end.
Key components of Blockchain Technology
Some of the key elements that make up the blockchain network are:
- Distributed Ledger
When it comes to the public ledger, every participant can access the transaction records. Every transaction in the ledger is recorded once, thereby eliminating the hassles of duplications, as we see in our traditional business systems.
- Smart Contracts
Smart contracts are a set of rules stored on a blockchain network to ensure speed and trust in transactions. These digital contracts self-execute when the parties have met the conditions of the contract.
- Immutable records
The records on a blockchain are unchangeable. Nobody can tamper with or change the transaction once it’s recorded on the network. In a case where there’s an error in one transaction, the developers must create a new one to reverse it and then make the two transactions visible to participants.
Type of Blockchain networks
There are four main types of blockchain networks, namely:
- Public blockchain
- Private blockchain
- Permissioned blockchain
- Consortium blockchains
- Public Blockchain
When you hear “public,” it means that anyone who’s interested in the network can join it and participate in the activities they want. An example of a public blockchain is bitcoin. The challenge in these types of networks is that they usually require high computational power. Sometimes, the transactions on these networks are not private or may have little privacy, and they face a lot of security issues.
- Private Blockchain
These networks are decentralized peer-to-peer systems where one organization controls the network. The organization is responsible for executing a “consensus protocol” and also maintaining the ledger. This practice boosts the trust which participants have for one another and also increases their confidence in the network. Having a central governing organization is the major difference between the public blockchain and private blockchain.
- Permissioned blockchain
These are networks where participants need to acquire permission or an invitation to join. A business that has a private blockchain network may also decide to set this type up as well. Also, a public network can also decide to restrict access to random participants. In an allowed blockchain network, there are usually restrictions on the people who can join, the transactions which they can participate in, and the ones they can’t.
- Consortium blockchain
This is a blockchain comprising of different organizations. The participating organizations can then decide on the people who can submit transactions or access data on the network.
How does blockchain work?
Before we go in-depth on how the network works, it’s better to understand the term “blocks” in the blockchain. A block on the blockchain contains vital pieces of information, which may include transaction information such as time, date, etc.
The blocks also contain pieces of information about the participants in the transaction or important information that distinguishes a block from another block. One block on the blockchain can store data up to 1MB, but this depends on the transaction in terms of size. But bear in mind that one block can store thousands of transactions under its roof.
So, coming back to how blockchain works, the network consists of many blocks that exist together. Whenever new data enters a block, the block will be added to the network. But for blocks to enter the blockchain, the following things must occur:
- There must be a transaction.
- The network of computers behind the blockchain must verify the transaction.
- Then the transactions must then be stored as a block.
- The block gets an identifying code known as the “Hash.”
When the new block enters the blockchain, it becomes available for the public to view.
Benefits of the Blockchain
There are many reasons for the worldwide acceptance and adoption of blockchain technology. Some of them include:
It is not easy to track or identify other users or participants on the blockchain. The reason is that developers use complex cryptography to hide the identity of users. This layer of security doesn’t give you access to anyone’s identity. Instead, you can only see their public address and their transactions, but you’ll not know their real person. Although the network hides the identity, you can still know the transactions of someone or an organization if you know their public address. This is where the transparency comes in because they can’t change or tamper with data on the blockchain. So, no matter what they do, they have to be honest about it unless no one knows their public address.
Blockchain is decentralized
Blockchain eliminates the need for the sort of central control that decides on what happens in our traditional systems. There are no third-party interferences when it comes to transacting on the network. For instance, if you want to send money to another participant, you can do so without consulting anybody about it or asking for permission to do it. Before the advent of blockchain and its decentralized methods, every system we had was centralized and posed lots of challenges. But the entrants of this technology have eliminated the hassle of third-party approvals, verifications, and even the fees you pay them for facilitating your transactions.
The security is top-notch
When it comes to record-keeping and securing the records, blockchain wins over the traditional systems. Every new transaction contains unique encryptions and is also linked to another transaction before it. The formation of blockchain itself is complicated, and it’s difficult for any entity to alter the mathematical numbers that form it. That’s why the network remains secured and incorruptible.
Another benefit of using the blockchain is that there is always an audit trail for every transaction on the network. If you apply this in exchange for goods and services, it will be nearly impossible for anyone to get away with fraud. The blockchain makes it easy to trace the movement of goods and even authenticate an asset in a trade.
Operational efficiency and lower costs
Transactions on the blockchain network are usually automatic. This feature has eliminated the time-consuming process of trading and the traditional method of recording and storing transaction data. By so doing, there’s no need for third-party mediation due to human error in the system. As such, no one pays heavy fees to these mediators in the transaction because everything is fast, accurate, and automatic. Moreover, the transparent nature of the network makes it easy to trust others and close deals fasters too.
Challenges of Blockchain Technology
- High cost of Technology
Using blockchain technology is very expensive. If you gauge the cost by the computational power which miners use to get proof of work, you’ll realize that electricity cost alone is very high. This is outside other charges that have to do with miners’ fees for validating transactions.
- Illicit transactions
Many users of the technology sometimes carry out different manners of illegal activities on the blockchain network. For instance, some form of a dark web marketplace had some time ago popped up on the network. The good news is that it didn’t last too long before the FBI shut it down. But that’s a clear indication that cybercriminals can use the blockchain for their nefarious activities.
- Recurring slow speed
This is another challenge that blockchain users face from time to time. One of the high points of using this technology should be speed. But users sometimes have to wait for far more than necessary before completing a transaction. For instance, many users have complained that adding a new block to the Bitcoin blockchain sometimes takes longer seconds than necessary.
There are many possible by which blockchain technology can improve processes in diverse industries.
Blockchain can enable bank clients to see all their transactions in less than 10 minutes. The technology can also improve the speed and security in the way banks exchange money with other banks or institutions.
The blockchain has become the building block for crypto activities. It eliminates the need for central authority and thereby reduces the hassles of transactions, the risks, and the fees. Blockchain also provides an option to countries battling with unstable currencies all over the world.
Blockchain can be a secure ledger for storing sensitive patients’ records and information. Also, if the doctors write the medical records on the blockchain, patients can be confident that their records are safe and private.
Blockchain voting will go a long to increase voters’ turnout, reduce election fraud, and boost confidence in the electoral system. Given the immutable and transparent nature of the blockchain, it’ll be impossible for anyone to tamper with votes and results.
- Supply chain
Deploying supply chain operations and processes on the blockchain will help companies to know if a product is authentic or not. It can help those in the supply chain to track products from the origin to the final destination easily.
The future of Blockchain technology
This is almost 30 years since the idea of blockchain technology started its journey in the tech space. It was first an idea on paper and later became a reality. The technology has had its fair share of interests, critics, supporters, skeptics, etc. But one exact thing is that blockchain technology is gradually finding its way into many industries and systems.
Right now, there’re many existing applications of blockchain, and enthusiasts are hopeful that more are yet to come. We can’t forget that the boom in worldwide recognition was because of the activities of cryptocurrencies on the blockchain. Bitcoin played a heavy role in recognizing and introducing the capabilities of the technology, and since then, it has been expanding as other players explore the numerous benefits.
With the steady increase in the number of systems and processes depending on the blockchain to operate efficiently and securely, it’s safe to say that the technology can only see more recognition and adoption as the years go by.
Blockchain technology is gradually transforming the way businesses and institutions operate. It makes them secure, accurate, and efficient. Different kinds of industries can utilize the network to improve its services and ensure its growth. The hope of blockchain enthusiasts remains positive that more and more industrial sectors will one day join the world-wide ledger for more efficient and affordable transactions.