For those who pay attention to events in the financial world, terms such as blockchain must be familiar to you. The term blockchain is rapidly used in cryptocurrencies, but the banking sector equally has a decent usage. What is the blockchain technology?
Read this guide to the end to learn all that is there to know regarding blockchain.
Table of Contents
Leading companies in blockchain adoptions
Even though these are not the only companies utilizing blockchain around the world, they are amongst the many that have made great strides regarding the technology.
They include:
- IBM
- Voatz
- Coinbase
- Gemini
- SALT Lending
- ShipChain
- Circle
- Mythical Games
- Steem
- Chronicled
- Microsoft
What is blockchain technology?
Also called Distributed Ledger Technology, blockchain could simply be viewed as a chain of data linked to each other via blocks.
Each of the blocks in question has the following features:
1. Data – The kind of data held by the blockchain is determined by what type it is. For instance, Bitcoin blockchain keeps data like sellers, buyers, and the amount being transacted.
2. Hash – Similar to how a fingerprint is unique to each person, the Hash key of each block is unique. Hash is used as a differentiating factor from one block to another.
3. Previous block hash – To create the digital chain being discussed here, each block keeps information regarding the previous block hash. For instance, block 8 keeps the hash of block 7, and block 7 keeps the hash of block 6, and so on.
Whenever you talk about a blockchain, you can view it from the point of a general financial ledger where debits, credits, and totals are kept.
The operations of blockchain are similar to this. However, there are two crucial differences to help you not confuse them:
1. The blocks are immutable – The immutability feature of blocks is what makes the blockchain to be as secure as it is. By immutability, we mean that after a block has been created, it is challenging
to change its contents. In the case of a traditional ledger, anyone with admin access to it could make modifications. The difficulty in changing a block is a result of the fact that content is not written. Instead, the block is created because a given value was changed to a certain amount at a given time. If you make genuine changes, another block would be created.
2. The distribution conception – As mentioned above, blockchain is a distributed ledger technology. Blockchain is ‘copied’ throughout the network in participating computers as opposed to traditional ledgers that have a common storage place. Every node can see what is in the system. For any changes to go through, all the nodes must verify the transaction. Successful verification of a transaction and subsequent creation of a block updates the information across all the existing nodes.
Blockchain technology is yet to reach even 10% of its capability, yet it already is revolutionary. Based on its nature, this technology is set to change everything as we know it.
Imagine a situation where your IT systems are unhackable, secured from fraud, intermediary fees, and are devoid of human error. These are the potentials expected from the blockchain technology.
Governments across the world, leading financial players, and social media giant (Facebook), are at the forefront of adopting blockchain for a reason. They are eager to be the pioneers of the curve because they are fully aware of the capabilities at hand.
Key takeaways from this section:
1. Blockchain may be viewed in the same manner as a traditional ledger. You may also consider it a spreadsheet that holds information, except that this information cannot be changed once a block is created.
2. Each transaction requires approval from all the nodes in the network.
3. Once a transaction is approved, it sets the stage for the creation of a block, which is very unlikely to change.
4. Blocks are identified by unique keys referred to as a hash. No two blocks can have the same hash.
5. Computers interconnected in the network are referred to as nodes.
6. Blockchain undergoes regular updates every 10 minutes.
Before we delve into the various factors motivating the adoption of blockchain, let us have a look at how the blocks are created.
More on blocks?
As you might have figured out by now, blocks are the bottom-line of the blockchain network. As such, they are crucial to understanding the entire technology.
By considering Bitcoin alone, a block can process over 500 transactions. The size of such a block is averaged at 1MB.
With regards to Bitcoin Cash, a fork of BTC, its block is averaged to be 8MB in size. As such, the crypto processes transactions much faster than Bitcoin.
The critical component of a block is its header. The header maintains metadata regarding the block, which is:
1. The block’s hash
2. Previous block hash
3. Mining competition
4. Merkle tree root
Digital signatures
The Bitcoin protocol has registered immense success, much of which is courtesy of digital signatures. The Bitcoin digital signatures are essential for verification purposes.
It enforces non-repudiation. That is, the only way a purpose can send money is if they hold a private key, which means they own the bitcoins being sent.
A sender’s private key is used to generate the public key, out of which the address is created. The chart below gives a brief breakdown of the process.
The sender is responsible for creating the private key and public key. The message is signed and sent to the bitcoin network. Bitcoin is built to operate as a peer to peer network, meaning that all the nodes get this message for validation. The only way the transaction is validated is if the nodes are in agreement.
Is blockchain technology the new Internet?
As you look at how blockchain technology operates, you are sure to wonder whether or not this is the new Internet.
For starters, the technology provides a baseline for which information is distributed rather than copied. As such, it has laid down the bricks upon which another kind of Internet would emerge.
Even though the initial goal was for it to be used by the Bitcoin world, blockchain has rapidly evolved to incorporate many other sectors and a wide range of potential uses.
Many people are yet to get accustomed to this new Internet called Web 3.0.
Web 3.0 is generally regarded as an intelligent internet in which elements are interconnected. From people to data and applications, everything seems to happen in sync, while privacy and security are maintained without the need for a middle intervention from a government or bank to foster this.
Digital currency is a clear proof of where blockchain is headed, but it is the least of all the exciting things that can come from the technology. Recent times have seen the emergence of innovative concepts that help push for the creation of Web 3.0.
Advantages of blockchain
- Decentralized: Decentralization is an essential characteristic of blockchain, which involves cutting off a central authority from the monetary system. In fiat currency, governments often dictate money usage through the central bank. Banks and other financial institutions equally have a say. The existence of a central system provides the challenge of a single point of failure and malfunctioning due to the hierarchy. Blockchain gets rid of these challenges through decentralization.
- Peer-to-peer transaction: Every transaction in the blockchain network is broadcasted to all the nodes for verification given that it is a peer to peer network. P2P means each node is interconnected and that nothing can happen without the knowledge of the other. Such a system is highly secured from fraudulent transactions. All the nodes are regarded to be equal to each other, although they play different roles, from full to minor.
- Open-source technology: Blockchain maintains a high level of transparency as a result of being open-source. Thanks to minimal barriers to entry, the network enjoys a vast number of developers. They collaborate on the open-source platform to better the community rather than being a single, for-profit entity. You cannot pinpoint to a particular person or organization as the owners of the software.
- Security: Completion of a transaction on the network is marked with the creation of a block. The block has its own hash key and as well as that of the previous block. Contents in the block are tough to change, as you need to have far greater power than the combined ability of the nodes to do so. Security is also attained in the essence that a single point of failure is eliminated, unlike the case of centralized systems. Furthermore, each transaction is completed with the existence of a digital signature.
Disadvantages of blockchain
Blockchain may be an exciting technology, but it also has its own set of demerits.
- High energy consumption
- Blockchain is destructible
- Proof of work is quite tedious
- The existence of mining acts as a dent to the network security
Conclusion
Conversations in various businesses revolve around the ability that blockchain holds to disrupt their operations. Through proper implementation, blockchain technology will have immense opportunities for organizations. However, we still ought to be wary of any negatives and devise ways deviate from these.
