Blockchain technology is one of the most exciting forms of technology globally. But, very few people understand the concept.
This guide breaks down everything you need to know about blockchain technology. It explains what it is, how it works, and why it’s regarded as the future.
What is Blockchain Technology?
First, let’s break down blockchain as a concept.
To understand blockchain, think of a ledger where transactions are recorded. Whenever money is sent from one account to another, it is recorded in the ledger for everyone to see.
The blockchain is a digital version of this “ledger” accessible to the public.
The term “blockchain” is derived from how these digital ledgers operate.
A blockchain is a digital ledger that records information in a way that makes it difficult for participants to alter or cheat the system.
Using cryptocurrencies as an example, once a transaction is initiated on the network, it is added to a “block” field with other similar transactions. A block is a data structure that permanently stores transaction data in a blockchain.
A group of validators then verify this block through a process called blockchain mining to ensure that there are no frauds or duplicates. Once this is complete, the validators then “chain” this block of transactions to other blocks in the network to create a block-like layer.
This is blockchain explained, in simple terms.
Blockchain technology comes with some key features. The first is a distributed ledger, which ensures that transactions are recorded once. This eliminates the need for the duplication of effort frequently seen in conventional business processes.
The second feature is immutability. By nature, the blockchain is an immutable database. The data stored in the blockchain network are permanent. They can’t be altered, falsified or manipulated.
Another feature is that blockchain transactions are immutable records, which means they are tamper-proof and can only be uploaded once. This makes it difficult for transaction history to be doctored by an entity.
Most importantly, blockchain technology uses highly sophisticated algorithms (smart contracts) to speed up processes and increase efficiency. These self-executing codes follow preset parameters and metrics in validating transactions and the authenticity of information added to the blockchain.
The underlying narrative pushing the spontaneous growth of blockchain technology lies in its decentralised nature. By this, value and asset transfer are on a user-to-user or peer-to-peer (P2P) basis. This feature eliminates intermediaries like established financial institutions who frequently interfere in business processes.
Instead, users can complete transactions amongst themselves, thereby saving bank costs, cutting through bogus red-tape, and fast-tracking the business execution process.
How Does Blockchain Work?
Essentially, all blockchain types operate in a similar manner. They rely on miners – dedicated individuals who verify transaction blocks and add them to the blockchains individually. These miners work with sophisticated hardware and software, and their work is critical to the functionality of a blockchain.
Transactions are recorded as data blocks. This data usually contains brief descriptions of what the transaction is about. For instance, cryptocurrency transactions usually include details about the parties involved, the transaction size, and more.
A validator adds the new block to an existing block on the network to form a chain. Once this chain is formed, it becomes impossible to alter or add new blocks in between.
Each new block automatically verifies the authenticity of the previous one, leading to a level of trust often lacking in the conventional financial space.
This architecture renders the blockchain immutable or unchangeable by an external entity.
How Many Blockchains Are There?
There are three popular blockchain networks available:
- Public Blockchain Networks
Most crypto protocols like Bitcoin and EOS blockchain fall into this category. These projects are open-source, meaning anyone can easily build on them and monitor transactions on the network through their blockchain explorer.
Blockchain networks like Bitcoin use the proof-of-work (PoW) consensus algorithm.
The PoW algorithm requires validators to compete in solving complex mathematical puzzles, which ensures greater security at the expense of speed, energy efficiency, and cost. This feature has seen the Bitcoin network constantly criticised for its energy-guzzling validation process.
While this has remained a key issue for the Bitcoin network, several public blockchain networks have already migrated to a more energy-efficient and low-cost consensus model called the proof-of-stake (PoS). Under the PoS model, holders of a cryptocurrency can stake their coins and create validator nodes to validate transactions on the network.
- Private Blockchain Network
As the name suggests, a private blockchain network permits only a few select participants. Participants can only join such networks through authentic and verified invitations.
So, a private blockchain controls who can participate in the network, execute consensus protocols and maintain the shared ledger. The owners of these blockchains have the right to edit, override, and delete any entries on the blockchain as they see fit. Hyperledger is a great example of a private blockchain network.
Considering how they function, private blockchains have been criticised for not being so decentralised. They are closed, secure databases that grant access to only a few participants to run nodes, make transactions, or authenticate settings.
- Permissioned Blockchain Network
A permissioned blockchain operates as a mix between the private and public blockchain networks. These blockchains support several customisation opinions, including allowing anyone to join the network after their identities have been sufficiently verified.
The entire point of a permissioned blockchain is to grant special permissions to each participant. This way, they can perform specific functions and handle specific processes. By restricting specific functions, permissioned blockchains can be open to more people.
What Are the Blockchain Use Cases?
However, blockchain use cases are more versatile. Blockchains like Block Array are also used to track the movement of tangible (like food shipment) and intangible assets, thereby aiding the supply chain and logistics industry. Supply chain-dependent industries can easily verify the authenticity and quality of their purchases.
Blockchain is also used in the healthcare sector for properly recording patient data and ensuring the seamless transfer of required data to the appropriate healthcare professional. Blockchain’s immutable nature ensures that patients’ data are tamperproof.
In the public sector, the blockchain revolution is expected to cut down on the duplication of efforts in business practices. It also adds more transparency to the processes and increases trust and accountability.
Other key industries benefiting from blockchain include oil and gas, retail, telecommunications, insurance, manufacturing, travel and transportation, and media and advertising.
How is Blockchain Used for Bitcoin?
The Bitcoin network is the world’s first recognised blockchain-based asset. Launched in 2009 after a whitepaper published the previous year by a pseudonymous developer named Satoshi Nakamoto, Bitcoin is a decentralized virtual currency.
The premier digital asset relies heavily on blockchain technology to operate as transactions are done by two parties: the sender and receiver. Once the transaction is sent, blockchain miners compete to solve this transaction. This process is called the PoW process of blockchain mining.
A blockchain miner is a sophisticated computer hardware used to validate blockchain transactions. Miners validate transactions by competing to create new blocks in the network.
The first miner to verify the block of transactions and add it to the blockchain is rewarded with freshly minted Bitcoins.
What Are the Top Blockchain Companies?
Blockchain companies have recently sprung up following the massive adoption of blockchain crypto. This adoption has led to the establishment of blockchain startups and companies either facilitating blockchain services or building hardware to support its smooth running.
Here are a few top blockchain investments that have seen exponential growth:
- Coinbase Global Inc. (COIN)
Coinbase was launched in 2012 to enable investors to buy, sell, and exchange digital assets while educating them. Coinbase has rapidly transformed from a launchpad for crypto newbies to a mega blockchain firm.
Operating as a crypto exchange for retail and institutional investors, Coinbase also serves as a crypto custodial service provider that helps legacy-backed businesses to buy and store their digital assets in cold storage wallets. Coinbase has since seen its user base swell to over 73 million in the last year.
- Canaan Inc. (CAN)
Canaan is a provider of high-performance Bitcoin mining hardware. The company manufactures Bitcoin mining hardware, especially the application-specific integrated circuit (ASIC) miners. Also listed on Nasdaq, Canaan has a one-year trailing return of 24.7%, showing huge potential for the future.
Chainalysis is a New York-based blockchain analytics firm. The company is notable for its blockchain monitoring solutions that help governments and security agencies track down illegal activities in the crypto space.
- Hive Blockchain Technologies Ltd.
Hive Blockchain Technologies is a crypto mining company based in Canada. Hive is an ESG-minded company that uses 100% green energy to mine Bitcoin and other digital assets.
How to Invest in Blockchain
Investing in blockchain companies and blockchain cryptocurrency is easy. The most popular step is to invest in cryptocurrencies like Bitcoin or Ethereum. You can also buy shares in the popular Grayscale Bitcoin Trust (GBTC) which grants secured exposure to BTC.
Another option would be investing in an exchange-traded fund (ETF) that directly tracks the price movement of Bitcoin or any other digital asset. A popular choice is VanEck Bitcoin Strategy ETF. Alternatively, you could invest in an ETF that tracks the performance of a few blockchain companies like Nasdaq NextGen Economy ETF.
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What is the Future of Blockchain?
Blockchain technology is here to stay! This position is evidenced by the growing migration of several businesses into the sector.
Popular tech company IBM has invested over $200 million in blockchain technology, and over 75% of companies are actively exploring the space.
Blockchain is also revolutionizing the areas of finance through decentralized finance (DeFi) and ownership with non-fungible tokens (NFTs). DeFi offers a large number of the unbanked population an avenue to enjoy financial services, while NFTs are used for tokenizing real-world assets.
With its numerous use cases, blockchain technology is the choice for many people and institutions seeking to break the monopoly of centralized systems. As the world migrates to a more decentralized reality, blockchain could transform our world as the internet did in the 1990s.
Decentralization is an essential component of a blockchain network. But what exactly does it mean? Let’s use a common example.
Consider a bank that stores customer data in the cloud or network server. While these systems are generally secure, they are also prone to intrusion from malicious actors. Why?
Banks operate on highly centralized servers, which creates a single point of failure. A security breach would likely expose all customers’ details.
With blockchain protocols, this is not the case. The computer networks handle the processing and storage of users’ data and are dispersed across multiple locations. This makes them decentralized, as each network has a digital copy of the blockchain transactions. This undermines the systemic structure’s centralization while increasing redundancy.
Centralized financial transactions are mostly carried out behind the scenes. As a result, current conventional financial practices are more opaque and less trustworthy.
Blockchain alters this narrative as it is completely transparent. This is accomplished by utilizing blockchain explorers. Blockchain explorers enable users of that network or anyone else to view real-time transactions completed on the selected protocol, implying that they are publicly viewable.
However, this does not imply that blockchain protocols are unconcerned about safeguarding users’ identities. The Bitcoin blockchain, for instance, identifies users by their wallet address, not by their personal identity, implying that the blockchain promotes anonymity while ensuring transparency.
Is Blockchain Secure?
Blockchain is based on cryptography, a highly complex system of encoding messages. This makes it hard for a third party to decipher the encrypted message except for the intended recipient.
Cryptography serves as the bedrock for blockchain technology, and the framework requires miners or computer networks to solve complex mathematical puzzles to add blocks of transactions to the Blockchain.
Once the puzzle is solved, and the data is added to a previous block, it is considered immutable, which means no one can change or alter it. This is because each block has its unique hash, a set of variables that distinguishes it from the others. The hash is sent to all network validators, and each node has a valid copy of the block.
Suppose some malicious software tries to change this transaction block by introducing a modified hash to the network. In that case, the network validators will compare it to their copy and remove the illegitimate block from the chain.
A change can only be implemented if all participating nodes on the network reach a consensus.
Another option for modifying the blockchain is through a 51% attack.
The 51% attack occurs when a single entity controls more than 50% of the network’s computing resources. In theory, this allows the entity to revise previous transactions added to the blockchain. A 51% attack is highly unlikely on a network like Bitcoin due to the high level of decentralized node verification structure in place.
Bitcoin vs. Blockchain
Although cryptocurrencies such as Bitcoin have popularized the concept of blockchain technology, the distributed ledger solution has a longer history. Researchers Stuart Haber and W.H. Stornetta first mentioned blockchain in an attempt to develop a system for timestamping documents.
However, Bitcoin’s introduction in 2008 and subsequent launch in 2009 saw its first real-world application. Bitcoin’s operation depends on the blockchain, not the other way around. Blockchain is self-sufficient.
The innovative technology has been used to record other data sets and structures in fields such as healthcare, real estate, animal tracking, population census, supply chain and logistics.
Blockchain vs. Banks
In contrast to the traditional financial system, blockchain is a multi-utilitarian technology. Aside from financial transactions, the distributed ledger technology (DLT) system is gaining traction in various industries.
However, regarding finance, timestamp technology continues to outpace the popular brick-and-mortar financial system. While banks have set closing times and do not work on weekends, blockchain facilitates financial transactions 24/7, 365 days a year, with no fixed closing hours.
Furthermore, transferring funds with centralized banks can be frustrating. It could take the recipient about 5-10 days to receive the funds for large sums or international transfers. On the other hand, Bitcoin transfers are faster. The average BTC transaction can be completed in about 3-10 minutes, regardless of the recipient’s location.
Blockchain solutions are significantly less expensive than traditional banks due to the elimination of a middleman. A Bitcoin transaction can range from $0 to $50, depending on the network load when the transaction is completed. Users can also choose how much they will pay in transaction fees. Banks charge customers enormous fees for using their services. This includes overdraft fees, returns, inactivity and even fees for using an automated teller machine (ATM) that’s out of service.
Other differences include the lack of personal information required, the lack of transaction sanctions, privacy, and the fact that all you need to get started is a Bitcoin, a mobile phone, and an internet connection.
Pros and Cons of Blockchain
Blockchain has both advantages and disadvantages. Here are a few:
- Lower transaction fees
- Enhanced privacy
- Zero KYC requirements
- Faster transaction time
- Zero account seizures
- No centralized entity in control
- Always online
- Data immutability
- Scalability issues
- Environmentally tasking
- High maintenance cost