Blockchain technology has risen in popularity in recent times and is getting more common by the day. While it may sound a little complicated depending on interest, blockchain technology is rather simple to understand and quite fascinating in how it works. Simply put, blockchain is a decentralized, shared ledger, a digital database of financial transactions, […]
Blockchain technology has risen in popularity in recent times and is getting more common by the day. While it may sound a little complicated depending on interest, blockchain technology is rather simple to understand and quite fascinating in how it works.
Simply put, blockchain is a decentralized, shared ledger, a digital database of financial transactions, saved on a cluster of computers in different places and is not owned by any single person or entity. The ledger is continuously growing as more transactions are carried out, each forming a block adding to the database, which creates a continuous chain of data containing records accessible to the public.
Pillars of Blockchain Technology
There are three main pillars of blockchain technology – decentralization, immutability, and transparency.
Decentralization is the one defining factor of blockchain technology. It refers to the fact that the financial transactions are stored in multiple locations and multiple computers. Therefore, no single entity has complete control over the data stored in the ledger. In the traditional financial system, everything is centralized, and the information is only in the hands of your bank – which is easy for unauthorized users to access.
Blockchain technology removes this risk through decentralization, where everyone has access to the data but cannot tamper with it. Using a decentralized system ensures that you do not have to go through a third party to interact with someone else. A centralized system will require that you go through an intermediary, like a bank, to complete a transaction. If something were to happen to a centralized system, services would grind to a halt, and the information would be corrupted. A decentralized system, on the other hand, ensures information is available in multiples rather than at a single source, which plays a crucial role in data security.
Once data has been entered into the digital database, it cannot be corrupted or tampered with, thanks to immutability. Cryptographic hashes, a technology that takes transactions as inputs, runs them through a hashing algorithm, and then produces an output of a fixed size and length, makes immutability possible.
Immutability secures the transactions and makes it impossible for anyone to get creative with the records in the ledger. Blockchain technology would, therefore, be ideal for preventing such things as embezzlement and other financial crimes.
A rather intriguing aspect of blockchain technology is its transparency while guaranteeing privacy to its users at the same time. The identity of any user is protected by complex cryptography protocols and are represented just by a public address that does not reflect their identity.
At the same time, every transaction made by a person, though their identity is secure. Transactions are recorded in the public ledger and displayed to the public for everyone to see. You can use the public address of a person, company, or organization to know every transaction they have made. This transparency forces companies to be honest in their spending, thus ensuring a high level of accountability which has not been seen before in other conventional methods.
How Does Blockchain Work?
To understand how blockchain technology works, we will use an example of two entities trying to complete a financial transaction. Take, for instance, two people A and B, with A wanting to send money to person B.
In blockchain technology, this transaction appears as a block which is then distributed across a network in various servers as opposed to a single one. Person A initiates a deal, and a network of computers works to prove that the owner and the transaction are authentic.
As soon as the transaction has been verified as valid, the block is then added to the digital ledger. This information is reconciled and updated across the servers and becomes a permanent record. The record of ownership for person A is now transferred on to person B, and the money becomes theirs.
The block must be given a hash after verification, a unique identifier for that particular transaction. This entire process is made to eliminate the middleman while ensuring that it is secure, private, and transparent.
Blockchain and Bitcoin
Tracing back to 2008, Bitcoin was created by a person or group of persons under the pseudonym Satoshi Nakamoto. It is a decentralized currency that is not issued or controlled by any central authority as opposed to money issued by a central bank. A network of computers called nodes or miners manages the blockchain behind bitcoin. These are computers built to run complex mathematical problems to allow a transaction to go through.
A person making a bitcoin transaction will do so from their digital currency wallet, which has a ‘private key’. This key is that specific person’s digital signature. It is mathematical proof that this particular transaction is coming from that person’s digital wallet. If multiple people are doing these transactions at the same time, they all get organized together into a block which is then sent out to the Blockchain network. Once the transactions have been verified, they are added onto former blocks creating a blockchain.
Uses of Blockchain in the Technology World
Blockchain technology has been fundamental in revolutionizing the financial scene. Thanks to the technology, we have seen several cryptocurrencies come up. However, blockchain’s unique features, such as decentralization provide leverage for the technology to disrupt several industries. Here are some of the uses of blockchain in the tech world.
- Smart Contracts
Blockchain can be used to facilitate, negotiate, and verify contract agreements under a specific set of conditions agreed to by the parties. Once everything is agreed to, the terms of said agreements are automatically executed.
With smart contracts, parties can get into agreements without intermediaries and have the transactions recorded in a public ledger. These contracts will help provide transparent transactions and minimize cases on involved parties going back on their word.
- Protection of Intellectual Property
Blockchain technology can be used to ensure that proprietary digital data is certified. The technology creates an indisputable record of ownership which can be used as proof of existence. Additionally, it helps avoid falsification of documents and counterfeiting of data such as certificates and copyrights.
- Payment Processing
Blockchain technology has been most influential in the financial system. Thanks to this technology, you can process payments from one party to another without an intermediary. By removing intermediaries such as banks, blockchain technology has helped to reduce transaction fees and minimize the time taken to complete transactions.
- Digital IDS
With blockchain technology, we can get rid of physical IDs and replace them with digital ones. Thanks to the multi-step and multi-factor identity verification process, blockchain technology ensures that digital IDs offer better security. Besides, third parties will not access your data, as is the case with the internet today, which results in too many adverts, especially in email inboxes.
Other sectors where blockchain technology could come in handy include governance, especially when trying to ensure full transparency in activities such as voting, supply chain management, healthcare systems, and so much more.
Blockchain technology is taking the world by storm since its creation several years ago. Its fundamental use-case is revolutionizing the financial world with the use of digital currency. But, blockchain technology can disrupt various sectors, thanks to its three pillars. Key players in the tech field are continually looking for ways through which the technology can help solve some of the global problems. While it is still not integrated into significant systems, it provides excellent opportunities for companies to conduct business, protect their data, and do so much more.