The future of technology is nowadays frequently associated with the term “Blockchain”.
But a few people are aware of its meaning and importance.
The majority of the people are still wondering “What is Blockchain?”, is it a technology or a novel chemistry compound!
So, people are actively studying and understanding blockchain, how it works, its purpose, and everything.
And I know you are one of them, who is keen on being updated and informed! So, just dig deeper into the blog and get to know everything you need to know about Blockchain Technology…
This blog could be your Blockchain tutorial covering important concepts like:
- What is Blockchain?
- Purpose of Blockchain
- Benefits of Blockchain
- Working of Blockchain and Real-time examples
- Blockchain Wallet
- Blockchain and Bitcoin
And many more …
So, starting with the Overview of Blockchain
Earlier, transactions were recorded into the ledger and only relevant people had the access to the ledger. So, blockchain democratized this old concept and brought in more transparency.
Now, the ledger can be accessed by a group of people who all are part of the ledger (whose transactions have been recorded into the ledger), thus maintaining transparency.
These groups of people who have access to the particular ledger are called networks. The blockchain ledger is commonly shared by the network with no one having any master copy of it. All the people or the computers ran by these people are known as nodes. Every node contains the same records.
This ensures high security of data because if someone wants to manipulate any transaction, the person would have to manipulate the transaction on each computer of the network.
A simplified overview of the blockchain ecosystem would be that there is a blockchain ledger that is shared among the nodes forming a network and consensus protocol to decide who can enter the network.
Definition of Blockchain
Blockchain is a digital ledger that is shared among a network and is inflexible, which means changes cannot be made by anyone, not even the administrator of the network.
It is a ledger in which anything of value, can be a tangible asset (house, land, etc.) or an intangible asset (patents, copyrights, etc) is recorded and tracked.
Any transaction, account, or payment can be tracked on the blockchain network.
How does Blockchain Technology work?
Before understanding how blockchain technology works, let’s know about its elements first.
Elements of Blockchain
- Distributed Ledger Technology (DLT):
This indicates the fact that the ledger is shared by a network of people and transactions can be tracked and recorded by anyone in the network.
With the ledger being shared among everyone, the transactions need to be recorded only once thus saving time and effort.
- Immutable Records:
This means that the records are unchangeable. Thus, the records/transactions/entries cannot be changed.
If there is a fault in any transaction, the correct transaction can be included and both the transactions would be visible to the network.
- Smart Contracts:
These are the digital contracts that follow “If/then/when…” statements written in the form of codes and when a predetermined condition is fulfilled the necessary action takes place.
Eg., if a ticket has to be issued, the smart contract would check if the necessary terms and conditions have been followed and once the system is assured that conditions have been met, the ticket would be issued and the transaction would take place.
Smart Contracts enable speedy and efficient transactions.
How does Blockchain work?
As the name ‘Blockchain’ suggests, it can be inferred that there are two components - block and chain.
Each transaction that happens is recorded as a block. A block also shows when the data was recorded and stored which is very essential to know in case of any transaction.
These blocks are then connected logically and chronologically that shows the movement of assets and their changing ownership. These blocks are securely linked to each other to prevent alterations in the chain like the insertion of any other block in between.
These transactions or blocks form an irreversible chronological chain which makes the blockchain ledger immutable, thus making it impossible to manipulate the data.
Examples of Blockchain
Bitcoin is the most popular example that is built on blockchain technology. Bitcoin uses the technology to maintain a transparent ledger record.
Another example of the use of blockchain technology can be the voting system of democratic elections. The process would go like each citizen would own a cryptocurrency or token and each candidate would have a specific wallet address. The voters can send their token or cryptocurrency to the preferred candidate’s wallet address. This will eliminate human intervention and thus, manipulation of votes.
Why blockchain - The purpose of blockchain
Blockchain Technology is also called Distributed Ledger Technology (DLT), which indicates that the main purpose of introducing blockchain was to create transparency.
The blockchain ledger can now be maintained and viewed by each person in a network. The same transactions are recorded on multiple computers, hence giving a single view of records to every user which means the data like order and time of transactions is the same for everyone.
Long story short, each person in the network has access to the same data.
The fact that the transactions are recorded on multiple computers brings in the concept of assured security because if anyone wants to manipulate any transaction, the person would require to manipulate it on each computer of the network.
Another feature of blockchain - immutability assures that the data cannot be changed by anyone under any circumstance, so, if an error occurred, the only possible way to correct it is to enter the right transaction, and then both the transactions will be visible to the network.
In this way, there is no chance that a person may manipulate or remove any transaction after recording.
The main purposes of blockchain can be summarized with the help of two words - Transparency and Security.
Benefits of Blockchain
Now, as you know the purpose of blockchain, here comes the five important benefits of blockchain technology:
- Security -
As discussed above, as the records are immutable and end-to-end encrypted, this helps to keep the data secured by preventing fraud.
The data is stored across a network of computers, making it difficult or impossible to manipulate the data.
There are features like anonymizing data and permissions to grant access to only desired people into the network.
- Transparency -
As blockchain is a Distributed Ledger Technology, identical records are maintained by multiple computers, thus decentralizing the data.
Each person in the network has access to the same records at the same time. Also, immutability assures that the records can not be altered at any point in time.
- Traceability -
Any kind of data recorded in a blockchain is traceable, which is very useful especially for the payment systems as the transactions would be traceable from its origin to its destination.
This traceability feature enables us to keep a whole record of the flow of money and helps us identify the problem areas in case of any failure like if a payment got stuck.
Since blockchain is a ledger, so traceability assures transparency for accounting purpose as it can trace the flow of assets and assure that no manipulation of records have taken place.
- Efficiency and speed -
As the ledger is distributed among everyone, there is no need for the exchange of ledger between parties to make any changes, thus eliminating double efforts and increasing the speed and efficiency.
- Automation -
Smart Contract is a great example of automation as there is no human interference required to see if the terms and conditions of a contract are met.
The smart contract uses ‘If/when/then’ statements to analyze if the conditions are met to allow the necessary action like issuing a ticket or registering a vehicle to take place.
Types of Blockchain Networks
As you came to know from above that the ledger is distributed among a network, so now go through the types of blockchain networks:
- Public Blockchain Networks
As the name says, public networks can be joined by anyone. This network has an incentivizing mechanism to stimulate the joining of new participants. Bitcoin is the most prevalent example of this network.
One of the drawbacks of this network is that a sizable amount of computational power is required to maintain the ledger across the network. This means each node is required to solve a cryptographic problem as proof of work to achieve consensus and ensure that all the nodes are in sync.
The other drawback is that, as the public network is an open network, everyone is aware of the transaction taking place between two people so there is no or little privacy of transactions.
- Private Blockchain Networks
A private network requires an invitation that is confirmed by the network starter or the rules set by the starter. Therefore, one regulatory authority is there to govern who can participate in a network and maintain the ledger.
An enterprise would mostly use a permission network to keep an eye on who can participate and allow them to participate in certain transactions.
- Permissioned Blockchain Network
This works as a kind of filter and decides who can enter a network and for which transactions. The people are allowed to enter the network for certain transactions only.
An invitation or permission is required to join the network. Both public and private networks can be permissioned.
- Consortium Blockchains
This is used when the blockchain is maintained by multiple organizations. Different parts of the blockchain are accessed by different organizations. They share the responsibility to maintain the blockchain.
The main organizations of the network decide who can record or access the data.
Applications of Blockchain
IBM Food Trust uses blockchain to track the food products from their origin to destination. The products can be tracked by the grower, retailers, suppliers, and consumers.
This helps them save the food from any kind of contamination well in advance or if the food gets contaminated, they can at least track the source of contamination easily. This can help save the lives of people and provide them with healthy food.
At present, the deposit one makes to a bank may take hours or days to be acknowledged by the banks but with the introduction of blockchain technology into the financial sector, processes like this will be performed efficiently.
Blockchain would send the acknowledgment of deposit within minutes, just the time it would take to add a block in the blockchain.
The exchange of funds between institutions will happen securely and efficiently.
These examples portray how blockchain technology is going to make the industries efficient.
Cryptocurrencies relation with blockchain
Blockchain and Cryptocurrency are closely related because cryptocurrencies are digital system which runs on the blockchain technology. All the transaction database is maintained with the help of this digital ledger - blockchain, thus providing data ownership to the user.
The reason for using the terms cryptocurrency and blockchain interchangeably could be that, although blockchain technology was introduced many years ago but came into limelight when the first cryptocurrency i.e. bitcoin entered the market.
As it is clear from the name itself that cryptocurrency is a currency, thus related to the finance sector but blockchain is a technology that offers solutions for multiple sectors.
So, remember this statement and avoid using the terms interchangeably - Cryptocurrencies run on Blockchain.
What is a Blockchain wallet?
A blockchain wallet is a digital wallet that can manage the balance of crypto-assets such as bitcoin, ether, etc.
It allows transfers of cryptocurrencies among users and also turns cryptocurrency into local currency. The blockchain wallet charges a dynamic transaction fee based upon factors such as transaction size.
But to access the blockchain wallet and other blockchain applications, you need a key that could unlock the Blockchain world, and that key is Metamask.
Metamask keeps all your data and valuables secure and protects you from hackers and fraudsters. The specialty of blockchain technology is that you are the owner of your data and so is of Metamask as it is the new internet driven by Ethereum blockchain.
Having the Metamask extension or app, one can send money to anyone worldwide, invest or buy, publish a book, or hire part-time workers or freelancers.
After entering Metamask, one doesn’t need a new Id or password to visit a different site, all one needs is a secret phrase which would be the login Id, password, and proof of ownership for all the accounts.
One just needs to keep the secret phrase safe and is ready to explore the seamless experience of the blockchain world.
Is Blockchain safe? Can blockchain be hacked?
While blockchain technology has an immutable and distributed ledger system to maintain security still hacking and fraud are possible and have taken place before.
Hackers use four main ways to attack the blockchain system:
- Phishing Attacks -
This type of attack defines a situation when fraudsters ask for the credentials of a user through an email designed to look as if coming from a legitimate source. Once the user gives the credentials, he can face huge losses.
- Routing attacks -
Hacking data is difficult as it is distributed so the same procedure has to be applied on every computer but extracting data while it is passed to the Internet Service Provider is easy and looks normal so doesn’t get caught easily. So, hackers hack the data when it’s moving to the ISP.
- Sybil attacks -
To attack hackers create multiple fake network identities to flood and crash the system.
- 51% attacks -
Mining requires a high amount of computing power but if the hacker or group of hackers managed to achieve more than 50% of the network’s mining power, the hacker can manipulate the ledger.
Private blockchains are not at the risk of 51% attacks.
Although there have been attacks in the past and can still happen, there is no need to worry as there are enterprise blockchain solutions to safeguard your business from these attacks.