The blockchain in a nutshell
What is Blockchain?
It is a way of storing data thus we can say it is a database, but it differs from the generic database technology. Here, data cannot be deleted once records added to the system. All new data is stored in a unit called a block. Once a block filled with data it is chained to the last block in chronological order. This process happens in all nodes in the decentralized peer-to-peer network, then all know the record of the transaction and as a result of that, there is a nearly 0% probability of having a fraud in the system. Blockchain is the underlying technology of any cryptocurrency in the world. Some of the real world cryptocurrencies are XRP, Bitcoin, Ethereum, Dogecoin, Stellar, EOS, Cardano, Uniswap Protocol Token, Litecoin, Bitcoin Cash, Chainlink, Thether, Binance Coin, Polkadot, TRON, OMG Network, BUSD, Sushi, Brand Protocol, and Bitcoin SV. Though blockchain is the underlying technology of cryptocurrencies, both of them are not equal and we cannot perform an apple to apple comparison.
Normally, a database structures its data into tables whereas a blockchain, like its name implies, structures its data into chunks (blocks) that are chained together. Blocks have certain storage capacities and when filled they are chained to a previously filled block, making a data chain known as a blockchain. All new information that follows after a freshly added block is compiled into a newly formed block that will then be added to the chain when it is filled. This system basically makes an irreversible time sequence of data when applied in a decentralized nature. Each block in the chain gets the exact timestamp when it is added to the chain.
If we look at the transaction process in blockchain technology, we can see a process that has few steps to validate and add a transaction to the system. When a transaction is entered into the system, it will transmit to all nodes/computers of the system with a peer-to-peer network. Then each node will try to resolve an equation to verify the validity of the transaction. If it can be confirmed as legitimate then it is clustered into a block. The newly created block then is chained together with the previous block in chronological order thus this chain of blocks which is the blockchain will maintain a clear, unchangeable, ordered transaction history across the network. Now the transaction is fully completed.
Attributes of Cryptocurrency
There are few unique attributes of any cryptocurrency. Intrinsicly, blockchain is trustworthy because of the architecture of the system, and as a result of that, almost all cryptocurrencies are using this as the backend technology. There is not central governance like a bank and important decisions such as total supply etc. will be taken by the majority of the network. Always the assets will be maintained digitally and a physical form of them is not available at all. Because of these attributes, this technology can also be used in legal contracts and inventories.
There are few central blockchain systems with a group of computers which are privately owned by organizations. But the majority of blockchain systems are decentralized and not governed by a central bank or any central authority. Instead, computers or group of computers in the network which is a=called as nodes will be maintained by individuals. By this decentralized nature of the system, there is not a possibility of happening a fraud, because if there is an error in a single node, there are multiple nodes with correct data to refer to.
Since the decentralized nature of the system, each and every transaction will be known by all nodes in the chain. Every node has its own copy of the chain and once a fresh block confirmed and added to the system, the chain of every node will get updated.
Once a block is added to the end of a blockchain, it is very difficult to go back and modify the contents of the block unless the majority has reached a consensus to do so. This is because each block contains its own hash, along with the hash of the block before it, as well as the previously mentioned timestamp. Hash codes are created by a mathematical function that converts digital information into a series of numbers and letters. If this information is edited in any way, the hash code. also changes. This is why it is important for security. Let’s say a hacker wants to modify a blockchain and steal Bitcoin from everyone else. If they changed their own individual copy, it would no longer match the copy of all the others. If everyone else would otherwise send their copies to each other, they would see that this one copy stands out and that the hacker version of the chain would be thrown out as illegitimate.
Advantages of Blockchain
- Accuracy of the Chain: There is not any human involvement in the transaction verification process, if anyone needs to introduce an error to the system, 51% majority of nodes in the chain would accept it, and there is nearly 0% probability for it.
- Cost Reductions: Normally in any transaction processing institute like banks, the end-user has to pay a considerable amount for the verification process and governance but n the decentralized blockchain, there is not a 3rd party to verify the transaction, and there is not a processing fee or sometimes it may be a very small amount.
- Decentralization: Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading this information across the network, instead of storing it in a single central database, the blockchain becomes more difficult to compromise. If a copy of the blockchain fell into the hands of hackers, only one copy of the information would be compromised, not the entire network.
- Efficient Transactions: Whereas financial institutions operate during business hours, five days a week, blockchain is working 24 hours a day, seven days a week, and 365 days a year. This is especially useful for cross-border trades, which usually take much longer due to time zone problems and the fact that all parties have to confirm payment processing. Transactions placed through a central authority can take up to several days.
- Private Transactions: Many blockchain networks act as public databases, which means that anyone with an Internet connection can view a list of network transaction histories. That is, when a user performs public transactions, the blockchain records his unique code called the public key, not his personal data. If a person has made a purchase of Bitcoin on an exchange that requires identification, then the identity of the person is still linked to their blockchain address, but the transaction, even when linked to the person’s name, does not reveal any personal information.
- Secure Transactions: After a computer has validated the transaction, it is added to the blockchain block. All blocks in the chain contains its own unique hash, along with the unique hash of the block before it. When information on a block is edited in any way, the hashcode of that block is changed, however, the hash code on the block after it would not.
- Transparency: Blockchain has an open-source codebase. It also means that there is no real authority over who controls the Bitcoins code or how it is edited. It gives auditors the ability to review cryptocurrencies like Bitcoin for security. If most network users agree that the new version of the code with the upgrade is correct and valuable, then Bitcoin can be updated.
- Banking the Unbanked: According to the world bank, there are nearly 2 billion adults that do not have bank accounts or any means of storing their money or wealth. Almost all of these individuals live in developing countries where the economy is in its infancy and is entirely dependent on cash. Then they need to store this physical cash in hidden places in their homes or places of residence, leaving them with subject to robbery or unnecessary violence. Blockchains of the future are also looking for solutions not only to be a unit of account for the storage of wealth, but also for the storage of medical records, property rights and a number of other legal contracts.
Disadvantages of Blockchain
- Technology Cost: Assuming electricity costs of $0.03~$0.05 per kilowatt-hour, mining costs exclusive of hardware expenses are about $5,000~$7,000 per coin. Despite the cost of bitcoin mining, customers continue to increase electricity bills to verify blockchain transactions For example, the poc system that bitcoin uses to validate transactions consumes a huge amount of computational power.
- Speed Inefficiency: At that rate, it’s estimated that the blockchain network can only manage about seven transactions per second (TPS). The inefficiency rate of Bitcoin is a perfect case study for the possible inefficiency of blockchain. Although other cryptocurrencies like Ethereum work better than bitcoin, they are still limited by blockchain.
- Illegal Activity: The most cited example of a blockchain used for illegal transactions is probably the Silk Road, an online dark web drug market that operated from February 2011 to October 2013, when the FBI shut it down. The website allowed users to search the website without tracking using the Tor browser and make illegal purchases in Bitcoin or other cryptocurrencies. Current US regulations require financial service providers to obtain information about their clients when opening accounts, verify the identity of each client, and confirm that the client does not appear on any list of known terrorist organizations. or suspicious.
- Regulation: While it is getting increasingly difficult and near impossible to end something like Bitcoin as its decentralized network grows, governments could theoretically make it illegal to own cryptocurrencies or participate in their networks. Many in the crypto space have expressed concern about government regulation of cryptocurrencies.
What’s Next for Blockchain?
Blockchain had begun its journey in 1991 and now it has been almost thirty years being alive in the world. The technology is already utilized in monetary solutions but it has a massive capability of other use cases as well. Therefore, there are no doubt legacy companies will move into the technology but the problem is when it has to happen. While looking into the distant future of blockchain is extremely exciting, new innovations are constantly entering the market promising greater and bolder use of technology. As active blockchain networks continue to bring real transformative change to many industries, we can predict future trends. With the new radical way of storing data, the technology will be used in multiple areas such as banking and finance, currency, healthcare, records of property, smart contracts, supply chains, voting.
Originally published at https://www.agnasarp.com on February 4, 2021.