Blockchain Technology – Everything You Need to Know
The blockchain is one of the revolutionary technologies we have seen in the last decade. Most people got to know about this technology when it was used as the backbone of bitcoin – the most popular cryptocurrency introduced in 2009. What most people don’t know is that this technology has way more use cases than crypto.
In this blog post, we will discuss everything you need to know about blockchain technology, including its common/potential use cases, benefits, limitations, and more. By the end of the post, you will have a clear idea of what actually this technology is and how it could impact your everyday life. Let’s get started!
What is a blockchain?
In simple terms, a blockchain is a digital ledger on a distributed network of computers. Unlike the centralized systems where the storage of data and computation happens on centralized servers, the blockchain relies on decentralized computers for both computation and data storage. This paradigm shift is what has made this technology popular.
Another main difference between the blockchain and databases used in a centralized system is how data is structured. Mainstream databases usually store data in tables, whereas the blockchain stores its data in blocks. With the blockchain, information is grouped to form a block. Each block is designed with a specific amount of data it can hold.
When the block is filled up, it is automatically connected to the previous block to form a chain of blocks hence the name blockchain. When new information is added to the block, it will be grouped together and put into another new block and is also linked to the previously closed block.
Once a block is added to the chain, it is given a timestamp indicating the exact time it was added to the blockchain. The blocks cannot be removed once they are added to the chain. We shall discuss more about this in the next section as we explain how the blockchain actually works.
How the blockchain works
Many people still struggle to understand how the blockchain works even after reading a series of articles or watching YouTube videos about the subject. I will try to make the explanation below as simple as possible to ensure everyone understands how this incredible technology works.
Before understanding how the blockchain works, it is important to know the reason behind the creation of this technology. The main goal of the blockchain was to create a distributed ledger with information that cannot be alerted or deleted. The main reason behind this concept is to reduce the reliability of the internet on a few big companies that run most of the internet services.
For instance, a huge percentage of data on the internet is stored in data centers of the big tech companies, including Google, Microsoft, Apple, Facebook, and Amazon. With the blockchain, data is distributed on a distributed network of computers owned by individuals. For instance, data of all bitcoin transactions is stored on tens of thousands of computers on bitcoin’s blockchain network. If someone tries to alter data on one of the computers, others will not allow the change to be made. It requires over 51% of the computers to have a consensus before making the change.
If anyone tries to tamper with data on any of the nodes, other nodes will have to be cross-checked before the change is made. That is why all data stored on the blockchain can’t be altered. It requires one to take over the biggest percentage of the computers on the network if they are to successfully make the change.
Benefits and limitations of the blockchain
Benefits
- It is autonomous
One of the main reasons this technology has become popular is because it is self-monitoring. There is no single company or individual that is always monitoring the blockchain to ensure it does its job. Once conditions are set for executing a certain task, it does so with accuracy and precision. This eliminates the need for third-party entities in transactions, leading to lower fees since there are no management costs involved.
- Speed and efficiency
The elimination of third parties from the equation eliminated all forms of bureaucracy that we usually see in transactions made with the mainstream centralized systems we are all used to. With the blockchain, transactions are completed faster and more efficiently since everything is automated. It also eliminates human error from the equation.
- Transparency
All transactions made on the blockchain can be accessed by anyone since all data is immutably recorded and stored on a distributed ledger with a timestamp of when they were made. This makes it easy for anyone on the blockchain network to see the history of a certain transaction hence reducing the chances of fraud.
- More security
The fact that data stored on the blockchain can’t be edited makes it extremely secure. All data is also encrypted, which adds an extra layer of security to it. Making changes to the data on any given blockchain network requires one to take over the biggest percentage of computers on that network, which is practically impossible.
- Reduced costs
Since the blockchain is an autonomous and self-monitoring platform, the costs of management are minimal. The only cost incurred in running it is computing, and this reward is given to miners – the people who put up their computers to be part of the blockchain network. That is why transactions made on the blockchain are way cheaper than transactions made on centralized platforms.
Limitations
- Mining requires a lot of computation power.
Most blockchain platforms use proof of work as a means to validate transactions before they are added to the blockchain. Proof of work involves solving complex mathematical problems that need a lot of computation. That is why most computers that are used for mining the different cryptocurrencies are GPU-based.
- Low number of transactions per second
Proof of work takes a significant amount of time, which reduces the number of blocks that can be processed every second. For instance, bitcoin’s blockchain is able to do only seven transactions per second. In comparison, PayPal does around 193 transactions per second, and Visa does about 1,667 transactions per second. However, newer cryptocurrencies are using proof of stake (POS) to validate transactions. POS requires less computation power, which leads to more transactions made per second.
- Cannot easily be regulated
Decentralization is the main benefit of the blockchain. However, this makes it hard to regulate activities on the blockchain, which could encourage actors on the dark web to use blockchain-based platforms to transact.
How secure is the blockchain?
One of the common questions that most people ask about the blockchain is whether it is secure. Based on its fundamental structure, the blockchain is a way more secure place to store data than mainstream databases. Here is why. New blocks on the blockchain are always stored linearly and chronologically, meaning they are added to the “end” of the blockchain.
Each block that is added to the chain has its own hash, the hash of the block before it, and the timestamp of when it was added. For those who may not know, hash codes are generated using a mathematical function that converts digital information into a string of numbers and letters. So, trying to change the information in a block will alter its hash number.
When the hash code on any of the blocks is altered, other nodes will detect a different version of the blockchain, which will be rejected immediately. The only way one can succeed at doing this is by simultaneously making the change on 51% of the computers on the network, which is practically impossible.
What are the different use cases of bitcoin?
- Currency
The most popular use case of blockchain is crypto. Bitcoin – the first and most popular cryptocurrency, was the reason lots of people got to know about blockchain technology. All the other cryptocurrencies, including Ethereum (ETH), Litecoin (LTC), Cardano (ADA), Polkadot (DOT), Bitcoin Cash (BCH), Stellar (XLM), Dogecoin (DOGE), and Binance Coin (BNB), use the blockchain to process transactions and store data.
- Health care
Health care providers can also use the blockchain to store their patient’s medical data. So, once the data is stored on the blockchain, the patient will be sure that it won’t be altered at any point.
- Smart contracts
This is one of the most innovative use cases of this technology. A smart contract is basically a program on a blockchain that runs when predetermined conditions are met. Smart contracts have made it possible for people to make virtual agreements without having to meet. It is because of smart contracts that we have crypto lending platforms.
- Supply chain
Another practical application where blockchain technology can be used is in the supply chain. Different suppliers can add details of how ownership of raw materials and the product itself have changed over time. This makes it easier for the final consumer to know the origin of the product while buying. If a product claims to be organic, there should be proof that all the raw materials used to make it are from organic sources.
- Voting
Voting is another crucial activity that could make good use of this technology. Using blockchain for voting and tracking election results can significantly reduce voter fraud and also increase voter turnout. Since data in the blockchain cannot be tampered with, it is practically impossible to rig elections.
How many blockchain platforms exist?
As you might have guessed, there are several blockchain platforms that have different rules regarding transaction validation, the size of each block, etc. However, they all still follow the fundamental principles of this technology, such as storing data in blocks and linking up these blocks in chronological order to form a chain.
Before we look at the different examples of blockchain platforms, let’s look at the four major types of blockchain platforms.
- Public blockchain: This is the type of blockchain platform that is controlled by the general public. That means anyone has access to it and can sign up to be a miner if they wish to.
- Private blockchain: This is the type of blockchain that is controlled by a private entity like a company. So, the rules of how the blockchain operates are set by that company.
- Hybrid blockchain: It is the type of blockchain that has properties of both the private and public blockchain. That means some of the data can be accessed by the general public, whereas some remain private and can only be accessed by authorized parties.
- Consortium blockchain is like a private blockchain with limited access to a particular group, such as organizations.
Let’s look at some common examples of the blockchain platforms that exist today.
- Ethereum: This is a fully decentralized blockchain that was introduced in 2013 when Bitcoin was just starting to become popular. One of the major benefits of this blockchain is the fact that it supports smart contracts. The Ethereum blockchain is also open source, so anyone can use it to deploy their decentralized app or tokens. It is also currently used to run Non-Fungible Tokens (NFTs)
- Bitcoin blockchain: This is still the most popular blockchain platform that contains the history of every bitcoin transaction. Anyone, including you and me, can download this blockchain and use it to inspect blockchain transactions.
- IBM blockchain: This is a private blockchain that was built by IBM. One of the most popular use cases of this blockchain is linking enterprise cloud and legacy technologies more seamlessly than is possible in other decentralized networks.
- Stellar: This is one of the newest blockchain platforms optimized for different kinds of DeFi applications. It uses the Stellar Consensus Protocol, which claims to speed transaction speeds on public blockchain networks.
Final thoughts
Blockchain technology has been here for close to 15 years, but the impact it has had during this short time has been immense. Many of us got to know about this technology through cryptocurrencies like Bitcoin and Ethereum. However, this technology has a lot of potential of disrupting many other industries, including health, supply chain, politics, and many more.