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Over the past few years, you've consistently heard the term 'blockchain technology', perhaps in relation to cryptocurrencies like Bitcoin. In fact, you may be asking yourself, "What is blockchain technology?" It seems that blockchain is a platitude but in a speculative sense, as there is no real meaning that ordinary people can easily understand. It is essential to answer “what is blockchain technology” including the technology used, how it works and how it is becoming important in the digital world.
As blockchain continues to grow and become more user-friendly, the onus is on you to learn this evolving technology to prepare for the future. If you are new to blockchain, this is the right platform to gain solid foundational knowledge. In this article, you will learn about "What is Blockchain Technology?" Learn how to answer questions. You'll also learn how blockchain works, why it's important, and how you can use this field to advance your career.
What is blockchain technology?
Blockchain technology is a framework that stores public transactional records, also known as blocks, in various databases known as "chains" in a network connected through peer-to-peer nodes. Generally, this storage is referred to as 'digital ledger'.
Each transaction in this ledger is authorized by the owner's digital signature, which authenticates the transaction and protects it from tampering. Hence, the information contained in the digital ledger is highly secure.
Simply put, a digital ledger is like a Google spreadsheet shared among numerous computers on a network, where records of transactions based on actual purchases are stored. The interesting angle is that anyone can see the data, but they can't corrupt it.
Why is blockchain popular?
Suppose you are transferring money from your bank account to your family or friends. You log into online banking and transfer money using the other person's account number. When the transaction is completed, your bank updates the transaction record. It seems simple enough, right? There is a potential problem that most of us overlook.
Such transactions can be manipulated very quickly. People familiar with this fact are often wary of using these types of transactions, hence the evolution of third-party payment applications in recent years. But this vulnerability is essentially why blockchain technology was created.
Technically, blockchain is a digital ledger that has been gaining a lot of attention and traction recently. But why has it become so popular? Well, let's dig into it to understand the whole concept.
Keeping records of data and transactions is an important part of business. Often, this information is passed in-house or through a third party such as a broker, banker, or lawyer, adding time, cost, or both to the business. Fortunately, blockchain avoids this lengthy process and facilitates faster transaction speeds, thereby saving both time and money.
Most people assume that blockchain and bitcoin can be used interchangeably, but in reality they are not. Blockchain is a technology capable of supporting various applications related to multiple industries such as finance, supply chain, manufacturing, etc., but Bitcoin is a currency that relies on blockchain technology to be secure.
Blockchain is an emerging technology with many advantages in an increasingly digital world:
Highly Secure: It uses a digital signature feature to conduct fraud-free transactions making it impossible for users other than a specific digital signature to corrupt or alter an individual's data.
Decentralized System: Conventionally, your transaction requires the approval of a regulatory authority such as a government or bank; However, with blockchain, transactions are done with the mutual consent of users resulting in smooth, secure and fast transactions.
Automation capabilities: It is programmable and can automatically generate procedural actions, events and payments when trigger criteria are met.
How does blockchain technology work?
In recent years, you've noticed many businesses around the world integrating blockchain technology. But how exactly does blockchain technology work? Is it a significant change or a simple addition? Blockchain advancements are still young and have the potential to be revolutionary in the future; So, let's start demystifying this technology.
Blockchain is a combination of three leading technologies:
cryptographic key
A peer-to-peer network with a shared ledger
A means of computing, for storing network transactions and records
Key cryptography consists of two keys - private key and public key. This key helps in successful transaction between two parties. Each person has these two keys, which they use to create a secure digital identity reference. This secure identity is the most important aspect of blockchain technology. In the world of cryptocurrencies, this identity is called a 'digital signature' and is used to authorize and control transactions.
Digital signatures are integrated with peer-to-peer networks; A number of individuals who act as authorities use digital signatures to reach consensus on transactions, among other things. When they approve a contract, it is certified by a mathematical verification, resulting in a successful secure transaction between two network-connected parties. So to summarize, blockchain users employ cryptography keys to perform various types of digital interactions through a peer-to-peer network.
Types of Blockchain:
There are four types of blockchains. As follows they are:
Private Blockchain Networks
Private blockchains operate on closed networks and work well for private businesses and organizations. Companies can use private blockchains to customize their accessibility and authorization preferences, network parameters, and other important security options. Only one authority governs a private blockchain network.
Public blockchain network
Bitcoin and other cryptocurrencies originated from public blockchains, which also played a role in popularizing distributed ledger technology (DLT). Public blockchains also help eliminate some challenges and issues, such as security flaws and centralization. With DLT, data is distributed across a peer-to-peer network rather than stored in a single location. A consensus algorithm is used to verify the authenticity of data; Proof of Stake (PoS) and Proof of Work (PoW) are two frequently used consensus methods.
The permissioned blockchain network
Also sometimes known as hybrid blockchains, permissioned blockchain networks are private blockchains that allow special access to authorized individuals. Organizations typically set up this type of blockchain to get the best of both worlds, and it enables better structure when determining who can participate in the network and what transactions.
Consortium Blockchain
Similar to permissioned blockchains, consortium blockchains have both public and private components, without multiple organizations operating a single consortium blockchain network. While these types of blockchains may be more complicated to set up initially, once they are up and running, they can offer better security. Additionally, consortium blockchains are optimal for collaboration with multiple organizations.
Transaction process
One of the key features of blockchain technology is the way it verifies and authorizes transactions. For example, if two individuals want to make a transaction with a private and public key respectively, the first party will attach the transaction information to the second party's public key. This total information is combined into a block.
The block contains a digital signature, a timestamp, and other important, relevant information. It should be noted that the block does not include the identity of the individuals involved in the transaction. This block is then transmitted across all nodes in the network, and when the correct person uses their private key and matches the block, the transaction is completed successfully.
In addition to managing financial transactions, blockchain can also hold transaction details for properties, vehicles, etc.
Here is a use case that explains how blockchain works:
Hash encryption
Blockchain technology uses hashing and encryption to secure data, relying mainly on the SHA256 algorithm to secure information. Sender address (public key), recipient address, transaction and its private key details are transmitted through SHA256 algorithm. Encrypted information, known as hash encryption, is sent around the world and added to the blockchain after verification. The SHA256 algorithm makes hash encryption almost impossible to hack, which makes authenticating senders and receivers easier.
proof of work
In a blockchain, each block consists of 4 main headers.
Previous Hash: This hash address identifies the previous block.
- Transaction Details: Details of all transactions that are to take place.
- Nonce: An arbitrary number given in cryptography to distinguish the block's hash address.
- Hash address of block: All of the above (eg, previous hash, transaction details and nonce) are passed through a hashing algorithm. It gives an output containing a 256-bit, 64 character length value, called a unique 'hash address.' Consequently, it is referred to as the block's hash.
- Countless people around the world try to find the correct hash value to meet a pre-defined condition using computational algorithms. Transactions are completed when predetermined conditions are met. To put it more precisely, blockchain miners attempt to solve a mathematical puzzle, referred to as the proof of work problem. Whoever solves it first gets a prize.
Mining
Difficulty
Blockchain and cryptography involve the use of public and private keys and, as is known, there have been problems with private keys. If a user loses their private key, they face many challenges, which makes this one of the disadvantages of blockchain. Another disadvantage is the scalability limitation, as the number of transactions per node is limited. Due to this, multiple transactions and other tasks may take several hours to complete. It can also be difficult to change or add to information after it is recorded, which is another significant disadvantage of blockchain.
How is blockchain used?
Blockchains store information about financial transactions using cryptocurrencies, but they also store other types of information such as product tracking and other data. For example, food products can be tracked from the moment they are shipped throughout their journey and up to final delivery. This information can be helpful because if there is a contamination outbreak, the source of the outbreak can be easily identified. This is just one of the many ways blockchains can store critical data for organizations
How to Invest in Blockchain Technology
Blockchain technology and stocks can be a profitable investment, and there are several ways to take the next step toward buying your first blockchain investment. Bitcoin is usually the first thing that comes to mind when investing in blockchain technology and should not be ignored. Apart from Bitcoin, there are also options to invest in cryptocurrency penny stocks like altcoins and litecoins. There are also some apps and services that are in the pre-development stage and that are using blockchain technology to raise funds. As an investor, you can buy coins, hoping that the price will increase as the service or app becomes popular. Another way to invest in blockchain technology is to invest in startups built on blockchain technology. Finally, there is always the option of investing in pure blockchain technology.
What are the implications of blockchain technology?
Blockchain technology has had great impacts on society, including:
- Bitcoin, the main application of blockchain and the whole reason the technology was developed in the first place, has helped many people through financial services like digital wallets. It provided microcredit and allowed people to make micropayments under ideal economic conditions, thereby injecting new life into the global economy.
- The next major influence is the concept of TRUST, especially in the field of international transactions. Previously, lawyers were hired to bridge the trust gap between two different parties, but this cost extra time and money. But the introduction of cryptocurrency has radically changed the trust equation. Many organizations are located in areas where resources are scarce and corruption is rampant. In such cases, blockchain provides a significant advantage to these affected individuals and organizations, allowing them to escape the tactics of untrusted third-party intermediaries.
- The new reality of the Internet of Things (IoT) is already teeming with smart devices that — turn on your washing machine; drive your car; navigate your ship; organize trash pick up; Manage traffic safety in your community — you name it! This is where blockchain comes in. In all of these cases (and many more), the use of blockchain technology by creating smart contracts will enable any organization to — both — improve operations and keep more accurate records.
- Blockchain technology enables a decentralized peer-to-peer network for organizations or apps like Airbnb and Uber. It allows people to pay for things like toll fees, parking etc.
- Blockchain technology can be used as a secure platform for the healthcare industry for the purpose of storing sensitive patient information. Health-related organizations can create a centralized database with technology and share information only with appropriately authorized individuals.
- In the private consumer world, blockchain technology can be employed by two parties who wish to make a private transaction. However, there are details of such transactions that both parties need to hammer out before they can proceed:
- Terms of Exchange (T
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