Blockchain for Dummies: What Is Blockchain?
Blockchain is the technology behind cryptocurrencies like Bitcoin and Ethereum. It is commonly defined as a distributed ledger that records and stores information or data. It is a decentralized network with no central authority. Information stored on the blockchain is transparent and immutable.
The best way to explain what Blockchain is is by examining a traditional record-keeping system that we have been using for thousands of years — the ledger. Ledgers were originally books, which have now become computer software applications, and they are essentially a record of all the transactions you make in your life. Unfortunately, ledgers are inaccurate because they depend on us — fallible humans — to keep them up-to-date and in order. And it’s not just individuals but also institutions such as government agencies, corporations, and even hospitals. Whether it’s greed, negligence, or incompetence, people make mistakes, which leads to faulty records of income and ultimately distrust. There is a silver lining, however. The ledger has now evolved to incorporate blockchain technology, thereby shifting the onus of trust from us fallible humans to the technology itself.
Blockchain is a global ledger accessible by all computers anywhere in the world. Every time a transaction is made, it is time stamped by all parties involved as well as being verified by all computers with access to the ledger so that each of them has an up-to-date copy. The latest transaction is then added to a list of all the previous transactions and they are forever connected along a timeline. Each transaction is a block in the long chain of chronological transactions, which is where the term Blockchain comes from.
How Does Blockchain Work?
Blockchain works as a decentralized database. Every time a transaction is made, details of the transactions pass through a network of connected devices known as nodes for verification. Once verified, the transaction is stored in a block.
The core function is to record and store records of transactions or events. The major difference is that blockchains address two main vulnerabilities of databases and bookkeeping systems: accuracy and security. The fact is that databases and bookkeeping systems are often riddled with inaccuracies and incomplete information. The public became aware of how easily records could be manipulated when the former titan of the accounting world, Arthur Andersen, collapsed after they were found guilty on charges relating to their auditing of Enron. Years later, the investing world was reminded about how devastating false bookkeeping can be when Bernie Madoff was charged and convicted – leaving a wake of victims whose life savings evaporated.
Blockchain delivers a solution that is accurate, secure, and cannot be edited at a later time. Every transaction or entry is recorded as a listing in the database – known as a block. Every block on the blockchain is unique and possesses its own “fingerprint” — tiny bits of data that are unique to it. Moreover, each block contains tiny bits of data that relate to the previous block. By linking transactions together, it creates a scenario where a person cannot go back at a later time to edit their entry into the database without needing to edit every single transaction that occurred afterwards.
What Are the Advantages of Blockchain?
1. Increased Transparency & Guaranteed Anonymity
Stop and think about how much of our daily lives have become intertwined with devices and services connected to the internet: smartphones, online shopping, electronic health records, email, etc. While this has brought transformative benefits, it has also led to a situation where each person is generating 1.7 MB of data every second (the equivalent of 60 pages of information in a Word document).
We highlight this information to showcase a fatal flaw of the internet: making personal information easily accessible allows companies to collect and store it. The result is that rates of identity theft and instances of criminals stealing and holding confidential patient medical records from hospitals for ransom have increased drastically.
Blockchain provides a solution to security breaches through its design, particularly its decentralized structure. Blockchain is fortified with military-grade encryption to deter hackers. Immutability makes it hard for anyone to change transactional records for their benefit. The need for verification before transactional approval also helps with the security of the network. Nothing can be done without the full participation of the members. It would take the fastest computer in the world about 10 billion years to hack into your blockchain entry and steal the information.
2. Transactions Are Instant and Permanent
Blockchain brings automation to processes that have been analog for the longest time. With automation, speed, and accuracy become real. Human errors and delays are eliminated, enabling fast and timely transactions.
3. Lower Fees
For the longest time, intermediaries have been the reason for the high operations costs. The more intermediaries a business has to go through, the deeper they have to dig in their pockets. Blockchain technology comes in to cut costs by eliminating the need for intermediaries. The technology makes it possible for people to transact directly, making services cheaper and faster.
What is Blockchain Used for?
Lastly, we must cover the most important factor related to blockchain and that is its use in the world. Generally speaking, blockchain technology is used to create all sorts of transparent data-storing ledgers, as it provides a reliable and untraceable environment perfect for data protection. Since no one can steal or manipulate the data on the blockchain, this technology can be used for scalable data storage solutions.
Moreover, blockchain is commonly used as a base for monetary transactions executed with cryptocurrencies, also known as modern, digital money. Cryptocurrencies such as bitcoin that are based on blockchain technology are considered far more secure and reliable than fiat currencies when used online. Since its inception, blockchain technology has revolutionized the worlds of finance, healthcare, art, and even gaming by providing active solutions to so many of the security and privacy issues that each of those industries faces.
This technology is used for a transparent verification of information, proof of provenance, as well as distributed cloud storage. Despite the fact that it became well known for building cryptocurrencies, the world of blockchain is so vast it is just getting started.