25 July 2020
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.
In this article, we will explain everything you need to know about the blockchain technology. Let’s dig in.
Why is It Called Blockchain?
Blockchain comes from the words block and chain. A block is made up of digital pieces of information. It stores vital information like the date and time of a transaction. The chain, which is made of a series of blocks of data, is permanent and not able to be changed in the public database once it’s created.
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.
A block has three basic elements, transaction data, a nonce, and a cryptographic hash. The nonce is a 32-bit randomly generated number that comes into existence when a block is created. The cryptographic hash is a 256-bit number made and partnered to the nonce.
The nonce generates the cryptographic hash. A cryptographic hash translates data into a string of letters and numbers, promoting the blockchain’s security.
Every block in a blockchain has its own unique nonce and hash. What’s more, it references the hash of the previous block in the chain. This is why it is impossible to alter any block without changing the subsequent blocks.
The nonce differentiates a block’s hash address and rules out the possibility of duplication or using the same crypto coin twice.
Blockchain: Google Docs on a Larger Scale
One of the best comparisons for blockchain is Google Docs. The main draw of Google Docs is that it allows an individual to collaboratively work and share information with others. All edits are done in real-time and latest version is fully visible to all stakeholders. All changes are logged with time stamps and it’s easy to see the contributions from any individual.
In contrast, this model differs from the experience of creating a Microsoft Word document and then emailing it to all stakeholders. Not only does this create a bottleneck, as all parties need to wait for the latest revision to be sent around, but there is also a risk that multiple versions can exist that present different information. The result is that the process needs to wait for one step at a time to occur, which subsequently leads to significant delays on simple tasks. A good example is how wire transfers between banks can take days, often due to internal checks & balances, even though this can be automated and completed in minutes (or seconds) by connecting all parties without a middleman between them.
Types of blockchain
Currently, there are at least three types of blockchain networks, Private, Public, and Consortium.
Public blockchain networks are accessible to everyone. They allow anyone to participate as users, miners, developers, or community members. They are completely decentralized and have no single authority determining the day to day operations of the networks. All transactions taking place on the network are completely transparent. Two of the most well-known public blockchains are Bitcoin and Ethereum.
Private Blockchain networks are only accessible to the chosen few. People need permission to access and use the network. Unlike public blockchain networks, private Blockchains are more centralized. Transactions are private and only available to members of the ecosystem. These are people with permission to participate in the network.
Consortium blockchain networks are more like private blockchain networks. However, instead of one entity being in control, there is a group. A group of entities comes together to govern the daily operations of the network. In a consortium blockchain network, some aspects of the organization can be made public while others remain private.
Benefits of Blockchain
Many benefits come with blockchain technology. Some of them include:
As a distributed ledger, all participants on a blockchain network share the same documentation. They all have to verify transactions before they go through. It makes it hard for anyone to tamper with any information privately. All transactions are open to scrutiny at any time.
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.
Speed and efficiency
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.
For the longest time, intermediaries have been the reasons for the high operations costs. The more the intermediaries a business has to go through, the deeper they have to dig in their pockets. Blockchain 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.
We hope this article helped you understand the basics of blockchain and the benefits it brings to many industry operations. However, theory explanations are not enough. To get a better understating of this technology and its implications, try out blockchain services, tools, and solutions.