What Is Blockchain Technology?
You’ve probably heard the term “blockchain” many times over the last decade, but what us blockchain technology? Well, it is one of the most influential technological breakthroughs of the last decade.
The concept is fairly difficult but also easy to understand once you learn the ins and outs of it. The cryptocurrency giant Bitcoin made it popular and has since revolutionized the financial industry.
What Is Blockchain?
The word blockchain refers to a public ledger that stores transactions. Whoever named it blockchain named it right, as the system is basically built of blocks connected in a chain. In simpler words, the blocks are made of information that is stored with a unique identifier (hash). These hash codes are generated by an algorithm and are completely unique for each transaction or block. But what really makes blockchain different is that these blocks of information are stored on a network or cluster of computers. So, the information is distributed over several points, visible to everybody.
In technical terms, this is a decentralized system (i.e., no single system controls the information). It’s also transparent as the information is visible to anyone (although protected by the unique hash code).
It’s the technology behind Bitcoin as it provides a decentralized ledger system for storing all the transactions made using the cryptocurrency.
Blockchain was developed by a person or group of persons named Satoshi Nakamoto in 2008 as a decentralized engine that ran the cryptocurrency Bitcoin. Technically, developments for a decentralized finance system had been in the works since the early 90s.
In 1991, Stuart Haber and W. Scott Stornetta came up with the idea of a decentralized system with distinct timestamps to store data. But it was not until Nakamoto published their white paper in 2008 and managed to resolve the many problems with the concept. Hence, blockchain was born with digital currency.
Blockchain and cryptocurrency were created out of a need for a decentralized system. The people behind the project did not believe in the conventional financial system, which was largely centralized and not too transparent.
The original blockchain technology created a footprint for transparent, decentralized ledgers that can operate independently of a bank or governing authority. This orchestrated the cryptocurrency revolution as newer systems with blockchain came about.
Ethereum and Ripple were the second-generation cryptocurrency and blockchain systems with their unique offerings.
How Blockchain Works
Blockchain works using a cluster of computers and record transactions in terms of blocks of information. Here’s how it works with the help of an example:
- You purchased a bag online with Bitcoin, and the information regarding that transaction will be stored in the blockchain. Information such as dollar value, timestamp and where the transaction occurred will all need to be saved. The block is made of hundreds and thousands of such transactions and blocks are connected.
- Before recording the transaction, it must be verified. This verification is done by the computers in the system through some complex coding. These machines vet the new data entry to confirm whether it really happened.
- Once verified, that record of data has to be stored in a block along with other such records of transactions. It’s stored in the current block taking records, and once it is complete, it is given a unique hash code.
- The block receives its unique hash, plus the hash of the last block in the chain of blocks. Now, it is added to the so-called blockchain.
- Once the block is added successfully, it is available for the public to view, so anyone can see the transaction.
This blockchain does not exist on a single computer but it is distributed to a system of thousands of computers, with each having a duplicate copy of the blockchain. The addition of new blocks is maintained and reflected on all the nodes, so everyone has the same copy.
This basically helps secure the information in case one computer loses it. As for the information about the transaction, it is not completely public. Only the unique username and the kind of transaction it is is visible, so the personal details of the actual user are not really public.
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Advantages and Disadvantages of Blockchain Technology
It’s true that blockchain technology has really changed how we have been seeing the finance system for decades, but it has both pros and cons.
What Are the Pros?
- Decentralization: Decentralization is at the core of blockchain technology. It effectively ends centralization in the financial system. The information does not belong to a single body, but hundreds of them.
- Transparency: fact that the transactions stored in blocks are accessible by the public makes the system super transparent. With no third-party and peer-to-peer transactions, the system does not allow any information to be hidden or creates accountability.
- Security: Blockchain has also proven to be highly secure. Once the blocks are added to the chain, they cannot be changed. The information will remain there for the lifetime, which ensures no data is manipulated.
What Are the Cons?
- Private keys: The owners of Bitcoin have a public key and a private key. The public key identifies them while the private key allows them to access their digital assets. This key basically allows them to run their own bank account without a bank. If the private key is lost, you basically lose all your cryptocurrency too. There’s no procedure to get the key back or replace it with a new one like you would with online passwords.
- Learning curve: Despite its revolutionary advantages, this kind of technology is still new to the world. People can take time to learn it and understand the protocols to fully embrace it.
Blockchain technology allowed cryptocurrency to become what it is today. It was an open-source technology that resulted in an echo of innovation. With dozens of successful cryptocurrencies, it is clear why it was so significant.
It effectively changed how money is handled and transactions are made. This technology provides stability, security and transparency, which have long been problematic with the current system.
Even though conventional finance systems continue to dominate, blockchain and cryptocurrency are not far behind.