• What is a Blockchain?

A blockchain is a distributed database shared by the nodes of a computer network. A blockchain, like a database, electronically stores information in digital format. Blockchains are best known for their critical role in cryptocurrency systems such as Bitcoin in maintaining a secure and decentralized record of transactions. The innovation of a blockchain is that it ensures the fidelity and security of a data record and generates trust without the need for a trusted third party.

The way data is structured significantly between a traditional database and a blockchain. A blockchain collects information in groups known as blocks, which hold data sets. When a block’s storage capacity is reached, it is closed and linked to the previous filled block, forming a data chain known as the blockchain. All new information that follows that newly added block is compiled into a newly formed block, then added to the chain once it is complete.

A database typically organizes its data into tables, whereas a blockchain, as the name suggests, organizes its data into chunks (blocks) that are strung together. When implemented in a decentralized manner, this data structure creates an irreversible timeline of data. When a block is completed, it becomes permanent and part of this timeline. When a block is added to the chain, it is given an exact timestamp.

• How Does a Blockchain Work?

Blockchain’s goal is to allow digital information to be recorded and distributed but not edited. A blockchain, in this sense, serves as the foundation for immutable ledgers or records of transactions that cannot be altered, deleted, or destroyed. As a result, blockchains are also referred to as distributed ledger technologies (DLT).

The blockchain concept was first proposed as a research project in 1991, and it predated its first widely used application, Bitcoin, in 2009. Since then, blockchains have grown exponentially with the blockchain development of various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.

• Benefits of Blockchains

   

• Accuracy of the Chain

A network of thousands of computers validates transactions on the blockchain network. This eliminates nearly all human involvement in the verification process, resulting in less human error and an accurate data record. Even if a network computer made a computational error, the error would only affect one copy of the blockchain. For that error to spread to the rest of the blockchain, it would have to be made by at least 51 percent of the network’s computers—an almost impossible task for a large and growing network like Bitcoin’s.

• Cost Reductions

Customers typically pay a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage ceremony. Blockchain eliminates the need for third-party verification and the costs associated with it. Business owners, for example, pay a small fee whenever they accept credit card payments because banks and payment-processing companies must process those transactions. On the other hand, Bitcoin lacks a centralized authority and has low transaction fees.

• Decentralization

Blockchain does not keep any of its data in a centralized location. Rather, the blockchain is replicated and distributed across a network of computers. Every computer on the network updates its blockchain whenever a new block is added to the blockchain. Blockchain becomes more difficult to tamper with by disseminating that information across a network rather than storing it in a single central database. If a hacker obtained a copy of the blockchain, only a single copy of the information would be compromised rather than the entire network.

• Efficient Transactions

Transactions processed by a central authority can take several days to settle. If you try to deposit a check on Friday evening, you might not see any funds in your account until Monday morning. Whereas financial institutions operate during business hours, typically five days per week, blockchain operates 24 hours a day, seven days per week, and 365 days per year. Transactions can be completed in as little as 10 minutes and are secure after only a few hours. This is especially helpful for cross-border transactions, which typically take much longer due to time zone differences, and all parties must confirm payment processing.

• Private Transactions

Many blockchain networks function as public databases, which means that anyone with an Internet connection can access a list of the network’s transaction history. Although users have access to transaction details, they do not have access to identifying information about the users making those transactions. It is a common misconception that blockchain networks, such as bitcoin are anonymous when they are only confidential.

When users conduct a public transaction, their unique code—referred to previously as a public key—is recorded on the blockchain. Their personal information, on the other hand, is not. Suppose a person buys Bitcoin on an exchange that requires identification. In that case, their identity is still linked to their blockchain address—but a transaction, even if tied to a person’s name, does not reveal any personal information.

• Secure Transactions

The blockchain network must verify the authenticity of a transaction after being recorded. Thousands of computers on the blockchain race to confirm that the purchase details are correct. The transaction is added to the blockchain block after being validated by a computer. Each block on the blockchain has its unique hash and the block’s unique hash that came before it. When the information on a block is changed in any way, the hash code of that block changes; however, the hash code of the block after it does not. Because of this disparity, it is extremely difficult for information on the blockchain to be changed without notice.

• Transparency

The majority of blockchains are completely open-source software. This means that anyone with access to the code can view it. This enables auditors to examine the security of cryptocurrencies such as Bitcoin. This also implies no real authority over who controls the Bitcoin code or how it is edited. As a result, anyone can propose changes or upgrades to the system. Bitcoin can be updated if most network users agree that the new version of the code with the upgrade is sound and worthwhile.

• Banking the Unbanked

The ability of anyone, regardless of ethnicity, gender, or cultural background, to use blockchain and Bitcoin is perhaps the most profound aspect of them. According to the World Bank, an estimated 1.7 billion adults lack bank accounts or other means of storing their money or wealth. 7 Almost all of these people live in developing countries, where the economy is still in its infancy and is completely reliant on cash.

These people frequently earn a small amount of money paid in cash. They must then conceal this physical cash in their homes or other places of residence, leaving them vulnerable to robbery or unnecessary violence. Keys to a bitcoin wallet can be written down on paper, stored on a cheap cell phone, or even memorized if necessary. These options are likely to be more easily hidden than a small pile of cash under a mattress for most people.

Blockchains of the future are also looking for solutions to store medical records, property rights, and a variety of other legal contracts and serve as a unit of account for wealth storage.

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• Drawbacks of Blockchains

• Technology Cost

Although blockchain technology can save users money on transaction fees, it is far from free. For example, the PoW system, which the bitcoin network employs to validate transactions, consumes enormous amounts of computational power. In the real world, the power consumed by the bitcoin network’s millions of computers is comparable to what Norway and Ukraine consume annually.

Despite the costs of mining bitcoin, users continue to drive up their electricity bills to validate blockchain transactions. When miners add a block to the bitcoin blockchain, they are rewarded with enough bitcoin to make their efforts worthwhile. Miners will need to be paid or otherwise incentivized to validate transactions on blockchains that do not use cryptocurrency.

Some solutions to these issues are beginning to arise. For example, bitcoin-mining farms have been set up to use solar power, excess natural gas from fracking sites, or power from wind farms.

• Speed and Data Inefficiency

Bitcoin is an excellent case study for blockchain’s potential inefficiencies. Bitcoin’s PoW system adds a new block to the blockchain in about 10 minutes. At that rate, the blockchain network is estimated to handle only about seven transactions per second (TPS). Although other cryptocurrencies, such as Ethereum, outperform bitcoin, they are still constrained by the blockchain. Visa, for example, has a processing capacity of 65,000 TPS.

For years, people have been working on solutions to this problem. There are currently blockchains with more than 30,000 TPS.

Another issue is that each block can only hold a certain amount of data. The block size debate has been and continues to be one of the most pressing issues for blockchain scalability.

• Illegal Activity

While blockchain network confidentiality protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network. The Silk Road, an online dark web illegal-drug and money-laundering marketplace that operated from February 2011 until October 2013, when the FBI shut it down, is probably the most frequently cited example of blockchain used for illicit transactions.

Using the Tor Browser and making illegal purchases in Bitcoin or other cryptocurrencies, users can buy and sell illegal goods without being tracked on the dark web. Current US regulations require financial service providers to obtain information about their customers when they open an account, verify each customer’s identity, and confirm that the customers do not appear on any list of known or suspected terrorist organizations. This system has both positive and negative aspects, and it allows anyone to access financial accounts while also making it easier for criminals to transact. Many have argued that the good uses of cryptocurrency, such as banking for the unbanked, outweigh the bad uses of cryptocurrency, especially given that most illegal activity is still carried out in an untraceable manner.

While Bitcoin was initially used for such purposes, its transparency and maturity as a financial asset have shifted illegal activity to other cryptocurrencies such as Monero and Dash. Illegal activity now accounts for a very small percentage of all Bitcoin transactions.

• Regulation

Many people in the cryptocurrency community are worried about government regulation of cryptocurrencies. While it is becoming increasingly difficult, if not impossible, to terminate a decentralized network like Bitcoin, governments could theoretically make it illegal to own cryptocurrencies or participate in their networks.

As large companies such as PayPal begin to allow the ownership and use of cryptocurrencies on their platform, this concern has diminished.

• What’s Next for Blockchain?

With many practical applications for the technology already in place and being explored, blockchain is finally making a name for itself, thanks in no small part to bitcoin and cryptocurrency. Blockchain, which has become a buzzword on the lips of every investor in the country, has the potential to make business and government operations more accurate, efficient, secure, and cost-effective by eliminating the need for middlemen.

As we enter the third decade of blockchain, it’s no longer a question of whether or not legacy companies will embrace the technology—it’s a matter of when. Today, we see a proliferation of NFTs and asset tokenization. The coming decades will be a critical period of growth for blockchain.

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