Blockchain as we know it today was introduced to the world in 2009 as the backbone of the Bitcoin ecosystem. Over a decade later, looking at the trends in the market and the rate at which this technology is getting adopted in a plethora of industries outside of finance, it is imperative for us to understand its nature and its working to make more sense of what’s happening around us.
So if your question is ‘what is blockchain in cryptocurrency?’ or ‘how does blockchain work?’, you have come to the right place. Let’s find out!
What is Blockchain?
Blockchain is a decentralized and distributed database system used to record and organize a range of transactions from across the world. But what makes it stand out? Blockchain makes use of distributed ledger technology (DLT), which is a digital system that records transactions and saves them in multiple places, called nodes, simultaneously.
To change or record an entry, it needs verification from all the nodes who uphold the network, making it nearly impossible for someone to break in from one single node and make any changes to the data.
Blockchain first came into existence in 2009 when a person or maybe a group of people named Satoshi Nakamoto (a pseudonym) developed this technology as a public ledger for Bitcoin transactions. This development paved the way for a new era of investment and revolution in finance, and now with time, it has started spreading to other fields and areas as well.
How Does Blockchain Work?
1. Transaction Process
To understand ‘what is blockchain in cryptocurrency?’ in-depth, one needs to know how blockchain transactions occur. The blockchain has originally been designed in a way that a central authority doesn’t control it; instead, the transactions and their entries are to be verified by all network modes as it is almost impossible to make any alterations on the chain afterward. After a transaction is initiated by one party, a verification process takes place to enter it into the blockchain, where most computers or nodes included have to verify that the transaction is completely valid. Once that is done, the transaction is added to a block, and the receiver finds the transacted funds in their wallet.
2. Attributes of Cryptocurrency
Blockchain was originally developed to store cryptocurrency transactions. Cryptocurrency is an intangible asset, purely existing digitally; hence, safeguarding its transactions online is a major concern. Blockchain is used to send and receive these assets while providing the highest security level and ensuring that no malicious activity leads to the illegal possession of crypto assets.
How Are Blockchains Used?
After establishing ‘what is blockchain?’ and ‘how does blockchain work?’, it is important to know how it is used. When blockchain was developed, the sole purpose of the technology was to keep records of cryptocurrency-related transactions. Even now, this technology’s primary use is as a distributor ledger for crypto, like Bitcoin, Ethereum, LiteCoin, and more.
However, blockchain has started spreading its wings into other areas and fields. Over the last few years, multiple corporations and institutions have been investing in blockchain technology. Worldwide expenditure on blockchain solutions is expected to reach $19 billion by 2024. Indeed, more and more people are realizing the potential of blockchain technology and its wider applications. The following are the ways in which blockchain technology is being used across industries and markets:
1. Banking and Finance
The use of blockchain in banking has the potential to make the industry decentralized while expediting many processes. Sending and receiving funds through blockchain eradicate the additional fees that get slapped on while making transactions through traditional channels. It can also help speed up the process, as instead of relying on custodial services, all transactions can be settled on a public blockchain.
Data security is one of the major concerns in the healthcare sector today, and blockchain as an incorruptible database can solve this problem. With blockchain, patient records can be sent and received without the threat of illegal possession, and the supply chain of medicines and related items can be managed better. It can elevate the standards of present-day healthcare and help it reach new heights in terms of technology and services.
3. Property Records
Taking the process of property acquisition and registration to the blockchain can take it to the whole next level. Putting up the documents and records on the chain can bring utmost transparency to the procedure, making it much easier to transfer ownership. Any changes in the records can be tracked easily, and corruption in the process can be avoided to a large extent.
4. Smart Contracts
Smart contracts are automated contracts established without a third party interfering and thus can be executed fully or partially without human interaction when the conditions written in its code are satisfied. Smart contracts lend efficiency, transparency, accuracy, and security principles in any blockchain use case.
5. Supply Chains
Employing blockchain technology in supply chain management will bring about a drastic change in the transparency of the process. A lack of transparency among different levels in the supply chain can be tackled by incorporating this technology into the business. Further, it can help keep clear records that aren’t susceptible to alterations.
The voting process is a crucial affair in terms of confidentiality, and in the history of every republic, there have been attempts to compromise that very factor in elections. Bringing it to the blockchain will establish the necessary security protocols, like decentralized nodes, end-to-end verification, and more. It brings much more transparency, accuracy, and convenience to the table.
Pros and Cons of Blockchain
So what are the pros and cons of blockchains? Let’s find out:
Benefits of Blockchains
With the introduction of blockchain technology in a range of industries starting from education to healthcare and more, significant changes in terms of performance and outputs have been noticed. Implementing such a technology removes all kinds of opacity and makes the system much more efficient and accurate. Here are some benefits of incorporating blockchain technology in a wide spectrum of services and procedures:
1. Accuracy of the Chain
Any transaction or entry in the blockchain network requires an extensive verification process. That leaves a minimal margin for inaccuracy, making it as reliable as possible. Any alteration in the entries, too, requires a series of complex steps in order to keep the information accurate.
2. Cost Reductions
Using blockchain technology, especially in the finance and banking sector, results in cost reductions to a considerable extent. As blockchain removes the necessity for intermediaries and mediators in transactions, it also removes extra costs brought on by them. It also reduces operational costs in both domestic and international transactions.
Decentralization refers to the process of taking away the decision-making power from any single entity and giving it to a distributed network. Blockchain works on the principle of decentralization, where no one person, group, organization, or even government has absolute control over its functions, information, and related technicalities.
4. Efficient Transactions
Blockchain technology takes away the hassle of extensive paperwork and human involvement. The system works in real-time whereas the traditional forms of transaction take time, even a few days in terms of cross-border transfer of funds. Removing these aspects expedites the process, making it much more efficient.
5. Secure Transactions
Blockchain technology works on the concept of encryption, and consensus from all network nodes is required to add or rectify any data stored on the chain. Further, blockchains are immutable, so what data has been stored once can never be reversed. All these factors add to the sheer extent of security blockchains can provide.
Blockchain, being decentralized, is accessible to any node from anywhere in the world for the purpose of data verification. Every block in every chain is visible, and each transaction can be clearly tracked. Because of its extreme security measures, viewers can’t alter any information on the blockchain. Thus, the visibility and security of information ensure that all transactions are as transparent as possible.
7. Banking the Unbanked
When blockchain technology is combined with finance, it ensures the inclusivity of the unbanked. Where the regular transfer of funds is expensive, takes time, and requires a bank account, transactions over the blockchain are instant, way cheaper, and don’t need a bank account.
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Drawbacks of Blockchains
Just like any other piece of technology, blockchain too comes with its set of ups and down. If it provides endless positives, expect some drawbacks as well, more so because this technology is rather new and continuously evolving. As you find out ‘what is blockchain in cryptocurrency?’, it’s pivotal to understand the challenges that come with this technology:
1. Technology Cost
Though most of the blockchain solutions are open source, the implementation cost of the technology is huge. To incorporate blockchain in any business venture, hiring developers and experts in the technology is also pivotal, which adds to the cost. Any additional paid blockchain services cost extra, sometimes making it an overall expensive deal.
2. Speed and Data Inefficiency
When overburdened, a blockchain’s agility in processing transactions can be severely impacted, and as new blocks are added to the chain, the extent of storage required for the data can further cause the system to grow inefficient.
3. Illegal Activity
While blockchain implements maximized security protocols, cyber criminals are always a threat, as they can still find out loopholes to launch attacks. Blockchains have yet a long way to go to staunch such illegal activities.
With blockchain technology being relatively new, governments across the world have still been trying to figure out how to regulate it. As of now, there is no uniformity in its regulation; hence, you must be aware of the regulatory measures across jurisdictions before using blockchains to make a transaction.
We do hope this post has answered your range of questions, like ‘what is blockchain in cryptocurrency?’ and ‘how does blockchain work?’ and more. The integration of this technology across industries has brought about security, transparency, accuracy, and efficiency to many procedures. However, one also needs to be aware of its drawbacks before diving deep into it.
Frequently Asked Questions (FAQs)
1. What is the Definition of Blockchain?
Blockchain refers to a secured distributed ledger system that records transactions that take place digitally in a way that the information can’t be hacked, changed, or manipulated. It involves extensive coding and encryption in order to make it visible to the viewers but still impenetrable to hackers.
2. What’s the Difference Between a Private Blockchain and a Public Blockchain?
Public blockchains are open networks where anyone can join, read, write, or participate in the blockchain. It is decentralized and no one has the authority over the chain or the information fed into it. Private blockchains, on the other hand, are managed by a group of network administrators and one needs to get permission to be a part of this network.
3. Who Invented Blockchain?
Blockchain, as we know it today, was invented by a person or a group of people named Satoshi Nakamoto, which is a pseudonym. The identity of the developer or the developers has been under wraps since day one, and no one still knows the truth about it.
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