Key Insights
- Blockchain technology has become immensely popular over the last few years.
- This technology is mostly related to crypto in everyday conversation but is much deeper than this.
- Blockchains run on a decentralized network of ledgers, also known as nodes.
- Each of these nodes is responsible for enforcing a consensus mechanism, which ensures that blocks are added to the chain correctly.
- Blockchain will likely make its way into more and more industries as the years go by.
Blockchain technology has grown over the years, with words like “crypto” and “web3” now being part of everyday conversations.
This aspect of technology has branched into several industries from Finance to healthcare to supply-chain management.
Even though the word “blockchain” is mostly associated with cryptos like Bitcoin, it still has some deeper applications beyond mere digital money.
What exactly is blockchain technology, and what should you know about it?
Let’s find out.
What Is Blockchain?
At its core, blockchain technology is a decentralized, digital ledger that records transactions across multiple computers.
Think of it as a register in a candy shop, where the sales of every chocolate bar and every piece of candy is recorded.
Now, think of this register as not one book but thousands of similar ones across thousands of other candy shops.
When a transaction is recorded in one book, it appears in all the other registers (which are called nodes).
This makes sure that anyone can walk into any candy shop and obtain the transaction details of every single sweet that has ever been sold.
Blockchain technology is a lot more complicated than this analogy, but the candy shop paints a pretty good picture.
The sync between all the nodes of any blockchain ensures that data remains transparent and immune to tampering.
Unlike having a single database controlled by a single entity, blockchain operates a peer-to-peer network between nodes.
This makes sure that no single entity can fraudulently record a transaction without being caught.
Each record in the blockchain is called a block, and these “blocks” are linked to one another in chronological order (hence the name blockchain).
Once a block has been added to the chain, it becomes impossible to “go back in time” and alter transactions in previous chains.
This is one of the aspects that makes blockchain an incredibly secure way to store information.
How does Works?
Remember how we mentioned that the candy shop analogy is a simplified version of things?
Blockchain technology depends on several major components to work properly. Here are the main processes:
1. Transaction Initiation
Every interaction on a blockchain starts with a transaction. This “transaction” could be related to moving money around, executing a smart contract, or transferring digital assets like NFTs.
Once a user initiates a transaction, it is broadcast to the rest of the network (or nodes) for validation
2. Verification and Validation
Once these nodes confirm that the transaction indeed happened (and wasn’t fraudulently added), the blockchain uses what is known as a consensus mechanism to proceed.
There are several kinds of consensus mechanisms, and the most common ones include:
Proof of Work (PoW)
This type is used by Bitcoin, Dogecoin, Litecoin and many other popular networks. PoW networks employ the services of “miners” to solve complex mathematical puzzles. Once solved, the miners are allowed to verify transactions and add new blocks to the chain.
Proof of Stake (PoS)
This mechanism is used by Ethereum and many others. Unlike PoW, PoS uses validators to verify transactions.
These validators ‘stake’ or lock up a certain number of tokens within the network and are randomly chosen to validate transactions. If a validator fraudulently attempts to alter transactions and is caught, they lose a portion of their “stake.”
3. Block Creation
After validation, transactions are grouped with others and are added to a block. This block is seeded with a special cryptographic hash (more like a digital fingerprint) that allows anyone to verify that it is valid.
Each block is also stamped with an identifier that references the previous block.
4. Consensus and Block Addition
For a block to be added to the blockchain technology, the majority of the network’s participants (nodes) must agree that it is valid.
Once these nodes agree that the block is valid, it is added permanently to the chain and cannot be changed.
5. Decentralized Storage
A good question to ask would be “Why have multiple registers in the candy shop?”
Having multiple registers makes sure that even if some shops burn down or go bankrupt, the integrity of the chain remains intact.
As long as at least one node is intact, the blockchain can be brought back onto its feet.
Key Features of Blockchain
Blockchain technology is so popular because of several of its major characteristics.
Blockchain technology stands out due to several defining characteristics. Some of these include:
1. Decentralization
Unlike traditional systems controlled by central authorities (like banks or governments), blockchain operates within a distributed network.
This reduces the risks of manipulation, and there is no single point of failure.
2. Transparency
All transactions on the blockchain technology are visible to anyone, anywhere in the world. This leads to accountability among network participants. The only exception to this is with private blockchains, which offer restricted access.
3. Immutability
Once a block is added to the blockchain, it cannot be changed. This means that blockchains are highly secure and fraud-resistant.
4. Security
Blockchain technology uses advanced cryptography to protect user data. This makes it incredibly difficult for hackers (or anyone else) to change records without being caught.
Putting It All Together
The applications of blockchain are limitless. This technology is already being used in a wide range of industries like Finance and Banking, supply-chain management, healthcare, real estate, and even voting systems.
Its future remains bright, especially as it continues to evolve rapidly.
In the world today, governments and other major entities are also exploring this technology for various applications.
This ranges from Central Bank Digital Currencies (CBDCs) to secure data sharing and so much more.
As the technology continues to mature, we can expect blockchain to become more and more integrated into aspects of everyday life.
