What is the blockchain?
Blockchain is one of the Distributed Ledger technologies. As the name suggests, these technologies are based on a distributed registry that can be read and modified by multiple nodes on a network. Since there is no central body, the validation of registry changes requires the consent of all nodes. How consensus is achieved and the structure of the ledger varies depending on the type of Distributed Ledger technology.
So, at its simplest, blockchain is a digital ledger of transactions. When a transaction occurs, it is recorded as a “block” on the blockchain. Each subsequent transaction is then added to the end of the blockchain in chronological order, creating an immutable record of all past transactions.
Because blockchain is a distributed database, it is incredibly secure. In order for hackers to tamper with the blockchain, they would need to simultaneously hack into thousands of computers around the world – an incredibly difficult feat.
How does it work?
Let’s say John wants to send some money to Jane. This transaction will be recorded on the blockchain as a new block, which will be added to the end of the blockchain. Then, let’s say that Jane wants to send some money to Sarah. This transaction will be recorded on the blockchain as a new block, which will be added to the end of the blockchain after John’s transaction. The blockchain is then able to provide a complete history of all transactions.
Each block is chained to the previous ones using a cryptographic hash function, which is a mathematical algorithm that converts data of any size into a unique string of characters of a fixed length. If even a single character in the input data is changed, the resulting hash will be completely different.
In the blockchain, each block contains a cryptographic hash of the previous block, as well as a timestamp and transaction data. This ensures that each block is unique and cannot be tampered with.
What are the main features of blockchain technology?
- Decentralization: blockchain is a decentralized technology, which means that it is not controlled by any single entity. Instead, it is distributed across a network of computers.
- Immutability: it means that once a transaction is recorded on the blockchain, it cannot be altered. This makes blockchain an ideal platform for tracking assets or data that needs to be tampered-proof.
- Transparency: it means that all transactions are public and can be viewed by anyone. However, blockchain also allows for pseudonymous transactions, for which users can remain anonymous if they choose to.
- Disintermediation: blockchain can be used to remove the need for third-party intermediaries in transactions. As we have seen in the example, if a user wanted to send money to someone, they could do so directly without needing to go through a bank.
- Programmability: it allows users to plan the execution of certain actions when specific conditions occur.
How is it used?
Blockchain is most commonly associated with Bitcoin, Ethereum, other cryptocurrencies, and also digital assets like NFTs. However, it has many other potential uses. Here are just a few examples:
- Smart contracts: a smart contract is a computer program that automatically executes its terms when certain conditions are met. For example, let’s say you want to buy a house. Normally, this would involve hiring a real estate agent, going through a lengthy process of paperwork and negotiation, and then waiting for the deal to close. With a smart contract, you could instead agree to all the terms of the contract electronically, and then the contract would automatically execute when the conditions are met – for example, when the down payment is received.
- Supply chain management and tracking: blockchain can be used to track the movement of goods through a supply chain and give customers more transparency about the origin of a product. For example, let’s say you want to buy a bottle of wine. Blockchain can be used to track the wine from the moment the grape is harvested, through transportation and storage, all the way to the moment it reaches your glass. This would allow you to verify the authenticity of the product and ensure that it has been stored correctly.
- Digital identity management: it is useful to store identity information. For example, you could use blockchain to store your birth certificate, driver’s license, passport, and other personal documents. This would allow you to prove your identity without having to carry around physical copies of your documents.
What are the advantages?
- Security: blockchain is a very secure platform due to its decentralized nature and immutability.
- Traceability: it allows for traceable transactions (but also products), which helps to reduce fraud.
- Efficiency: it can help to streamline processes and reduce the need for intermediaries, which makes transactions faster and more efficient.
- Cost-effectiveness: it can help to reduce costs by eliminating the need for middlemen in transactions.
- Trustless transactions: it means that two parties can transact without needing to trust each other. This is possible because of the decentralized nature of blockchain and the fact that all transactions are recorded on a public ledger.
And what are the disadvantages?
- Scalability: blockchain is not yet scalable, due to its limited capacity and slow transaction times.
- Complexity: blockchain technology is complex and can be difficult to understand for non-technical users.
- Lack of regulation: it is currently unregulated, which could lead to unethical uses, such as money laundering or terrorist financing.
- Security risks: it is a secure technology, but there have been cases of hacking and theft.
- Energy consumption: it is a power-hungry technology, due to the amount of computing power required to maintain the network.
- Environmental impact: since it uses a lot of energy, it can have a negative impact on the environment.
- High Costs: it can be expensive to use, due to the high costs of mining and transaction fees.
The future of blockchain
Although blockchain is still in its early stages and needs to overcome some challenges, it is capable of revolutionizing entire industries, such as finance, healthcare or government. But this decentralized technology could also bring about great changes in people’s everyday lives, for example by streamlining bureaucracy, ensuring the authenticity or wholesomeness of products, creating new forms of investment. In other words, the potential of the blockchain is immense and we haven’t seen it all yet.
