Blockchain Explained

What Is a Blockchain, and How Is It Different from a Traditional Database?

Each node on a computer network has a copy of the blockchain’s database. A blockchain is a digital database that stores information electronically. Keeping a record of transactions in a decentralized and secure manner is the primary function of blockchains, which are most commonly associated with cryptocurrency systems such as Bitcoin. A blockchain’s innovation is that it ensures the integrity and security of a record of data without the need for a trusted third party, thereby creating trust.

The structure of the data is a major difference between a typical database and a blockchain. A blockchain organizes data into blocks, each of which contains a specific set of data. A chain of data known as the blockchain is created when a block is filled to capacity and linked to the previous block. That newly added block’s information is compiled into a new block that will be added to the chain once it’s full.

Data in a database is typically organized into tables, whereas data in a blockchain is organized into blocks (as the name suggests) that are linked together. When implemented in a decentralized manner, this data structure creates an irreversible time line of data. When a block is filled, it becomes a permanent part of this timeline and cannot be changed. When a block is added to the chain, it is given an exact time stamp.

The following are the most important takeaways.

  • Unlike traditional databases, blockchains store data in blocks, which are linked together using cryptography, making them a unique type of shared database.
  • Data is entered into a new block as soon as it’s received. To keep things in chronological order, the blocks are joined together once they’ve been filled with data.
  • The most common use of a blockchain so far has been as a transactional ledger, but other types of information can be stored.
  • Because of the decentralized nature of Bitcoin’s blockchain, no single person or group is able to exert control over the currency.
  • The data entered into a decentralized blockchain is immutable, which means that it cannot be changed. Because of the open nature of Bitcoin, all transactions are available to anyone who has access to the blockchain.

Digital information can be recorded and distributed but cannot be edited using blockchain technology. To put it another way, a blockchain serves as a skeleton for immutable ledgers, which are records of transactions that cannot be changed and cannot be deleted or destroyed. As a result of this, blockchains are also referred to as a distributed ledger technology (DLT).

The blockchain concept was first proposed as a research project in 1991, long before its first widespread application in use: Bitcoin, which was launched in 2009. Decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts have all emerged as a result of the proliferation of blockchain technology in the last few years.

Decentralization of the Bitcoin Blockchain’s Transaction Processes

There are 10,000 computers in an enormous server farm used by a company to store its customers’ account information. These computers are all housed in a single warehouse building, and this company has complete control over all of them and the information they contain. It’s a single point of failure, however. What will happen if the power goes out at that location? What would happen if its Internet connection was cut off?? What if it all goes up in flames? How devastating would it be if a malicious individual were to delete everything with a single keystroke? Lost or corrupted files are a result of any of the above scenarios.

Using a blockchain, a database can be spread across multiple network nodes in different locations. Because the database contains multiple copies of each record, any attempt to alter a record at one location would not affect other locations and thus prevent any malicious activity. This not only provides redundancy, but it also helps ensure the integrity of the data stored therein. Because all other nodes would cross-reference each other, it would be easy to identify the node that tampered with Bitcoin’s record of transactions. This system aids in the creation of a chronologically precise and unambiguous record of events. This ensures that no single node in the network has the ability to alter the data it contains.

There is no way to undo the information and history of a cryptocurrency transaction because of this.

Many different kinds of information can be stored on the blockchain in addition to transactions, including legal contracts, state IDs, and a business’ product inventory.

It is necessary for a majority of the decentralized network’s computing power to agree to validate new entries or records in a block. Consensus mechanisms such as proof of work (PoW) or proof of stake (PoS) are used to ensure that bad actors cannot validate fraudulent transactions or double-spends on blockchains (PoS). It is possible to reach agreement even if there is no single node in charge.

Transparency

There are two ways to view transactions on the Bitcoin network: by running your own node or by using blockchain explorers that allow anyone to see transactions taking place in real time. As new blocks are confirmed and added to the chain, each node’s copy of the chain is updated. Tracking Bitcoin’s movements is now possible because of this.

For example, in the past, exchanges have been hacked, resulting in the loss of all Bitcoins stored there. Even if the hacker is completely anonymous, the stolen Bitcoins can be tracked down. If some of these hacks’ stolen Bitcoins were moved or spent somewhere, the location would be known.

Encryption is standard practice for all data stored in blockchains, including Bitcoin’s. In this case, only the person who owns a record can decrypt it and reveal their true identity (using a public-private key pair). Blockchains allow users to remain anonymous while still maintaining transparency.

Is Blockchain Safe?

Decentralized security and trust are possible thanks to the blockchain technology. First, new blocks are always stored in chronological order and in a logical progression. They are always added to the “end” of the blockchain, in other words. Blockchains cannot be changed once they have been inserted into a chain and cannot be changed until a majority of network members agree to do so. In addition to the hash of the previous block and the time stamp mentioned earlier, each block contains its own unique hash. Mathematical functions are used to generate hash codes, which are strings of numbers and letters. The hash code changes if that information is changed in any way.

A hacker who also runs a node on the blockchain network wants to alter the chain and steal everyone’s cryptocurrency, for example. Because of this, if they were to alter their own copy, it would no longer be in sync with the rest of the copy. Everyone would see this one copy stand out when they cross-checked their copies against each other, so the hacker’s version of the chain would be rejected.

Successfully carrying out such a hack requires controlling or altering at least 51% of the copies of the blockchain at the same time in order to achieve the desired outcome. Because the blocks would need to be redone with new timestamps and hash codes in such an attack, it would cost a lot of money and resources.

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As many cryptocurrency networks grow in size and speed, the cost to pull off such a feat is likely impossibly high. For one thing, it would be a huge waste of time and money. It would be impossible to go unnoticed if such a drastic change were made to the blockchain. They would then hard fork off to a new chain that had not been affected by the attack. This would make the attack pointless, as the bad actor would have control of a worthless asset as a result of this. If the bad guy were to attack the new Bitcoin fork, the same thing would happen. Participating in the network is more lucrative than attacking it because of this design.

Blockchain vs. Bitcoin

Stuart Haber and W. Scott Stornetta, two researchers interested in implementing a system that prevented tampering with document time stamps, first proposed blockchain technology in 1991. There was a time in the late 1990s that blockchain had its first real-world application: with Bitcoin’s launch in 2009.

A blockchain is the foundation of the Bitcoin protocol. Bitcoin’s pseudonymous inventor, Satoshi Nakamoto, described it as “a new electronic cash system that is fully peer-to-peer, with no trusted third party” in a research paper introducing the digital currency.

To put it another way, Bitcoin only uses blockchain to keep track of transactions, but the technology could theoretically be used to store any number of data points. Transactions, votes in an election, product inventories, state IDs, deeds to homes, and much more are all examples of this.

More than just recording transactions, blockchains are now being used in a wide range of ways to benefit society, including as a way to vote securely in democratic elections. The immutability of the blockchain means that fraudulent voting will be much more difficult to perpetrate in the future. When it comes to voting, for example, a single cryptocurrency or token could be issued to each citizen of the country to be used in the election process. Voters would then send their tokens or crypto to the wallet address of the candidate they want to support, which would be assigned to each contender. Blockchain would eliminate both the need for human vote counting and the ability of bad actors to tamper with physical ballots, thanks to its transparent and traceable nature.

Blockchain vs. the Banks:

It has been predicted that blockchains will upend the financial industry, particularly in the areas of payments and banking. Although banks and blockchains are vastly different, they share a lot of similarities.

Let’s compare the banking system to Bitcoin’s implementation of blockchain in order to see how a bank differs from blockchain.

What Is the Purpose of Blockchains?

Coin transactions are recorded in a block on the Bitcoin blockchain. On the blockchain, there are currently more than 10,000 other cryptocurrencies. However, it has been discovered that blockchain can be used to store data about other kinds of transactions as well, as previously thought.

Walmart, Pfizer, AIG, Siemens, and Unilever are just a few of the many companies already using blockchain. When it comes to food products, IBM has created a blockchain called Food Trust to track their journey.

What’s the point of doing this? E. coli, salmonella, and listeria outbreaks, as well as the accidental introduction of hazardous materials into food, have plagued the food industry for decades. These outbreaks and illnesses have previously taken weeks to find the source or the cause of. Brands can track a food product’s journey from its origin to its final delivery using blockchain technology. Food contamination can be traced back through every step of its journey to its source. That’s not all; these companies can also see everything else it may have come into contact with, which could save lives by allowing the problem to be identified sooner. It’s just one example of how blockchain is being used, but there are many others.

Finance and banking

Banking is perhaps the most well-positioned industry to gain from the adoption of blockchain technology. On business days, banks and other financial institutions are only open for business. Due to the nature of the banking system, you may not be able to deposit your check until Monday morning at the earliest. Even if you deposit during normal business hours, the transaction may still take one to three days to be verified due to the volume of transactions banks must process. Aside from Bitcoin and Litecoin, blockchain never sleeps.

The time it takes to add a block to the blockchain, which is roughly 10 minutes, can be incorporated into banks, allowing customers to see their transactions processed in as little as 10 minutes, regardless of holidays or the time of day or week. With blockchain technology, banks have the ability to transfer funds more quickly and securely between institutions. To put it another way, the settlement and clearing process in the stock trading business can take up to three days (or longer, if trading internationally), meaning that all of your money and stock is frozen for that time.

Because of the large sums involved, even a few days in transit can pose significant costs and risks to banks. Santander and its research partners estimate that $15 billion to $20 billion in annual savings is possible. If blockchain-based applications are used to cut banking and insurance costs by up to $16 billion annually, Capgemini, a French consulting firm, estimates.

Currency

Cryptocurrencies like Bitcoin are built on a foundation of Blockchain technology. The Federal Reserve is in charge of the US dollar. A user’s data and currency are in the hands of their bank or government under this central authority system. Private information belonging to customers is at risk when their bank accounts are compromised. Currency values may decline if the client’s bank fails or the client lives in a country with an unstable government. In 2008, a number of failing banks were partially bailed out by the government. These are the concerns that sparked Bitcoin’s inception and development.

For Bitcoin and other cryptocurrencies to work without a central authority, blockchain spreads its operations across a large network of computers. As a result, many of the transaction and processing fees are eliminated. If you’re a business owner in a country with unstable currencies or financial infrastructures, this could help you get your hands on more stable currency that has a wider range of applications.

For people without state identification, using cryptocurrency wallets for savings accounts or as a method of payment is especially significant. War-torn or government-less countries may not have the infrastructure to provide IDs for citizens. Citizens of these countries may not be able to access savings or brokerage accounts, which means they have no safe place to keep their money.

Healthcare

Patients’ medical records can be stored securely using blockchain technology. It is possible to store medical records in the blockchain, which provides patients with proof and confidence that the records cannot be altered.. To ensure privacy, these records could be encoded with a private key and stored on the blockchain, where they can be accessed by only those with the private key.

Records of a property

Recording property rights is a tedious and time-consuming process if you’ve ever been to your local Recorder’s Office. A physical deed must be delivered to a government employee at the local recording office, where it is manually entered into the county’s central database and the public index. The public index must be reconciled with claims to the property in a property dispute.

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An inaccuracy can make it more difficult to track the ownership of a piece of property, making this process expensive and time-consuming. To put it another way, a blockchain could eliminate the need to scan and locate physical records in a local recording office. Owners can have confidence that their deed is accurate and permanently recorded if it is stored and verified on the blockchain.

It’s nearly impossible to prove ownership of a property in war-torn countries or areas with little to no government or financial infrastructure, let alone a Recorder’s Office. Using blockchain technology, a group of residents in such an area could establish clear and transparent time lines for property ownership.

Contracts with a Smart User Interface

It is possible to build a smart contract into the blockchain to facilitate, verify, or negotiate a contract agreement using a computer code. In order for smart contracts to work, users must accept a set of conditions in advance. There are certain conditions that must be fulfilled before agreement can be fulfilled.

Let’s say a prospective tenant wants to lease an apartment through the use of a smart contract. Tenant gets apartment door code as soon as security deposit is paid if landlord so desires. Both the tenant and the landlord would send their respective portions of the deal to the smart contract, which would hold and automatically exchange the door code for the security deposit on the date when the lease begins. The smart contract returns the security deposit if the landlord fails to provide the door code by the lease start date. The use of a notary, a mediator, or an attorney would no longer be necessary, saving time and money.

Chains of supply

Suppliers, like IBM Food Trust, can use blockchain to keep track of the origins of materials they buy. There are many common labels, such as “Organic,” “Local,” and Fair Trade, that companies can use to verify the authenticity of their products.

In the food industry, the use of blockchain is becoming more prevalent as a way to ensure the safety and traceability of food from farm to consumer.

Voting

Modern voting could be made easier with the help of blockchain, as previously mentioned.. Election fraud could be eliminated and voter turnout increased by using blockchain voting, as demonstrated in the November 2018 midterm elections in West Virginia. A vote tampered with in this manner would be virtually impossible using blockchain technology. It would also reduce the number of people needed to conduct an election and provide officials with almost instant results using the blockchain protocol. Recounts would be unnecessary, and there would be no real risk of election fraud.

Blockchain: Pros and Cons

Despite its complexity, the decentralized record keeping potential of blockchain is virtually limitless. There are likely to be other uses for blockchain technology besides the ones listed above, such as improved privacy and security for users, reduced processing fees, and fewer processing errors. However, there are some drawbacks.

Pros

Automated verification procedures have improved accuracy by eliminating the need for human intervention.

By eliminating the need for third-party verification, companies can save money.

Decentralized systems are more difficult to manipulate.

A safe and efficient means of exchanging value is provided.

Technology that is completely transparent.

Gives citizens of countries with unstable or underdeveloped governments an alternative banking option and a way to protect their personal information.

Cons

A large amount of money is spent on technology to mine bitcoins.

Transactions per second are low.

Utilization history involving criminal activity, such as on the dark internet

Regulations vary from jurisdiction to jurisdiction and remain hazy.

Limitations on the amount of data that can be stored

The Chain’s Accuracy Benefits of Blockchains

One computer is responsible for approving each transaction on the blockchain network. As a result, there is less human error and a more accurate record of information because there is less human intervention. Any mistakes made by other computers would only affect one copy of the blockchain. It would take at least 51% of the computers on the network to make that mistake, which is nearly impossible on a network as large and growing as Bitcoin’s.

Cost-cutting measures

When a customer wants to verify a transaction, a notary or a minister usually charges a fee. There is no longer a need for third-party verification and the associated costs that come with it, thanks to blockchain technology. Small fees are incurred when businesses accept credit card payments because banks and payment-processing companies must process those transactions. When it comes to Bitcoin, there isn’t a central bank, so there are no transaction fees.

Decentralization

All of the information in the Blockchain is not held in a single location. Instead, a network of computers copies the blockchain. Every time a new block is added to the blockchain, each computer on the network updates its blockchain to reflect the new information. It is more difficult to tamper with information that is spread across a network rather than stored in a single database. A single copy of the blockchain, rather than the entire network, would be compromised if a hacker gained access to it.

Transactions that run smoothly.

It can take up to a few days for transactions made through a central authority to be finalized. If you try to deposit a check on Friday night, for example, you might not see the money in your account until Monday morning. Blockchain, on the other hand, works around the clock, seven days a week, and 365 days a year, unlike financial institutions that operate during business hours. There is no need to wait for days or even weeks for a transaction to be completed. Because of time zone differences and the fact that all parties must confirm payment processing, cross-border trades tend to take longer.

Transacting in Privacy

Anyone with an Internet connection can see a list of the network’s transaction history on many blockchain networks, which operate as public databases. A user’s transactions can be viewed, but his or her identity cannot be discerned from those transactions. Bitcoin and other blockchain networks like Ethereum are not anonymous, but rather confidential.

A user’s unique code, referred to as a “public key,” is recorded on the blockchain when they make a public transaction. There is no access to their personal data. It is still possible for someone to purchase Bitcoin on an exchange that requires identification, but the transaction, even when linked to a specific person’s name, does not reveal any personal information.

Transparency in Business Transactions

Authenticity is verified by the blockchain network after a transaction has been recorded. On the blockchain, tens of thousands of computers scramble to verify the purchase’s accuracy. The transaction is added to the blockchain block after a computer verifies it. The unique hash of the previous block and its own unique hash are included in each block of the blockchain. The hash code of a block changes if any of the information on the block is changed, but the hash code of the block following it does not. Because of this discrepancy, it’s nearly impossible to make a change to data stored on the blockchain without being noticed.

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Transparency

Open-source software is the norm when it comes to blockchains. This means that anyone with a web browser can see the source code of the application. This enables auditors to examine the security of cryptocurrencies like Bitcoin. The lack of a central authority over Bitcoin’s code and how it is edited also means that no one can really be trusted. As a result, anyone with an idea for improving the system is welcome to submit it. Bitcoin’s code can be upgraded if a majority of the network’s users agree that the new version is sound and worthwhile.

Unbanked People’s Banking

As far as blockchain and Bitcoin are concerned, the ability to use it by anyone is perhaps the most profound aspect of it. Most people in the world don’t have bank accounts or any other way of keeping their money or wealth safe. People in developing countries, where cash is the only currency, make up a large portion of this group.

It is not uncommon for these people to be paid in cash. In order to protect themselves from robbery or unnecessary violence, they must store this cash in secret locations in their homes or other places of residence. Bitcoin wallet keys can be stored on paper, on a cheap cell phone, or even memorized if required. It is likely that for most people, these options are easier to conceal than a small bundle of cash under a mattress.

Blockchains of the future are also looking for ways to store medical records, property rights, and a wide range of other legal contracts in addition to wealth.

The drawbacks of Blockchain technology are expensive.

Although blockchain can save users money by reducing transaction fees, the technology is not completely without cost.. For example, the Bitcoin network’s PoW system, which is used to verify transactions, uses a lot of computational power. When it comes to real-world power consumption, the millions of computers on the bitcoin network consume close to what Denmark consumes each year.

In spite of the high electricity costs associated with mining bitcoin, users continue to spend their money on the blockchain. Miners are rewarded with enough bitcoin to make their efforts worthwhile when they add a block to the bitcoin blockchain. If you’re using a blockchain system that doesn’t use cryptocurrency, you’ll need to pay miners to verify transactions.

Some solutions to these problems are starting to emerge. Many bitcoin mining farms have been set up to use solar power, excess natural gas from fracking sites, or power from wind farms. For example

Data Inefficiency and Speed

Using Bitcoin as a case study, we can see the potential inefficiencies of blockchain technology. It takes about 10 minutes for a new block to be added to the Bitcoin blockchain using the PoW system. According to this rate, it’s estimated that the blockchain network can only handle about seven transactions per second (TPS). Even though Ethereum is a better performing cryptocurrency than bitcoin, the blockchain is still a constraint. Visa, for example, has the capacity to process 24,000 TPS.

Efforts to solve this problem have been ongoing for years. More than 30,000 transactions per second (TPS) are possible on some blockchains.

Furthermore, the amount of data that can be stored in a single block is limited. When it comes to blockchain scalability, block size has been and will continue to be one of the most contentious issues.

Acts Prohibited by Law

However, the blockchain network’s anonymity allows for illegal trading and activity to occur, despite the fact that it protects users from hacks. One of the most frequently cited examples of illicit transactions using blockchain technology is Silk Road, a dark web illegal-drug and money-laundering marketplace that operated from February 2011 to October 2013.

With the help of the Tor browser, users can buy and sell illegal goods without being tracked by using Bitcoin or other cryptocurrencies to conduct transactions. When customers open an account with a financial service provider in the United States, they must provide personal information, verify their identity, and ensure that they are not on any list of known or suspected terrorist organizations. This system has both advantages and disadvantages. Anyone can access financial accounts, but it also makes it easier for criminals to conduct business. Even though the bad uses of cryptocurrency outweigh the good ones, such as banking the unbanked world, many argue that the good uses of cryptocurrency outweigh the bad ones.

Bitcoin’s transparency and maturity as a financial asset have actually led to illegal activity moving to other cryptocurrencies like Monero and Dash. Only a small percentage of all Bitcoin transactions are used for illegal purposes today.

Regulation

Many in the cryptocurrency community are concerned about the government’s plans to regulate the industry. As Bitcoin’s decentralized network grows, it becomes increasingly difficult and nearly impossible to shut it down. However, governments could theoretically make it illegal to own or participate in cryptocurrencies or their networks.

PayPal, for example, is now allowing users to own and use cryptocurrencies on its platform, reducing this concern.

So what is a blockchain platform?

Using a blockchain platform, users and developers can create new applications for an already established blockchain. Ethereum, for example, has a native cryptocurrency known as ether that is used to buy and sell goods and services (ETH). ICOs and non-fungible tokens can also be created on the Ethereum blockchain, thanks to smart contracts and programmable tokens (NFTs). Using Ethereum’s infrastructure, these are all built up and secured by Ethereum nodes on the network.

Is there a limit to how many blockchains there can be?

We’re seeing a steady increase in the number of active blockchains. About ten thousand cryptocurrencies and non-cryptocurrency blockchains are expected to be in use by 2021, with many more to follow.

Private and public blockchains have different features.

The term “permissionless” or “open” refers to a blockchain network that allows anyone to join and set up a node. These blockchains must be protected by cryptography and a consensus system like proof of work because of their open nature (PoW).

Private or permissioned blockchains require each node to be approved before joining. A more robust layer isn’t necessary because nodes have been deemed safe and secure.

Who came up with blockchain?

This idea for a system where document time stamps couldn’t be tampered with was first put forth by Stuart Haber and W. Scott Stornetta in 1991. To secure a digital payment system known as “bit gold” in the late 1990s, cryptopunk Nick Szabo proposed using a blockchain (which was never implemented).

What’s next for the blockchain?

At the age of 27, blockchain is finally making a name for itself, thanks in no small part to bitcoin and cryptocurrency. It’s no surprise that blockchain has become a buzzword in the minds of investors across the country, as it has the potential to improve business and government operations in a number of ways.

It’s no longer a question of whether or not legacy companies will adopt blockchain technology—a it’s question of when. There has been an increase in the use of NFTs and the tokenization of assets in recent years. The next few decades will be critical for blockchain’s development.

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