What is blockchain? How does it work? How to use it? Which problems does it solve? What are the reasons to use blockchain? Let’s understand the concept of blockchain technology in simple words!
The first work on a cryptographically secured chain of blocks was described in 1991 by Stuart Haber and W. Scott Stornetta. They wanted to implement a system where documents’ timestamps could not be tampered with or backdated. Once the data enters the block it’s very difficult to modify that data.
We will discuss the following point in this article:
- What is blockchain?
- How does it work?
- How to use it?
- Which problems does it solve?
- 5 reasons to use the blockchain concept.
1. What is blockchain?
As the name says, blockchain is a chain of blocks containing data. These blocks are continuously growing with the list of records and secure with cryptography. Each block of blockchain typically contains a cryptographic hash of the previous block, a timestamp, and transaction data. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. Since blockchain is a distributed ledger, it uses peer to peer network to prevent centralization.
There are basically three types of blockchains which are as below:
There are no access restrictions in public blockchains. Anyone with an internet connection can send transactions to it as well as become a validator (i.e., participate in the execution of a consensus protocol). Usually, such networks offer economic incentives for those who secure them and utilize some type of a Proof of Stake or Proof of Work algorithm.
Some of the largest, most known public blockchains are Bitcoin and Ethereum.
One requires permission to access a private blockchain. One can not join it unless invited by the network administrators. Participant and validator access is restricted.
This type of blockchains can be considered a middle-ground for companies that are interested in blockchain technology in general but are not comfortable with a level of control offered by public networks. Typically, they seek to incorporate blockchain into their accounting and record-keeping procedures without sacrificing autonomy and running the risk of exposing sensitive data to the public internet.
A consortium blockchain is often said to be semi-decentralized. It also requires permission but instead of a single organization controlling it, a number of companies might each operate a node on such a network. The administrators of a consortium chain restrict users’ reading rights as they see fit and only allow a limited set of trusted nodes to execute a consensus protocol.
2. How does blockchain work?
As I mentioned above, a block contains transaction data, a cryptographic hash, and the hash of the previous block. The data stored in the block depends upon the type of the block. For example, a block of bitcoin contains details of a sender, receiver, and the amount.
It contains a unique hash by which we can identify any particular block. It’s like the fingerprint for a human which will never repeat! If the data inside the block is changed then the hash of that block will also change.
These blocks also contain the hash of the previous block which is helpful to keep track of the previous block. It’s also helpful to create a chain of blocks.
As you can see in the above picture, every block contains the hash of the previous block. Thus, complete blockchain is created.
Now as we know, a blockchain works as a peer-to-peer network and everyone can join the network. All nodes in the network have a full copy of the blockchain so that they can verify that everything is perfect and also in order.
When someone creates a new block, every other node gets a copy of that block and verifies that whether the block has tampered with or not? If the block hasn’t tampered then they add that node in their blockchain.
Thus. when a newly created block will be approved by the majority of available nodes, only then it will be added to the blockchain otherwise it will be rejected by other nodes in the network. So, if someone is willing to tamper with one block, he must tamper with all other blocks and he also has to get more than 50% of control over the network otherwise he will not be able to tamper or modify the block.
3. How to use blockchain?
The first blockchain was conceptualized by a person (or group of people) known as Satoshi Nakamoto in 2008 who invented the cryptocurrency bitcoin by using the concept of the blockchain. It serves as the public ledger for all transactions on the network. Through the use of a blockchain, bitcoin became the first digital currency to solve the double-spending problem without requiring a trusted authority and has been the inspiration for many additional applications. (If you want to know more about bitcoin, read the article: What is Bitcoin? Should you invest in bitcoin?)
We can also use this concept in government areas. This will help to reduce and prevent corruption as the economical help provided by the government will be received by the right person directly with the help of peer to peer network without any other person between them who can take any illegal advantage! Also, Institutes can give digital blockchain-based degrees to the students instead of in a paper form. This will help to prevent fake degrees.
The blockchain is also helpful to store medical records, create a digital notary, collecting taxes, recording events. Also, other recording management activities such as identity management, transaction processing documenting provenance, food traceability, voting, and more!
4. Which problems does blockchain technology solve?
The blockchain solves many problems. Some of them are as below:
- In a general sense, as I mentioned above, blockchain technology removes the need for a middleman in contracts and transactions.
- Voting via the blockchain to make elections tamper-proof and immutable.
- We can store data more securely on the blockchain network empowered with the encryption feature.
- Instant monetary transactions, also overseas, instead of wire transfers that take days and banks taking money out.
- The significance of the blockchain is that it is a solution to the Byzantine Generals problem and allows us to create decentralized applications. One significant application is Ethereum.
- As I mentioned in the above section, by using this concept, the problem of corruption can be reduced because the blockchain keeps track of who owns what, even as those things change hands, without requiring some central body to keep track of it all.
- In healthcare, the blockchain is helping to create efficiencies by storing encrypted patient information that is shared across healthcare providers, removing the need for form filling.
- The agriculture industry can better track produce and other products.
- We can assure that only humans can view advertisements with the help of this network and digital advertisers can pay content creators directly, avoiding giants like Facebook and Google.
- The multiple parties in a supply chain can trust that what they receive is accurate and the correct quality as blockchain is secure and trusted.
5. 5 reasons to use blockchain technology:
- Due to the use of a distributed peer to peer network, there is no need for any trusted third party to transfer data or digital currency from one node to another.
- Transparent data transfer, as well as money transfer, is possible with the help of this concept.
- In the case of money transfer, it also becomes cheap as we do not have to pay any extra fees to the third party for the transaction.
- Data will be more secure and very difficult to tamper with. Because if any hacker wants to hack the system which is based on the concept of blockchain then he has to hack too many computers at a time.
- If any node of the network fails, the entire system with blockchain will still work properly without any interrupts.
Thanks for reading the article. I hope you got your answers from this article on “blockchain technology”. Still, if you have any queries, feel free to comment down below. Also, spread the knowledge by sharing it with your friends and family.