Blockchain technology has completely changed the way we do business and has provided new opportunities and solutions to preexisting problems across many industries. Blockchain is fundamentally a distributed, decentralized ledger that securely and openly records transactions. This ground-breaking technology has the power to fundamentally alter the way we communicate, conduct business, and store data, challenging old structures and introducing new heights of effectiveness, security, and reliability. In this article, we’ll look more closely at what blockchain is, how it operates, and the advantages and difficulties of its widespread adoption
What is Blockchain?
A distributed database or ledger used by each of the nodes of a computer network is known as a blockchain. However, they are not only used in cryptocurrency systems, where they play a vital function in keeping a private and decentralized log of transactions. Blockchains can be used by any business to make data immutable, which is another word meaning unchangeable.
Since a block cannot be modified once it has been constructed, the only time trust is necessary is when a person or program submits data. This feature lessens the requirement for trustworthy third parties, who are typically auditors or other people who incur expenses and commit errors.
Since the introduction of Bitcoin in 2009, the number of blockchain applications has increased as a result of the creation of numerous cryptocurrencies, DeFi applications, non-fungible tokens, and smart contracts.
How do Blockchains Work?
You may be familiar with databases or spreadsheets. Because a blockchain is a database in which data can be input and kept, they are relatively comparable. But what separates a blockchain from a traditional database or spreadsheet is the way the data is set up and retrieved.
The tasks you would ordinarily conduct in a database, such as entering and retrieving information, saving it, and preserving it somewhere, are carried out by software programs known as scripts that make up a blockchain. For a distributed blockchain to be genuine, many identical copies must be kept on multiple computers.
The blockchain collects transaction data and stores it in blocks, just like a spreadsheet’s column would. When it is filled, the data is processed by an encryption method, which yields a hash, or hexadecimal number.
The hash is subsequently added to the header of the following block and encrypted alongside the block’s other data. This results in a chained-together group of blocks.
How do Transactions Carry out?
According to the blockchain they are taking place on, transactions have a specific workflow. For instance, starting a transaction on the blockchain of Bitcoin using your Bitcoin wallet—the program that acts as the blockchain’s user interface—starts a series of events.
Your transaction in Bitcoin is delivered to a memory pool, where it is held in a queue until it is picked up by a miner or validator. Once it is added to a block, the block is sealed and encrypted using an encryption method once the block is full of transactions. The mining then starts.
The entire network is working all at once to “solve” the hash. Other than the “nonce,” which stands for “number used once,” each one produces a random hash.
Each miner begins with a nonce of zero, which is added to their hash and is produced at random. A value of one is added to the nonce and a new block hash is produced if that sum is not equal to or less than the intended hash. This goes on until a miner creates a valid hash, winning the contest and collecting the payout.
A transaction is finished after the block is closed. The block is not regarded as confirmed until five more blocks have been verified. The first block contains your transaction and the five blocks after it takes the network, multiplied by the average confirmation time of slightly under 10 minutes, almost an hour to complete.
This approach is not followed by all blockchains. The Ethereum network, for instance, selects one validator at random from among all users who have staked ether to validate blocks, which are then validated by the network. In comparison to the Bitcoin process, this is far faster and less energy-intensive.
Blockchain Decentralization
With a blockchain, data in a database can be distributed over several network nodes—computers or other devices that run the blockchain’s software—located throughout the world. In addition to adding redundancy, this preserves the accuracy of the data. For instance, the other nodes would stop someone from changing a record if they attempted to do so at a single location in the database. This prevents any one node in the network from changing the data it contains.
The information and history (like cryptocurrency transactions) are irreversible due to this distribution and the encrypted record that the transaction was done. Various types of data, such as legal contracts, state identifications, or a business’s inventory, may be stored on a blockchain. Such a record may be a list of transactions (such as transactions made with a cryptocurrency).
How Secure is it?
Decentralized trust and safety are made possible by blockchain technology in several ways. To start, new blocks remain chronologically and linearly stored. The blockchain’s “end” is constantly added to them. Previous blocks cannot be modified once a block has been successfully added to the end of the blockchain.
Any modification to data affects the block’s hash. Each block carries the hash of the previous block, thus if one changed, the next blocks would also change. As a result of the hashes not matching, the network would reject an edited block.
Consider a scenario where a hacker controls a node on a blockchain network and aims to change a blockchain so they may take everyone else’s cryptocurrency. They would need to persuade the remaining nodes that their copy was the correct one if they wanted to alter their copy.
To achieve this and deliver it at precisely the appropriate time, they would need to have control over a large portion of the network. Since you need to control over half of the network to even try it, this is referred to as a 51% attack.
In this form of attack, timing is crucial because, by the time the hacker takes a single step, the network is probably already passed the blocks they were trying to change. This is due to how quickly these networks hash data. On April 21, 2023, the Bitcoin network hashed at a pace of 348.1 exahashes per second (18 zeros).
Blockchain Advantages
Decentralization
None of the data stored by the blockchain is kept in a single location. Instead, a network of computers copies and distributes the blockchain. Every computer in the network updates its blockchain every time a new block gets added to the blockchain.
With blockchain, it becomes increasingly difficult to mess with it. It does it by scattering information over a network as opposed to keeping it in a single central database.
Complete Transparency
The majority of blockchains use only open-source code. This implies that everyone can see its source code. This enables auditors to assess the security of cryptocurrencies like Bitcoin. It also suggests there is no actual control over who edits the code for Bitcoin or how it is controlled. As a result, anyone can recommend making improvements to the system. Bitcoin can be upgraded if the new version of the code is considered to be sound and worthwhile by most network users.
The Chain Accuracy
Thousands of computers and other devices authenticate transactions on the blockchain network. With nearly no one left in the verification process, there will be less chance of human error and a more accurate record of the information. Even if one of the network’s computers made a computational error, the error would only affect one copy of the blockchain and would not be acknowledged by the other computers.
Reduced Prices
A public notary or a bank is often paid for by consumers to certify a transaction or sign a document. The need for third-party verification and the associated expenses have been eliminated. Business owners that accept credit card purchases, for instance, are subject to a small fee since banks and payment processors must handle those transactions. Bitcoin, on the other hand, has a decentralized administration and few transaction fees.
Transaction Efficiency
Transactions processed by a centralized authority may take a long time to complete. For instance, you could not see any funds in your account until Monday morning if you tried to deposit a check on Friday night. Financial institutions typically function five days a week during business hours, but a blockchain is operational around the clock, every day of the year.
Some blockchains allow for transactions to be finished quickly and become considered secure after a few have been completed. This is especially useful for cross-border trades, which generally take much longer to complete because of issues with time zones and the requirement that all parties confirm payment processing.
Blockchain Drawbacks
No Regulation
Many people in the cryptocurrency community have raised concerns regarding government regulation of cryptocurrencies. Governments might conceivably make it illegal to hold cryptocurrencies or take part in their networks, even though it is becoming more and more challenging—if not almost impossible—to put an end to Bitcoin as its decentralized network expands more and more every day.
Illegal Trading and Activity
While secrecy on the blockchain network safeguards users’ privacy and prevents hacks, it also enables criminal activities and trade on the network. One of the most famous examples of blockchain being used for criminal activities is the Silk Road, a dark web marketplace for illegal drugs and cash laundering that was active from February 2011 until it was taken down by the FBI in October 2013.
Using the Tor Browser and the dark web, users can purchase illicit things in different cryptocurrencies and sell them without being seen. This made regulators in the United States demand financial service providers gather customer information when an account is opened. They are required to validate each customer’s identification and that they do not appear on any lists of groups that are known or suspected to support terrorism.
Speed Inefficiencies
The potential limitations of blockchain may be studied perfectly using Bitcoin as an example. With Bitcoin’s PoW algorithm, a new block may be added to the network in about ten minutes. At that rate, it is estimated that the blockchain network can only process three transactions per second (TPS). Blockchain continues to have limitations on other cryptocurrencies, even though Ethereum performs better than Bitcoin in terms of performance. The legacy brand of Visa can process 65,000 TPS, for comparison.
People have been working on solutions to this issue for years. There are currently blockchains that have a TPS of above 30,000. After rolling out several improvements, including sharding—a division of the database so that more devices can run Ethereum. This is anticipated to boost transaction speeds, decrease congestion, and enhance network membership. The other issue is how much data each block can store. The debate over block size is one of the major barriers to the future scalability of blockchains.
High Costs to Maintain
Blockchain technology is not free, even though it can help consumers save on transaction costs. For instance, the Bitcoin network’s proof-of-work method, which it depends on to validate transactions, consumes a lot of computing power. Millions of Bitcoin-using devices consume more energy on the network than Pakistan does in the real world each year.
These problems are starting to have some possible solutions. For instance, farms for Bitcoin mining have been built using solar energy, or power from wind farms.
Summary | Blockchain
Blockchain technology has finally established itself, in a major way due to Bitcoin and cryptocurrency, with several real-world uses for the technology now being implemented and looked into. Blockchain, a term that’s on everyone’s lips as an investor in the nation at large, promises to reduce middlemen while increasing accuracy, efficiency, security, and cost-effectiveness in commercial and government activities.
