By now, almost everyone will have heard the term ‘blockchain’. But what is blockchain technology?
Those outside the tech industry will associate blockchain with cryptocurrencies, especially Bitcoin, but perhaps not understand what it is and how it works.
This article will explain the basics in layperson’s terms.
Why Blockchain?
Before we answer, ‘what is blockchain technology’, let’s understand why we are asking.
The technology is complex, so explaining it in detail can be complicated. Here, we will try to stick to the basics to give newcomers an introduction to the concept.
Blockchain is fundamental to cryptocurrencies, NFTs, many play-to-earn games, and many more advances in the digital world. That means it will take on increasing importance, raising the need for more people to understand it.
Blockchain will evolve and become even more prevalent, so having a basic grasp of the technology will better prepare you for the future.
This article aims not to explore all the complexities of blockchain, but to outline the fundamentals. I will try to answer the question, ‘what is blockchain’ in accessible language.
What is Blockchain Technology?
Blockchain is defined as a decentralised data ledger that is securely shared.
Blockchain technology allows a select group of participants to share data. Collecting, integrating, and sharing transactional data from multiple sources is easier using blockchain cloud services. Data is divided into shared blocks linked together using cryptographic hashes as unique identifiers.
Blockchain ensures data integrity by providing a single source of truth, reducing data duplication, and increasing security.
Because data cannot be altered without the permission of a quorum of the blockchain system’s parties, fraud and data tampering are prevented.
A blockchain ledger can be shared, but cannot be changed. If someone tries to change data, all participants will be notified and will know who did it.
How Does Blockchain Technology Work?
Consider a blockchain to be a transactional history. Each block in a sequence is ‘chained’ to the previous block and is immutably recorded across a peer-to-peer network.
In addition, each transaction is assigned a unique identifier – or digital fingerprint – by cryptographic trust and assurance technology.
The chain is forged with trust, accountability, transparency, and security. This allows many organisations and trading partners to access and share data, known as third-party, consensus-based trust.
Every participant keeps an encrypted record of every transaction in a decentralised, highly scalable, and resilient recording mechanism that cannot be reversed.
Blockchain eliminates the need for any additional overhead or intermediaries. Executing trusted business interactions among parties who may not fully trust each other is reduced in cost by having a decentralised, single source of ‘truth’. Participants in a permissioned blockchain, which most enterprises use, are authorised to participate in the network, and each participant keeps an encrypted record of every transaction.
This unique technology can benefit any company or group of companies that require a secure, real-time, shareable record of transactions. There isn’t a single location where everything is stored, resulting in improved security and availability with no single point of failure.
Main Blockchain Types
Public Blockchain
A public or permissionless blockchain network is one in which anyone can participate freely. For example, most cryptocurrencies operate on a public blockchain governed by rules or consensus algorithms.
Permissioned or Private Blockchain
A private or permissioned blockchain allows businesses to control who has access to blockchain data. Specific data sets can only be accessed by users who have been granted permission. For example, the Oracle Blockchain Platform is a blockchain with restricted access.
Hybrid Blockchain
This is a combination of a private and public blockchain. It has applications in organisations that do not want to deploy one or the other type of blockchain, but instead want to deploy the best of both worlds.
Federated or Consortium Blockchain
A blockchain network in which the consensus process (mining process) is tightly controlled by a predetermined number of nodes or stakeholders.
Benefits of Blockchain to Business
- A decentralised organisational structure – Because blockchain is decentralised, there is no single point of failure or control. That means no individual or group can corrupt the system for their gain.
- Increased security and privacy levels – One of the primary benefits of blockchain-enabled systems is increased security. Because of how the technology is designed, using blockchain is more secure. In addition, end-to-end encryption in blockchain technology eliminates the possibility of fraud and other illegal activity by creating a permanent record of all transactions.
- Trust and cost-cutting measures – Because of the nature of blockchain technology, businesses may be able to save money. Transactions are processed more quickly. As a result, time-consuming manual tasks such as data collection and modification, reporting, and auditing may be reduced, if not eliminated.
- Transparency and traceability – Blockchain technology’s visibility and traceability can be used to track the origin of goods and their journey to the end consumer. For example, it will inform consumers about the sources of their food, clothing, and other products. It will also enable businesses to track their supply chain and see what is going on with their products.
- Reliability and speed – Transactions cannot be changed or deleted once recorded on the blockchain. In simple terms, this is what immutability means. Because each transaction on the blockchain is timestamped and datestamped, it is permanently recorded. Blockchain technology can thus perform a secure and trustworthy audit of the information recorded on the blockchain.
Pros and Cons
Like all forms of technology, blockchain has advantages and disadvantages to consider.
Advantages
One significant advantage of blockchains is the level of security, which means blockchains can protect and secure sensitive online transaction data. The technology also provides fast and convenient transactions for anyone looking for them. It only takes a few minutes, whereas other transaction methods can take several days. There is also no interference from financial institutions or government organisations, which many users see as beneficial.
Disadvantages
Blockchain and cryptography involve public and private keys, and there are issues with private keys. If users lose their private key, they face numerous challenges, making this one of blockchain’s disadvantages. Another disadvantage is the limited scalability due to the limited number of transactions per node. As a result, completing multiple transactions and other tasks can take several hours. Another significant disadvantage of blockchain is the difficulty in changing or adding information after it has been recorded.
What is Blockchain Technology – Conclusion
So, if you are new to blockchain technology or wanted to understand more about what lies behind cryptocurrency and NFTs, I hope this article has explained the basics.
I recommend you further your knowledge by conducting independent research and reading widely on the topic, like sites such as Investorpedia.
