Have you ever heard of blockchain? It might sound like something that is complicated, but it’s actually a really cool way to store information in a safe and secure way. Bitcoin has been all over the news. Bitcoin is an example of a way that blockchain technology is used. In the case of bitcoin, it is used as a way to store value, send payment, or receive payment. Let me explain it to you in a way that’s easy to understand.
What is blockchain?
a blockchain is a series of tamper-proof data databases. This database is called a ledger (think of a ledger as a spreadsheet of data). This ledger can be either public or private. The word blockchain is a combination of “block” and “chain.” Blocks store the information. Chains are used to connect a block to the block before it. The chains work by using a hash to connect the block. A hash is basically a type of digital fingerprint that is generated through a mathematical formula. This formula uses the data that is stored inside each block to make a unique key. If any of the data in the block is changed or deleted, the chain will become broken. Since every block is connected to the block before it, the data that is stored inside of those blocks are hard to tamper with or delete. Anytime new data is added to the blockchain, a new block is added.
How does blockchain work?
To understand how the blockchain really works, we have to first take a look at what makes up a block. A block is made up of data, a hash, and the hash of the previous block. A hash is a digital fingerprint that is created by running the data that is stored in each block through a cryptographic algorithm. This then outputs a key that uniquely represents the data that was added to it. If the data inside the block is changed or deleted, a new hash will be created and this will cause the chain that links the data together to no longer work.
For a new block to be added to the blockchain, it must solve the cryptographic puzzle. The puzzles are solved by devices called miners. Once that puzzle has been solved, it will be added to the blockchain. Another feature that makes blockchain secure is that every device on the blockchain network must also validate this data and keep a copy of all the transactions that have taken place. They do this through what is called a consensus mechanism. These networks of stored data on a blockchain are called nodes.
How do Consensus Mechanisms work to keep the integrity of the blockchain?
One of the most important aspects of blockchain technology is the consensus mechanism. This could be looked at as a form of teamwork among the different nodes on the network. Those nodes work together to ensure that fraudulent transactions do not occur on the blockchain. How do they do this? Through consensus. There are two main consensus mechanisms in use today by the majority of blockchains today. These are proof of work (PoW) and proof of stake (PoS).
Proof of Work (PoW): This is a consensus in which nodes on the blockchain compete to solve a mathematical puzzle. Solving this puzzle requires very expensive and powerful computers. Bitcoin, for example, uses the proof of work mechanism to verify blocks before they are added to the blockchain. New blocks are added to the Bitcoin blockchain every 10 minutes. The node that solves the puzzle first is rewarded with Bitcoins. When a block is added to the blockchain, that block is considered “mined.”
Proof of Stake Consensus: This is a consensus mechanism that is growing in popularity. It is newer than proof of work. In Proof of stake, nodes are rewarded for holding a stake in the blockchain. The more tokens a node holds, the more likely it is to be selected to add a block to the blockchain. Cryptocurrencies such as Ethereum use the proof of stake mechanism to add new blocks to the blockchain.
What are the benefits of blockchain Technology?
Blockchain technology has the potential to change life as we know it. In a world in which people are becoming increasingly impatient and require events to happen in real-time, blockchain technology allows for almost instantaneous transactions without a threat to security and accuracy. Below are some of the benefits of blockchain technology and how it can be used:
- Decentralization: No middleman is necessary with blockchain technology. For example, when it comes to financial services, each person will now have the ability to become their own bank. Imagine an election where you do not have to go and stand in line to vote for your next leader, you could
- Transparency: By default, blockchain is a transparent system. That is because all the transactions on the blockchain can be traced using the public ledger that records the transactions. That means that fraud can be eliminated using blockchain technology. This could be useful in voting, banking, education, healthcare records, and so forth.
- Security: Blockchain is a secure system that uses cryptography to protect data by generating hashes. These hashes linked together makes it difficult to tamper with the blockchain. This helps to create data integrity
- Efficiency: Blockchain can help to reduce costs and improve efficiency. Since the data can be validated in real-time, a trusted third party is not necessary. For example, if you want to send $1.000 to a friend in another country, in the old system of money, you would have to send the money to that bank and the bank sends the money to your friend through a trusted bank in your friend’s country. With blockchain, all you have to do is get your friend’s wallet address and send cryptocurrency to that address. Your friend will now have instant access to the funds that you sent to them with 100% control and without the need for intermediaries.
- Reduce Corruption: Blockchain could help to prevent election fraud. With the distributed ledger approach by the blockchain, voter fraud will be a thing of the past as one central authority will no longer be responsible for logging votes.
- Sustainability: Blockchain will reduce the need for paperwork and paper-based systems. This will reduce the number of intermediaries, bureaucracy, and paperwork that is necessary.
What are the risks of blockchain technology?
Blockchain technology is a concept that is new to us in the digital realm. However, we have been recording items since man learned how to write. Like anything that is new, there will be issues surrounding the authenticity of the system. Will this system last? How secure is it? Below are some of the risks associated with blockchain technology as it stands today:
- Newness: Blockchain technology. Since the technology is new, it is not yet widely accepted.
- Learning Curve: Learning about the blockchain and how it works takes time and effort. Even though cryptocurrency is the main driving force behind the popularity and widescale acceptance of blockchain technology today, that is just the tip of the iceberg far as the potential of this technology is concerned
- Privacy Concerns: one of the primary features of the blockchain, the publicly viewable distributed ledger is also a part of the risks of the system. Since the transactions are public, some individuals or corporations may not be comfortable with their transactions being publicly viewable.
- Cybersecurity Risks: The internet makes the blockchain possible. That means that various wallets, contracts, and nodes on the blockchain can become compromised by hackers.
- Internet Accessible: The blockchain relies on the internet. If the internet goes down, this could severely affect the ability of blockchains to function.
- Smart Money: Governments are increasingly looking to create their own digital money. There are some risks involved based on how those governments may use the digital money that they create. If a government is tyrannical against the people, then this could become an instrument of control. This is because that entity could design the money to prevent it from buying certain goods or services to even turning the money off altogether.
In conclusion, blockchain technology is a revolutionary concept that has the potential to transform different sectors of society. Blockchain is a secure and tamper-proof database that uses cryptographic algorithms to link blocks together. This creates a decentralized and transparent system. Blockchain technology can eliminate intermediaries, reduce costs, and improve efficiency in many areas such as banking, healthcare, education, supply chain management, and voting. However, despite its many benefits, blockchain technology is still in its early stages, and there are risks associated with it. The system’s newness, the learning curve, privacy concerns, cybersecurity risks, internet accessibility, and the government’s ability to abuse digital currencies are some of the risks associated with this technology. Nonetheless, blockchain technology is here to stay, and as more people become aware of its potential, it will be exciting to see the various ways it can be utilized to benefit society.