The role that crypto-assets are playing in the financial ecosystem is expanding day by day. It is necessary to understand the widening influence of the technical inventions like blockchain which are like life blood to the most sought after cryptocoin – Bitcoin. The blockchain technology is definitely going to impact the functioning of the financial world with its vast potential and numerous applications.
It is interesting and surprising at the same time to learn that the mastermind behind Bitcoin, Satoshi Nakamoto didn’t use this term anywhere in his white paper. He either used the phrase ‘blocks are chained’ or ‘chains of blocks’ to refer to the concept. The term ‘Blockchain’ gained popularity at a later stage, somewhere in 2015.
As the world witnessed the rise of Bitcoin, the use of blockchains has shot up and its new variants like coins, NFTs, DeFi applications and smart contracts are ruling the crypto economy.
What Is a Blockchain?
A blockchain is a type of Distributed Ledger Technology. It is basically a database that is shared among the nodes and managed by various participants. Hence, all the information is stored in digital format on a blockchain. Blockchains mantain a secure and decentralized record of all crypto transactions. But the innovation of paramount importance here is that the record of transactions is immutable which nullifies the need of a trusted third party.
As said earlier blockchain is just one type of DLT, exactly like dollar is one type of currency or Mercedes Benz is one type of car.
Blockchain, therefore, is a type of shared database that differs from a typical database in the method of storing information. A database collects and stores data into tables whereas a blockchain collects data and stores it on form of groups known as blocks.
Blocks are filled as per their storage capacity, once a block is full it is sealed with timestamp and linked to the end of previous blocks of the chain. The provision of timestamp disables any tampering of the data and creates an uneditable timeline.
Applications of Blockchain
Blockchains can store different types of information, ledger transaction is just one field that has seen extensive use of blockchain so far. Its demand is constantly rising in sectors like Healthcare, smart contracts, property records, legal contracts, supply chains etc.
How does Blockchain work?
In case of a decentralized blockchain, all the users can conjointly control the data and any one person or entity cannot exercise control over it. Any data stored on blockchains, thus cannot be tampered with. To add any new entry to a block, the data needs validation from majority of the decentralized nodes on the network.
The consensus mechanism can be either of the two types: Proof of Work (PoW) or Proof of Stake. This system of validation helps in overcoming the problem of double spending also.
As in blockchain technology, several copies of the data are created immediately and stored on all the nodes which are part of the computing network, so the records can be viewed by anyone having a personal node. It implies that you can easily track Bitcoin transactions everytime their owner is changed.
Although the data can be viewed by anyone, it doesn’t imply that you can get the personal records of the person owning a specific cryptocurrency. It only stores the wallet address. The exchange through which a person is trading may or may not keep the identity record of its users (depending on its type).
Is Blockchain Secure?
As we know, Blockchain technology relies on decentralisation, therefore it becomes highly secure in nature. All the records maintained on the blockchain are recorded in a chronological order. So, in case if anyone wants to alter the history, it will need validation from majority of the users.
This may be possible if a user has acquired 51% stake on the blockchain. But even then the validation process will require enormous amount of money and resources to make a similar kind of change in all the nodes at the same time. This scenario is unthinkable in relation to the way the blockchains are growing in size.
In case the editing of transaction records is done at only one node, that copy of the chain will not match with others’ copy and the record will be treated as illegitimate.
Is Blockchain a way to Future?
Blockchain is the way, the world will work in future. However, the root strengths of blockchain, i.e., the inbuilt trust mechanism which denies the need of any intermediaries plus the low transaction fee come at a cost. And that the world is paying in massive amount of power which is required for validating the transactions. Bitcoin is the living example to this.
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