What is Blockchain and How Does it Work? - Guide

News Lekhak June 01, 2024 0

What is blockchain technology? Bitcoin has been in the news for a long time recently. People have a lot of hope about Bitcoin because the price is increasing day by day. But do you want to know What is the technology behind Bitcoin? If yes, then you will definitely like this post about What is Blockchain and how does it work? Because Bitcoin is related to blockchain, you have to know about blockchain and how it works.

Blockchain technology is about to transform our IT industry in a way that open-source software did a decade ago. Just as Linux has been the core of modern application development for almost a decade, blockchain is also going to be a very good way to share information in the coming time. It will be lower in cost and can be easily implemented between open and private networks. However, there was a lot of hype among people about blockchain technology because they felt that it could completely change our future technology. This is also true to a large extent, but just saying it won't make it clear.

What is Blockchain technology?

Blockchain is a digital ledger. But do you know what is a ledger? A ledger is a book that maintains accounts where debits and credit transactions are posted from the book where the original entries are made. Or rather, entries from the original book are updated in this ledger.

We can say that a blockchain is a digitized, decentralized, public ledger.

Understanding Blockchain Technology in Easy Words

Let's say you have a file of transactions (a "node") that is on your computer (a "ledger"). Two government accountants (whom we call "miners") also have the same file in their system (hence the "distributed"). As soon as you make a transaction, your computer emails the two accountants to inform them.

Every accountant wants to check as soon as possible whether you can afford it (and in return, they can get their salary, which is "Bitcoins" or not). Whichever of these two first checks and finally validates it and presses "REPLY ALL", attaches their logic to verify that transaction, and this is called "Proof of Work". If, in the meantime, the other accountant also agrees, then everyone updates their files of transactions. This whole process or concept is called "Blockchain" technology.

That's why blockchain is an incorruptible digital ledger of transactions that is programmed to record virtually everything. All lists of records that are in the blockchain are called "blocks". Therefore, this blockchain is always a continuously growing list of records that are linked and secured.

Who Invented Blockchain Technology?

Blockchain technology was invented by Satoshi Nakamoto in 2008 so that he could do it in cryptocurrency Bitcoin, according to its public transaction ledger. The main objective of Satoshi Nakamoto was to create a decentralized Bitcoin ledger—the blockchain—that gives people the ability to control their money so that no third party, or any government, can access or monitor this money.

The creator of Bitcoin, Satoshi, suddenly disappeared in 2011 and left behind this open-source software that Bitcoin users use, update, and improve. Many believe that Satoshi Nakamoto is not a person but a fictional character. Correct information about its veracity is not available.

The invention of blockchain for Bitcoin is the first digital currency that can solve the double-spending problem without the help of any trusted central authority or central server.

Therefore, Blockchain Technology has also been the inspiration for many other applications.

Why Should We Know About Blockchain?

There are three main reasons why we should know about blockchain:

• Growth: Exponential and disruptive growth of blockchain can come when public and private blockchains converge in an ecosystem where firms, customers, and suppliers collaborate securely, auditable, and virtually.
• Existence: Blockchain technology does not need to exist publicly. It can also exist privately, where the nodes simply point to a private network and the blockchain will act as a distributed ledger. Financial institutions are under pressure to demonstrate regulatory compliance; hence, many are implementing blockchain. Secure solutions like blockchain can become a significant building block for reducing compliance costs.
• Reach: The reach of blockchain technology goes beyond finance. It can be applied to any multi-step transaction where traceability and visibility are needed. The supply chain is a notable case where blockchain can be used to manage leverage, sign contracts, and audit product provenance. As the digital and physical worlds converge, the practical applications of blockchain are also increasing.

How Secure is Blockchain?

As such, nothing on the internet is secure. However, if we talk about Blockchain technology, it is "unhackable" to a great extent compared to the rest of the technology. To make any transaction in Blockchain, all the nodes of the entire network must agree, only then will that transaction be valid. Here, no single entity can decide whether the transaction has been done or not. To hack it, you would need to hack all systems in the entire network, not just one system like a bank, making hacking very difficult in this technology.

The computing resources of almost all blockchains are tremendous because there are many computers connected to the network.

The email was for the Internet, Just Like Bitcoin

In the 1990s, when internet technology (TCP/IP or HTTP) was in its early stages, email was a very large and first major application. Later, new applications like web browsers came. Websites became very popular. People then used chat software such as Skype a lot. If we think about it now, you can see many different applications running on your mobile, which use the Internet.

Similarly, when blockchain technology came to the market, Bitcoin was also the first major application like email that used this technology. Other cryptocurrencies followed this trend later. Now blockchain technology is used in many applications, such as security, online voting, etc.

Internet Technology vs Blockchain Technology

If we talk about both technologies, the Internet allows computers to exchange information. At the same time, Blockchain allows computers to record information. Both use many computers (nodes).

The first generation of the Digital Revolution brought us the Internet of Information. The second generation, powered by blockchain technology, introduced the Internet of Value: a new platform that will reshape the business world and improve the old order of human affairs.

Blockchain is a vast, globally distributed ledger and database that constantly runs across millions of devices and is open to anyone. Not just information, but anything of value, such as money, titles, deeds, identities, and even votes can be moved, stored, and managed securely and privately. Mass collaboration is needed to establish trust, with clever code to implement it, unlike old methods requiring powerful intermediaries like governments and banks.

Thus, we can say that Blockchain technology is made by us, works for us, and controls it, making it very secure and reliable.

Technology Behind Blockchain Technology

The main technologies behind Blockchain are mainly three:

1. Private Key Cryptography
2. P2P Network (Peer-2-Peer)
3. Program (the blockchain's protocol)

Why Do We Need Blockchain Technology?

Blockchain is a mechanism that helps us reach our highest degree of accountability. Now there will be no missed transactions, it will reduce human and machine errors, and the consent of any third party or government is not necessary, but the trust or secure validation of all connected nodes matters.

The most critical area where Blockchain helps us and provides a guarantee is by recording the validity of a transaction not just in one main register but in all distributed systems connected in the network. All these registers must have secure validation for the transaction to be called valid.

Applications of Blockchain Technology in the Future

1. Crowdfunding: Blockchain-powered crowdfunding campaigns have more secure investment from an interested community for a new project, mainly in the form of Bitcoin or other cryptocurrencies.
2. Supply Chain Management: Blockchain is a very good option to manage processes when a value changes or the status of an asset changes.
3. Asset Protection: Musicians wanting proper royalties for their songs or property owners wanting asset protection can benefit from blockchain technology by creating an indisputable record of real-time ownership.
4. Smart Contracts: Industries heavily dependent on contracts like insurance, financial institutions, real estate, construction, entertainment, and law will benefit from this technology. With blockchain, contracts can be updated, managed, tracked, and secured without any dispute. Smart contracts, embedded if/then statements, do not require intermediary party involvement to execute.
5. Personal Identification: Governments manage significant data such as personal data from birth to death records, marriage certificates, passports, and census data. Blockchain technology can manage and securely store all this data.
6. Payment Processing: Blockchain can handle payment processing for large companies, eliminating the need for intermediaries in payment processing.

Real-Life Applications of Blockchain Technology

1. Follow My Vote: Aims to change how we vote and become the first open-source online voting solution in the world.
2. Symbiont: Provides better smart securities in blockchain.
3. Bitnation: Bitnation creates a virtual nation using blockchain technology.
4. Chainlink: Provides input and output of blockchain applications for smart contracts.
5. Arcade City: A decentralized ridesharing service, also known as the 'Uber killer'.
6. ShoCard: ShoCard stores your identity in Bitcoin's blockchain for easy verification.

What are the differences between Public and Private Blockchains?

Both types have distinct characteristics and serve different purposes, offering unique benefits and challenges.

Public Blockchains: 

Public blockchains are open to anyone. They allow anyone to view and send transactions, provided they participate in the consensus process. These blockchains are decentralized and transparent, often associated with cryptocurrencies like Bitcoin and Ethereum. In these systems, the consensus process involves validating transactions and maintaining the integrity of the blockchain. Anyone can join or leave the network at will, ensuring a high degree of decentralization and trustlessness.

One notable feature of public blockchains is their security through transparency. Every transaction is recorded on a public ledger, making it difficult to alter past records without detection. However, this openness also means that public blockchains can be slower and require significant computational power, which translates to high energy consumption.

Private Blockchains

Private blockchains, in contrast, restrict access to specific users. Typically used within organizations, these blockchains limit who can participate in the network, making them more centralized than public blockchains. Only authorized entities can validate transactions and maintain the ledger. For instance, a consortium blockchain might be used by a group of banks to manage trade settlements, where only selected nodes are involved in the verification process.

The restricted nature of private blockchains allows for faster transactions and lower energy consumption. They are also more customizable to the needs of the organization, offering greater control over governance and operation. However, this centralization can introduce trust issues, as the integrity of the blockchain depends on a few entities.

Opportunities and Advantages of Blockchain Technology

Blockchain technology offers numerous benefits across various sectors:

1. Regulatory Benefits: Blockchain addresses issues related to freedom, jurisdiction, censorship, and regulation effectively.
2. Enhanced Communication: Blockchain enables smart devices to interact more effectively, improving the Internet of Things (IoT) ecosystem.
3. Accountability: By solving manipulation issues, blockchain ensures high levels of transparency and accountability.
4. Speed and Efficiency: Without intermediaries, blockchain can speed up transactions and streamline record-keeping.
5. Immutability: Data once recorded on the blockchain cannot be altered, significantly reducing fraud and enabling straightforward auditing.

Criticisms and Challenges of Blockchain Technology

Despite its advantages, blockchain faces several criticisms and challenges:

• Energy Consumption: Blockchain operations, particularly for public blockchains, require substantial computing power and electricity, posing environmental concerns.
• Private Key Security: Maintaining the security of private keys is crucial. If a private key is lost or compromised, the associated assets are irretrievably lost.
• Transaction Speed: The process of verifying blocks can be slow, especially in public blockchains, affecting transaction speed and efficiency.

The Future of Blockchain

Blockchain's utility is evident, but widespread adoption will take time. Much like TCP/IP, which faced initial resistance, blockchain technology challenges traditional systems and requires a shift in how we manage and store information. As organizations and individuals better understand blockchain's benefits, its adoption will grow, leading to significant changes in various sectors.

Blockchain holds immense potential for our digital and financial future. The technology underpinning Bitcoin has shown its capacity to revolutionize various sectors, much like the internet did. Blockchain's ability to decentralize systems could liberate us from financial intermediaries, empowering individuals to conduct transactions freely across the globe. It has the potential to transform our society, reducing reliance on banks, governments, and corporations, and ushering in a digital revolution. Understanding and embracing blockchain is crucial for harnessing its full potential.

I hope this explanation has provided a clear understanding of What is Blockchain and how does it work? Share this information with others to increase awareness and foster a broader understanding of this transformative technology. If you have any questions or need further clarification, feel free to ask. Your feedback and ideas are always welcome, and sharing this post on social networks can help spread knowledge and enthusiasm for blockchain technology.