Blockchain Overview
Blockchain is an extremely hot topic nowadays: you'll see articles describing this phenomenon in almost every newspaper and magazine, even where you would hardly expect it to see. Even if you haven't read about Blockchain in your favorite newspaper or magazine, chances are you have heard Elon Musk tweeting about it.
Cryptocurrencies like Bitcoin and Ethereum are powered by a technology called the blockchain. At its most basic, a blockchain is a list of transactions that anyone can view and verify. The Bitcoin blockchain, for example, contains a record of every time someone sent or received bitcoin.
Database
If you work for a company they most definitely have a multitude of databases. Your company would have a database of all their products or services. Or a database containing all their sales and purchases.
Blockchain is a special kind of database in that it tracks all the transactions that have occurred. It is different from your company's database in that nobody owns the blockchain.
Another difference is how the data is stored. Traditional databases use tables to store data. Blockchain data is stored in blocks. A block is a chunk of data. These blocks have specific capacities for storage. When these get filled they are chained to the previous block. This forms a chain of all the data and is called the Blockchain.
Blockchain Defined
IBM uses the following to define the Blockchain
Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.
Key Elements of a Blockchain
Let's break down the above description of blockchain so we can understand it.
Immutable records
Nobody can change or tamper with a transaction after it's been recorded to the shared ledger. Not being able to change the data stored in a block on the blockchain is what is meant by immutable.
If a transaction record includes an error, a new transaction must be added to reverse the error, and both transactions are then visible.
Shared Ledger
Generally a company will have one single database that contains their data. The Blockchain on the other hand is a shared database.
All network participants have access to the distributed ledger and its immutable record of transactions. With this shared ledger, transactions are recorded only once, eliminating the duplication of effort that’s typical of traditional business networks.
Security
Blockchain is very secure and here’s why: it uses cryptography and encodes the transactions so you can’t see exactly what happened but you know that it happened. It’s like a very big accounting system for all sorts of things that can be traded that is not owned by one company but it’s owned by everybody.
Blockchain is very secure and here’s why: it uses cryptography and encodes the transactions so you can’t see exactly what happened but you know that it happened. It’s like a very big accounting system for all sorts of things that can be traded that is not owned by one company but it’s owned by everybody.
Transparency
All the transactions can be viewed in a transparent manner due to the decentralized nature of the Blockchain.
Each of the node has a copy of the chain that keeps on getting updated when fresh blocks are confirmed and also added. This means, you are able to track every transaction on the Blockchain.
How Blockchain Works
The name Blockchain is hardly accidental: The digital ledger is often described as a chain that’s made up of individual blocks of data. As fresh data is periodically added to the network, a new block is created and attached to the chain. This involves all nodes updating their version of the Blockchain ledger to be identical.
How these new blocks are created is key to why blockchain is considered highly secure. A majority of nodes must verify and confirm the legitimacy of the new data before a new block can be added to the ledger. For a cryptocurrency, they might involve ensuring that new transactions in a block were not fraudulent, or that coins had not been spent more than once. This is different from a standalone database or spreadsheet, where one person can make changes without oversight.
Once there is consensus, the block is added to the chain and the underlying transactions are recorded in the distributed ledger. Blocks are securely linked together, forming a secure digital chain from the beginning of the ledger to the present.
Transactions are typically secured using cryptography, meaning the nodes need to solve complex mathematical equations to process a transaction.
Miners
Mining is the term used to describe the computer systems that are responsible for solving the complex mathematical equations. The miners’ collective computing power is used to ensure the accuracy of the ever-growing ledger.
In exchange for contributing their computing power to the blockchain, miners are rewarded with small amounts of cryptocurrency.
Advantages and Disadvantages of Blockchain
Advantages of Blockchain
Higher Accuracy of Transactions
Because a blockchain transaction must be verified by multiple nodes, this can reduce error. If one node has a mistake in the database, the others would see it’s different and catch the error.
In contrast, in a traditional database, if someone makes a mistake, it may be more likely to go through. In addition, every asset is individually identified and tracked on the blockchain ledger, so there is no chance of double spending it (like a person overdrawing their bank account, thereby spending money twice).
No Need for Intermediaries
Using blockchain, two parties in a transaction can confirm and complete something without working through a third party. This saves time as well as the cost of paying for an intermediary like a bank.
It has the ability to bring greater efficiency to all digital commerce, to increase financial empowerment to the unbanked or underbanked populations of the world and to power a new generation of internet applications as a result.
Extra Security
Theoretically, a decentralized network, like blockchain, makes it nearly impossible for someone to make fraudulent transactions. To enter in forged transactions, they would need to hack every node and change every ledger. While this isn’t necessarily impossible, many cryptocurrency blockchain systems use proof-of-stake or proof-of-work transaction verification methods that make it difficult, as well as not in participants’ best interests, to add fraudulent transactions.
More Efficient Transfers
Since blockchains operate 24/7, people can make more efficient financial and asset transfers, especially internationally. They don’t need to wait days for a bank or a government agency to manually confirm everything.
Disadvantages of Blockchain
Limit on Transactions per Second
Given that blockchain depends on a larger network to approve transactions, there’s a limit to how quickly it can move. For example, Bitcoin can only process 4.6 transactions per second versus 1,700 per second with Visa. In addition, increasing numbers of transactions can create network speed issues. Until this improves, scalability is a challenge.
High Energy Costs
Having all the nodes working to verify transactions takes significantly more electricity than a single database or spreadsheet. Not only does this make blockchain-based transactions more expensive, but it also creates a large carbon burden for the environment.
Because of this, some industry leaders are beginning to move away from certain blockchain technologies, like Bitcoin: For instance, Elon Musk recently said Tesla would stop accepting Bitcoin partly because he was concerned about the damage to the environment.
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