Blockchain technology and how does it work?

To store and secure digital data, blockchain technology was first developed in 1991. Blockchain is a public or a distributed or decentralized ledger that many parties can view simultaneously. The fact that the information is recorded and difficult to change without consent from all parties is one of its main advantages. According to IBM, every new record turn into a block with a special hash for identification. A blockchain is created by connecting the blocks into a chain of documents. Blockchain technology is used in Bitcoin (BTC) and Ether (ETH).
Featured Image by Reto Scheiwiller from Pixabay

In Simple Terms: Blockchain is a distributed, unchangeable database that makes it easier to track assets and record transactions in a decentralized network. An asset may be tangible ones or physical (Like a home, property, car, money, gold, silver or Land) or intangible (intellectual property on creative content or inventions, patents for inventions, copyrights, branding).

Brief History of Blockchain Technology

The concept of Blockchain as a technology was originally proposed by Satoshi Nakamoto in 2008, whose true identity is still shrouded in mystery, and a topic of lot of discussions in the Crypto world. Nakamoto used a very similar technique to Hashcash and the architecture continued to advance and change. This architecture ultimately was adapted and evolved into the core of Bitcoin (BTC), a very well-known cryptocurrency which acts as a public record for all network transactions. The size of the Bitcoin blockchain files, which included all of the network’s transactions and data, grew significantly over time.  Presently the bitcoin blockchain size is over 400 gigabytes as of July 2022, and it is expected to exceeded and go beyond.

Why is Blockchain Important?

Blockchain makes it easier for multi-step transactions that need these features to be verified and tracked. It can reduce compliance costs, protect transactions, and speed up data transmission processes. Blockchain technology can simplify contract administration and confirm a product’s lineage.   Additionally, it can be used to control voting platforms, titles, and deeds.

How blockchain works

As previously said, a network with numerous nodes is required to store the ledger. In this manner, the Blockchain is a single document that is replicated across all computers.

Peer-to-peer (P2P) networks are the foundation of blockchain technology. All parties involved in the chain must agree or come to a consensus before any changes to the recorded transactions are made.

All the computers connected to the network immediately validate any new transactions or information before storing them as a block in the chain. This validation procedure makes sure that no one cheats and that the rules of the system are followed by all.

Additionally, due to this network’s decentralization, hacking is virtually impossible. As a result, everyone has access to the Blockchain’s enormous database.

Important elements of a blockchain

Digital Transactions:

Here, we’re talking about the trading or exchange of value of digital assets like cryptocurrency and crypto tokens.

Digital Signature:

It is a type of digital signature that ensures the legitimacy of a deal or item. This guarantees that all transactions in blockchain technology are secure and difficult to hack.

Distributed ledger or Database

The distributed ledger, which contains an immutable record of all transactions, is accessible to all users of a decentralized network. A typical distributed ledger transaction is recorded only once with the shared ledger, this prevents the duplication of effort which is usually present in conventional centralized networks.

Consensus Protocols:

To validate transactions, a consensus must exist on the ledger of those transactions; this is made possible by protocols like proof-of-work (POW) and proof-of-stake (POS).

Mining in Blockchain

Once a transaction has been completed, miners use their processing capacity to solve challenging mathematical puzzles in order to validate and record the transaction on the blockchain. For their efforts, miners are rewarded with cryptocurrencies like Bitcoin (BTC).

Addressing:

An address or code is generated when you give coins to someone else in order to record the transaction. You will frequently be given a random alphanumeric address that only links back to you digitally in order to protect your anonymity.

Public Key Cryptography:

It is what guarantees users’ anonymity when they interact with one another. Transactions are signed with a private key (secret code) to ensure their validity as opposed to a public key.

Blocks in the Blockchain

To ensure immutability, every block is connected together. This is one of the main benefits of blockchain technology since each block refers to its preceding block, which cannot be altered (when new transactions are added). By altering earlier records, it is almost impossible to change the course of history because doing so would require more processing power than the world now possesses and would involve rewriting all subsequent blocks as well. Cryptocurrencies are made viable by Blockchain technology because of their immutability.

Decentralization in Blockchain?

There are no centrally located third parties carrying out transactions. Transaction processing and validation are shared tasks among all peers in a decentralized network.

Peer-to-Peer Network:

Without a central authority or reliable middleman, blockchain technology employs a peer-to-peer network to carry out and validate transactions on the ledger. In a blockchain, all nodes are treated equally and cooperate to reach agreement or consensus.

Immutable records

Once a transaction has been added to the shared ledger, no participant is permitted to alter or interfere with it. If an error has to be corrected then a fresh transaction must be created to undo the error in a transaction and a record of both transactions are displayed.

Smart contracts

To expedite transactions, a smart contract, or set of instructions, is kept on the blockchain and automatically executed. A smart contract can specify specific conditions for corporate bond transfers, including the price of travel insurance, the precise amount that needs to be paid, and many other things.

Types of blockchain networks

There are four different types of blockchains. They are as follows:

Private Blockchain Networks

The term “private blockchain” refers to a blockchain network that operates in a constrained setting, such as a closed network, or that is governed by a single institution. Although it uses peer-to-peer connectivity and decentralization like a public blockchain network, this kind of blockchain is substantially smaller in scope. Private blockchains are often run on a tiny network inside a company or organization, where members can join and contribute processing power but everyone else cannot. They go by the names permissioned blockchains and business blockchains as well.

Public Blockchain Networks

Distributed ledger technology became famous because to public blockchain, which is where cryptocurrencies like Bitcoin first appeared (DLT). Less security and transparency are just two of the issues that centralization brings with it. When using DLT, data is distributed across a peer-to-peer network rather than being stored in a single location. A technique for confirming the veracity of data is necessary due to its decentralized nature. This approach, known as a consensus algorithm, enables blockchain users to agree on the ledger’s present state. These two consensus techniques are known as proof of work (PoW) and proof of stake (PoS).

Anyone with internet access can log on to a blockchain platform to register as an approved node because public blockchains are open and decentralized. The sophisticated calculations necessary to verify transactions and add them to the ledger can be performed by this person, who also has access to both current and historical records. Since the source code is typically open source, nobody can alter any valid records or transactions on the network, and anybody may check the transactions, identify errors, and suggest fixes.

Permissioned or Hybrid Blockchain Networks

Organizations occasionally employ hybrid blockchain, a form of blockchain technology that includes components of both private and public blockchain, to get the best of both worlds. It enables businesses to set up both a private, permission-based system and a public decentralized system, giving them control over which data is made available to the public and who has access to it.

In a hybrid blockchain, transactions and records are typically private but can be validated as necessary, for example by granting access via a smart contract. Although protected inside the network, confidential information can still be verified. The hybrid blockchain may be owned by a private organization, but it cannot change transactions.

An individual who joins a hybrid blockchain has complete access to the network. Other users cannot discover a users identify without engaging in a transaction. It is then revealed to the other person who they are.

Consortium Blockchains

The fourth kind of blockchain, a federated blockchain or consortium blockchain, is comparable to a hybrid blockchain in that it combines elements of both private and public blockchains. However, it is distinct in that numerous organizational members operate together on a decentralized network. To put it simply, a consortium blockchain is a private blockchain with access restricted to a certain group, removing the risks associated with having just one entity control the network on a private blockchain.

Consensus protocols are managed by predetermined nodes in a consortium blockchain. Initiates, receives, and validates transactions through a validator node. Nodes that are members can send or receive transactions.

Benefits or Advantages of blockchain

The advantages of using blockchain technology are as follows:

Transparency

Transaction histories are now more transparent than ever thanks to blockchain technology. Each node in the network has a copy of the documentation because it is a particular form of distributed ledger. Everyone may view the data on a blockchain ledger with ease. Everyone in the network can notice the change and the updated record if a transaction history is changed. Therefore, everyone has access to all information regarding currency exchange.

Prevent Human error and fraud

It is challenging to track things back to their sources in supply chains that are complex. However, with blockchain, the trades of items are tracked, giving you an audit trail to find out where a specific object was acquired. Additionally, you learn about every stop the product made along the way. This level of product tracking can assist customers confirm the product’s legitimacy and stop fraud.

Decentralization & Cost Reduction

Blockchain reduces costs for organizations significantly since it does away with the need for intermediaries and third parties. You don’t require anyone else to create the terms and conditions of exchange because you may put your trust in the trading partner. By allowing everyone to read a single, immutable version of the ledger, the time and money spent on documentation and its changes is also reduced.

Enhanced Security

By all measures, blockchain is more secure than any other method of maintaining records. Only a blockchain network’s consensus can update and/or modify the shared records of transactions. A record is only updated if the majority of nodes, or all of them, concur. A transaction is also encrypted and linked to the prior transaction when it is accepted. Therefore, a record cannot be changed by a single party or individual. Due to the decentralized nature of blockchain, no one has the independent authority to update records. Blockchain technology can be used to impose strict security in any sector that has a crucial need to secure sensitive data, such as governments, healthcare, financial services, etc.

Fast Transactions

It takes a lot of labor to complete a transaction using conventional paper-based systems since they require third parties to mediate and are prone to human mistake. Blockchain can speed up and discipline these antiquated processes, minimize error-proneness, and increase trading’s efficiency. Parties don’t need to maintain various records because there is only one ledger, which results in significantly less clutter. Additionally, building trust is simpler when everyone has access to the same information. Settlements can be made simple and easy without the need for middlemen.

The Process of Blockchain Transaction

A transaction needs to be authorised and validated before it can be posted to the blockchain.

Before a transaction can be added to the blockchain, it must go through a number of important procedures. We’ll concentrate on cryptographic key authentication, proof of work authorization, the function of mining, and the more recent usage of proof of stake protocols in later blockchain networks.

Blockchain Applications

Applications for blockchain go well beyond cryptocurrencies like bitcoin. The technology is affecting many different industries in ways that range from how contracts are enforced to making government run more effectively. It has a possibility to increase openness or transparency in transactions and could help in providing uniform justice while also saving businesses a lot of time and money.

Asset Management

Blockchain plays a crucial role in asset management, just like it does in the financial sector. The processing and trading of numerous assets that a person may possess, such as fixed income, real estate, stock, mutual funds, commodities, and other alternative investments, constitutes asset management in general. Normal asset management trading can be quite expensive, particularly when it involves numerous nations and cross-border payments. Blockchain can be a tremendous help in these situations because it eliminates the need for middlemen like the broker, custodians, brokers, settlement administrators, etc. The blockchain ledge, in contrast, offers a clear and open process that leaves no opportunity for error.

Cross-Border Payments

Have you ever attempted to send money across international borders in a different currency? The money may not arrive at its destination for several days due to this lengthy and complicated process. Blockchain’s ability to provide end-to-end remittance services without any middlemen has contributed to the simplification of these cross-border transfers. Blockchain services are provided by a lot of remittance providers, and they can be used to send money internationally within 24 hours.

Healthcare

Blockchain technology has the potential to have a big impact on the healthcare sector. These ingenious contracts make it possible for two parties to directly contract with one another. All parties are aware of the contract’s terms, and it comes into effect once its conditions are met. Personal health records can be encrypted using Blockchain technology so that they are only available to primary healthcare practitioners with a key. The healthcare sector may find this to be quite beneficial. They also support the HIPAA Privacy Rule, which ensures the confidentiality of patient information and limits access to it.

Cryptocurrency

Undoubtedly, one of the most well-known applications of blockchain technology is cryptocurrency. Everyone is familiar with bitcoin and its meteoric ascent to stardom. Blockchain adoption for cryptocurrencies has many advantages, one of which is that it is not geographically constrained. As a result, transactions can be made anywhere using cryptocurrencies. The only important factors in this process are exchange rates and the potential for some people to lose money. This solution is preferable than local payment services that can only be used within a certain country or region and cannot be used to send money to people outside, like Paytm in India.

Birth and Death Certificates

Many people worldwide lack a genuine birth certificate, especially in the world’s poorer countries. According to UNICEF, one-third of all children under the age of five do not have a birth certificate. Furthermore, the problem with death certificates is comparable. But by creating a secure repository of verified birth and death certificates that is only available to those with the necessary authorization, blockchain can help to solve this problem.

Online Identity Verification

Online identity and verification are necessary for the completion of any kind of financial transaction. And every service provider a user can have in the banking and financial industry follows the same rules. Blockchain, on the other hand, has the potential to centralize the online identity verification process, enabling users to share their identity with any service provider of their choice after only having to validate it once using blockchain. Users can also choose their preferred method of identity verification from choices like user authentication and facial recognition.

 Internet of Things

An interconnected network of devices known as the “internet of things” can communicate with one another and collect data that can be used to guide decision-making. Any group of “things” that are networked together form an IoT system. Perhaps the most well-known application of IoT is the Smart Home, which allows all home appliances like lights, thermostats, air conditioners, smoke detectors, etc. to be networked together on a single platform. But how does Blockchain fit into all of this? Well, security is something this highly dispersed system needs, and Blockchain can deliver it. An IoT system’s security is only as strong as the weakest device, or link, in the chain. Here, blockchain can ensure that the information gathered by IoT devices is safe and accessible to authorised people only.

Copyright and Royalties

Copyright and royalties are big issues in the creative industries, like music, film, etc. These are artistic means of expression, and they don’t seem to have anything to do with blockchain. However, this technology is essential for ensuring openness and security in the creative industries. When the original artists are not properly credited, there are many instances of plagiarism in music, movies, art, and other forms of media. This can be fixed using blockchain, which keeps a complete record of artist rights. Blockchain can provide a secure record of artist royalties and agreements with significant production companies while also being transparent. The administration of royalties can also be done using digital currencies like Bitcoin.