Blockchain technology, the “chain” is a network that holds “blocks” of transactions and financial service. If a transaction is added, everyone who has access to the chain can see it. In fact, this is what makes blockchain so difficult to hack as every block in the chain.
Another important feature of blockchain solutions is that its transactions cannot be changed. That helps provide stability to the ledger.
In the 1980s, cryptographer David Chaum wrote his dissertation about blockchain. Then a decade later, Stuart Haber and W. Scott Stornetta added to the theories. A real-life blockchain was not created until 2008, when Satoshi Nakamoto developed Bitcoin.
How does blockchain work?
Blockchain is complicated technology, and it continues to evolve. Nonetheless, there are some core parts that are important to understand.
First, blockchain is a distributed technology, which means that anyone can access it. Thus, it is a peer-to-peer network, and this allows for rapid distribution while also providing improved transparency.
Next, a block has three key components. There is the blockchain data, which holds information about the transactions and the senders/receivers. Then there is the hash code, which is unique and is used to identify the block. Whenever there is a new transaction, the hash will change.
Finally, a block will have a hash for the previous block. This is critical for security. That is, if someone adds a malicious block, the chain will not work.
True, it’s possible for hackers to use sophisticated computers and algorithms to break this feature. At the same time, blockchain has a system that slows down this process. This system is known as proof-of-work. Furthermore, sophisticated blockchain encryption enhance security.
It’s also possible to create programs that are stored on the blockchain. These are called smart contracts. They can help with the seamless exchange of coins with others. Smart contracts can also make it possible to create sophisticated applications, such as for medical records or mortgages.
Blockchain and Cryptocurrencies
Most digital currency, or cryptocurrencies like Bitcoin are based on blockchain technology.
A typical transaction involves a blockchain wallet. Behind the scenes, there is a complex set of math calculations that need to be solved. There are also no intermediaries like banks or government institutions to handle the transactions, which means various fees can be avoided.
Instead, it’s the members of the distributed network that will solve the math problems – through is a process called mining.
For most people, the way to get started with blockchain is to use a wallet. There are many available, such as those from Robinhood, Square, PayPal, Coinbase, and SoFi.
A blockchain wallet stores the public and private keys, and a smart contract for security. The private key must be kept in a safe place. If you lose it, you will not be able to get it back into the wallet.
Some blockchains are accessible via the internet, such as through an app. Others are hardware devices, which provide more security.
Blockchain vs. Banks
When Nakamoto developed Bitcoin, his motivation was to avoid the fees and limitations of the traditional financial system. He wanted transactions to be private, thereby eliminating the need to provide identification information.
A bitcoin transaction may have a fee, but it is usually low. The reason is that the amount is based on the data sent.
This contrasts with a credit card, which charges fees based on the value of the transaction. This can certainly add up, which is why merchants try to avoid credit card transactions.
Additionally, blockchain transactions tend to be quick, especially for international payments.
Pros and Cons
Blockchain Network Pros
· Transactions have no middleman. This lowers the fees. Blockchain solutions also provide transparency, since everyone in the network can see everything.
· The technology is highly secure, and based on private keys and hashes.
· Transactions can be quicker than is the case with the traditional financial system.
Blockchain Network Cons:
· If you lose the private key, you will not be able to get access to the network.
· There are concerns about increased regulations and taxes, such as for cryptocurrencies.
· Blockchain consumes large amounts of energy and could have significant environmental consequences.
Despite the disadvantages, blockchain remains a transformative innovation and is likely to see wider applications in the years ahead.