If you want to get involved in a new industry like cryptocurrencies, it’s essential to learn and understand the underlying technology involved. For those who’ve been paying attention to the crypto industry, you’ve probably come across the term “blockchain” quite regularly. But do you really know what happens behind the scenes when it comes to blockchain-powered applications?
If you’re new to the whole crypto thing, think of this article as an essential introductory lesson before diving into things. If you’re already experienced with blockchain technology, this can always act as a quick refresher.
Why Blockchain Technology is Important
Blockchain’s potential stems from the fact that everyone in every industry can adopt it. It is decentralized, utilizes cryptography to store and secure information, immutable, and transparent—all of which are characteristics a modern consumer looks for in a piece of transactional technology.
Thanks to these features, blockchain makes owning money and digital goods easier and safer without needing the intervention or manipulation of any third parties like the government agencies. What’s more, it better secures an individual’s identity and personal information away from fraudsters.
How Blockchain Technology Works
So, how exactly did the word blockchain come about? To fully understand the origin of the word, you only need to understand what’s going on behind the scenes.
- A party initiates a transaction and starts the process by creating a block (block of data). In this block, no actual sensitive information is explicitly recorded; instead, it uses a unique digital signature like a username.
- A network of computers or nodes across the globe verifies the block; this is known as mining.
- Each verified transaction generates a hash or an identifying code composed of strings of numbers and letters. One transaction’s hash depends on a previous, relevant transaction’s hash, but all codes are unique.
- Once hashed and verified, the block is added to the chain stored in the network of computers, creating a unique record and history.
- Any changes made on the block creates an entirely new hash. The millions of nodes continue to check the block to make sure no changes were made on it, making record falsification extremely difficult.
- The updated blockchain is published for the public to see, making it a distributed ledger.
Pros and Cons of Blockchain Technology
Despite being beneficial to the Fintech sector and many other industries, blockchain may also be disadvantageous in a few ways.
The thousands or millions of devices connected on the network of nodes make the data highly resistant to technical failures and hacks because each of them replicates and stores a copy of the block of data. If a single node goes offline, the availability or security of the network isn’t easily compromised. This makes fraud and unauthorized manipulation difficult.
The verified blocks are immutable once registered into the blockchain, making it extremely difficult to remove or change. This makes blockchain great for storing sensitive data like financial records or any other transaction that requires an audit trail.
Traditional payment systems usually require an intermediary aside from the parties involved in the transaction themselves, like a bank or payment provider. With blockchain technology, a third-party is no longer needed because the network of nodes is already there to verify the transactions, which also reduces overall costs. This is why blockchain is often called a “trustless system.”
The ledger is made public, so the record is available to all parties involved in the transaction. This transparency instills confidence in users by making it easy to track the entire supply chain.
Being immutable and stable may not always be an advantage for the ledger. Those who do need to change information on it would often resort to a hard fork or abandoning the old chain to take up a new one, which requires all nodes or users to upgrade to the latest protocol software.
Private Keys can be Lost or Stolen
Private keys or asymmetric cryptography is proof of ownership of crypto units, with each blockchain address having a corresponding private key. The address is shared, but the private key is not, mainly because it is what users need to access their funds. If the key is lost or stolen, the money is also lost, and there is no remedy to it for now.
Inefficiency That Impacts Energy Resources
Blockchain, with respect to BTC mining, can be highly inefficient. As miners continue to try to increase their computational power for better mining, the resources used by the BTC network increases significantly and consumes more energy. This happens because no miner wants to put his/her efforts to waste and maximizes time efficiency.
Lack of Storage Space
As more and more blocks are added to the transaction ledger, the blockchain naturally grows over time. In fact, the BTC blockchain is currently at just over 200 GB. It appears that the ledgers’ size is exceeding the development of hard drives storage space. If this continues, the network may lose nodes as the ledgers become too large to download and store.
Major Applications for Blockchain Technology
Blockchain is a cheaper, more transparent, and more efficient way to pay or transfer money anywhere. Traditional systems are usually known to be cumbersome, prone to errors, and tedious, and will even require intermediaries; which means they are costly stressful, and time-consuming.
Blockchain reduces error by encrypting records and simplifies the process without the need for intermediaries. Transfer of funds is made directly and securely to anyone in the world almost instantly with low fees. This is all totally revolutionary when it comes to asset management, insurance claims processing, and cross-border payments.
Smart contracts, despite being coined in 1994, are better associated with crypto thanks to Ethereum, a digital currency that runs smart contracts. These are computer programs that carry out the terms of an agreement automatically. American Banker defines it as “a financial security held in escrow by a network that is routed to recipients based on future events, and computer code.”
Typically, an intermediary ensures that all parties follow through on the terms. Today, blockchain can ensure that all participants know the details and that the terms are implemented automatically once the conditions are met. It also helps businesses bypass regulations and lower costs for everyday financial transactions.
Processes in financial derivatives, property law, and crowdfunding can be improved with blockchain. Ethereum-enabled internet-of-things platform Slock is already using smart contracts when customers rent from them. A smart lock goes into effect after both parties agree on the terms of the rent. Banks are also using it to improve the loan market, with Synaps utilizing the technology to issue microloans.
It’s quite apparent for blockchain technology to be utilized in safeguarding sensitive information such as one’s details thanks to its secure encryption. In 2014, software development platform Github used blockchain tech to power their digital passport software.
Users would need to take a picture of themselves and encode it with a public and private key to prove the photo’s legitimacy. The passport is kept on the ledger, assumed a BTC address and public IP, and verified by other blockchain users.
In the future, experts believe that innovations such as the digital Blockchain ID will replace physical forms of identification, which can then be used as an ID for signing up to different services. It is more reliable in terms of protecting information as the blockchain secures it but, at the same time, it is also transparent through the public ledger.
In addition, record-keeping is also reliable through blockchain. Hopefully, people will soon be able to encrypt and access their own or a loved one’s birth and death certification and other vital documents through blockchain.
A Word About Decentralized Digital Currencies
As mentioned earlier, blockchain technology was initially devised to create a currency that gives more power to the people and not institutions. That is why one of its selling points—and ultimately, of cryptocurrency—is decentralization. People saw the possibility of banks failing because of the responsibilities they have to bear (which eventually happened), and started looking for an alternative.
Decentralized digital currencies like Bitcoin and Noah Coin are those with a value that isn’t influenced by banks or other institutions, and no single body controls it. Though, it’s important to note that not all digital coins are decentralized. There are centralized digital currencies, and some still choose to invest in them because they have a few advantages over their decentralized counterparts.
Blockchain, outside of cryptocurrency, will soon be the way of life for everyone if more people participate in it.
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