Investors, financial pundits, and regular folk who’ve been following stock market updates have undoubtedly come across the terms cryptocurrency, bitcoin, and most importantly, blockchain. New technology has impacted the banking industry and has made significant changes in the way people invest.
Traditionally, investing in the stock market has been the greatest source of income generation. Long-term investors have the potential to make a hefty regular income or even a retirement/ savings fund. The advent of cryptocurrencies in the market has created new ways to invest, as people realize moving away from the traditional investing mindset is quite lucrative.
However, potential investors are put off by the seemingly complex technology that is the backbone of the cryptocurrency boom. This gives rise to a few crucial questions. What is blockchain technology? What makes it so powerful? Why is it considered disruptive? The fact of the matter is, blockchain isn’t the unknowable entity that fear-mongers make it out to be. The principle behind its functionality is quite simple. Here’s our guide at New Kind of Network to blockchain.
What is Blockchain?
At its core, blockchain technology is the digital, decentralized record-keeper that tracks and saves all transactions. It works as an incorruptible record of transactions that do not rely on an external authority/ gatekeeper to validate the rectitude of transaction data. The technology is basically a sequence of blocks or groups of information/ transaction data that is distributed among a network of users.
While all of this might sound complicated, it’s actually no harder to understand than a chicken nugget. Don Tapscott (Executive Chairman of the Blockchain Research Institute) wrote, “The way I like to think of it is that a blockchain is a highly processed thing sort of like a Chicken McNugget and if you wanted to hack it’d be like turning a Chicken McNugget back into a chicken. Now someday someone will be able to do that, but for now, it’s going to be tough.” In other words, the highly processed nature of blockchain makes it virtually impossible to hack.
As opposed to the traditional method of copying data from a central source, blockchain distributes it. The blocks or groups of data are time stamped and are managed by a cluster/ network of computers not owned by a single entity, giving rise to massive decentralization of data. Every block of data is independently secured and bound to each other using cryptographic principles, forming a chain of blocks, i.e., a blockchain.
Blockchain technology is an ingenious method of transferring data securely from one point to another. Blocks of data are verified by thousands (even millions) of computer systems across the network. This eliminates the requirement of a central validation authority. Verified blocks are then added to the chain, which is stored on the network, creating blocks with a unique record and history. It’s statistically impossible to falsify or corrupt a block, as this would mean corrupting it across millions of systems.
Blocks are typically used to record transaction details, but the principle can be applied across several industries. Blocks store information like date, time, and amount of transactions. They also store a record of every entity involved in the transaction. Instead of real names, purchases are recorded without identifying information, but rather using unique digital signatures.
Blocks also store identifying information about themselves that helps networks differentiate between two blocks. Each block stores a code called a ‘hash’, which is unique to every block. Even similar or repeated transactions have different codes when stored on blocks, which distinguishes each transaction from the previous one.
In order to combat the pervading incompetence of the traditional banking sector, Satoshi Nakamoto created Bitcoin, the most popular cryptocurrency in the world. Although the concept of blockchain has been around since 1991, Satoshi implemented the concept practically in 2008. His real identity remains a mystery to this day, which only increased public fascination with Bitcoin and blockchain technology. At its height, Bitcoin traded for about $20,000 per unit. Curiosity surrounding blockchain technology led to a burst in investment. As a result, IT companies around the world began applying the principles of blockchain to other IT projects.
How Does Blockchain Work?
The sheer security offered by blockchain technology is what makes it unique.
Let’s take the example of a purchase made by a consumer living in the US from an e-commerce store.
The blockchain process is initiated when a transaction is completed. The user picks out a product they like, and proceed to the checkout page. They then finish the purchase by paying through a secure payment gateway. The transaction details are then verified and entered into blocks.
In the case of other traditional establishments, there is a central authority, a council or a department that verifies the authenticity of the transaction being conducted by the user. In the case of blockchain, this task is left to numerous independent systems owned by different people on the blockchain network. Details like the parties involved, in this case, the user and the eCommerce store, the time of the transaction, the amount paid, the product purchased are recorded. When the details are corroborated and verified to be true, the block gets green-lit.
When a party exchanges currency, a bank or another central institution takes precedence. The central entity takes control and defines the term of the transaction. This principle translates across domains as well. Human history has been dominated by central authorities making decisions and governing over people. The policies and rules imposed by such authorities are not always transparent.
The reason blockchain is considered an industry-disruptor is because it takes away the very idea of a central authority – shaking the very roots of established norms. A decentralized system with several computers acting as control nodes gives all involved participants equal power – as opposed to one single authority enjoying full control.
Digital signatures for the user and store are generated to protect real-life identities. The bloc is then inserted into a chain with similar blocks. The other blocks can number from hundreds to possibly thousands. The block then receives a unique hash that can be used as an identifier.
The fact that user information is stored across several computers is a privacy concern. Blockchain users can rest easy because every piece of information is encrypted. Anonymity is maintained by making transaction details untraceable by using cryptography methods. Cryptography is a central part of blockchain technology. Since copies of unique blocks are spread of thousands to million systems, manipulating or deleting data is a mammoth task, one that is almost virtually impossible to pull off without detection. The linear and chronological arrangement of blocks in a chain means that going back to add new blocks or altering existing ones is impossible. New blocks are always added at the end of an existing chain.
Let’s reconsider the case of a user making a purchase from an eCommerce website. If a hacker wants to access this transaction for whatever reason, they cannot actually hack the block without changing the associated block. As soon the dollar amount of the specific transaction is edited by the hacker, it automatically changes the cryptographic hash associated with the block, and generates a new block with a new hash.
In order for the hacker to cover their tracks, they will need to edit the old hash. But this will result in the generation of a new one again, and the cycle repeats. To change a single block’s data, a potential hacker has to alter the hash values of every resulting block in the chain, which requires an improbable amount of computing power and time. Once a block has been added to the chain, it’s virtually impossible to edit, which is the ‘immutable’ feature of blockchain technology. The generated ledgers are indisputably true and cannot be removed or altered.
Imagine a single excel spreadsheet that is replicated across a network of thousands of computers. The network is set up to change the spreadsheet cells and update all changes across every computer. In the process, it always records which system made the change along with the timestamp. This is a very basic understanding of the functioning of blockchain technology.
What Blockchain is not
There are several misconceptions of what blockchain technology actually is – and more importantly what it isn’t. It’s crucial to differentiate the underlying technology from its applications, in order to understand the implications of this disruptive technology.
- Not a form of cryptocurrency.
- Not a cryptographic codification.
- Not an AI or a machine learning technology.
- Not a programming language.
- Not a finished, marketable product.
- Not a transaction processing replacement system.
- Not a distributed database replacement system, or a Python library.
- Not only about currency transactions.
- Not a secure messaging replacement system.
Blockchain is, however, technologically mature with over 10 years of use. It’s stable and enjoys a huge market valuation, and newer versions can handle thousands of transactions per second.
The Benefits of Blockchain
The benefits of blockchain are its very cornerstones – transparency, immutability, security, and decentralization. When investing in blockchain technology, companies can expect to leverage benefits like these. First and foremost, the information ledgers are distributed in equal capacity among all nodes of the network. This distribution creates security, decentralization, and massive accountability. The ledgers are also timestamped and added chronologically, which makes tampering with the chain information close to impossible.
Blockchain technology also allows for independent verification without relying on unsecure third-party vendors. Every transaction and piece of data are attached to blocks after a process of maximum trust verification. A consensus among every participant of the ledger chain must be reached to add that transaction to that particular block. This exponentially increases the trust value attached to each block.
Lost data can always be recovered easily, as the probability of losing the same piece of data across millions of participant nodes (attached to different internet providers and servers) simultaneously is virtually zero. The transactions are also transparent.
Individuals in the network who have a good reputation in the community, and are widely trusted, are given authority over the overseeing transaction details. Origin details, edit details, and transaction specifics can always be traced to the source of creation. Consensus protocols and policies are enforced to prevent duplication or other fraud. Stability is another advantage of blockchain technology, owing to the immutability of information ledgers.
The Cons of Blockchain
The strength of blockchain technology stems from the independent nodes across the network. For transparency and decentralization to work efficiently, at least 51% of the network of computers must be independently owned. When a single party manages to buy up 51% of the computers of a blockchain system, its veracity is compromised.
While this is improbable, it is definitely possible. If a malicious entity manages to take control over 50% of the network’s hashing power, they have the power to alter and edit the blocks, and also disrupt the chronology. This leads to the complete compromise of the blockchain system. While this hasn’t happened even once yet, blockchain systems are scaling up rapidly. The technology is still immature and the predictability of these factors grows smaller with the increase in size.
While the immutability factor of being unable to modify data is a boon is most cases, it can serve to hinder as well. Several industries require constant modification of data across networks, and blockchain does not offer an easy solution to do this. In cases of a wrong entry, or shift in processes, the old chain has to be abandoned for a new one.
In addition to this, some mainstream blockchain technology (e.g. those used for Bitcoin) require large amounts of power to operate and can be quite energy inefficient. It also requires massive amounts of data storage as it scales up.
Industries That Use Blockchain
The primary application of blockchain technology has been in the financial sector. The application of this principle can be carried over to several industries and has the potential to disrupt the functioning of traditional institutes as we know them.
The primary industry to be impacted by blockchain technology is of course, the banking sector. Banks have traditionally conducted all monetary transactions and enjoy certain levels of authority over customers’ funds. Blockchain technology provides a comprehensive solution to most banking issues, by providing an unalterable ledger of every transaction conducted. Secure records lower the risk associated with online banking, and the decentralized nature of blockchain can help reduce the costs of transactions.
The other industries that are going to be disrupted by the advent of blockchain technology and smart-contracts are the real-estate industry, healthcare industry, logistics industry, the legal system, cryptocurrency exchange systems, politics, voting systems, messaging apps, Internet of Things (IoT) and smart devices industry, the security industry, and many more. Ready for a New Kind of Network? Get started here.
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