Blockchains are decentralized databases shared among nodes on a computer network. Though best known as decentralized and secure records of cryptocurrency transactions, any industry can utilize blockchain technology to make data immutable - meaning that it cannot be changed over time.
What Is Blockchain Technology?
Blockchain technology is a database designed to facilitate transparent information sharing among networks. Data stored in blocks linked by chains can only be deleted or modified with consensus among network members. Creating a permanent ledger unalterable can be used for tracking transactions, orders, payments, and accounts. At the same time, the system contains safeguards to prevent unauthorized transactions and maintain continuity in shared views.
As blocks cannot be altered, trust must only be extended when entering data. This reduces the need for third-party auditors and other humans who can add costs and cause errors.Since Bitcoin first appeared in 2009, Blockchain has grown exponentially through various cryptocurrencies, Decentralized Finance (DeFi), non-fungible Tokens (NFTs), smart contracts, and decentralized finance applications.
Why Is Blockchain Crucial?
Traditional database technology presents various challenges when recording financial transactions. Consider, for instance, a property sale: ownership passes to the buyer once money is exchanged between buyer and seller, yet neither party can rely on the other's record of exchanged amounts - they could both claim they had not received payment even though they did receive it!
A trusted third party must verify and supervise transactions to avoid legal ramifications. Unfortunately, this central authority creates more steps in transactions while creating one source of weakness. Both parties would experience losses should this central database become compromised.
Blockchain addresses these concerns by creating an uncentralized, tamper-resistant system of recording transactions. Blockchain uses two ledgers for each party involved in an actual property transaction - each must approve all transactions before updating their ledgers - to record historical transactions without corruption of either ledger. Due to its properties, blockchain technology has widespread use across various sectors, such as digital currencies like Bitcoin.
What Are The Characteristics Of Blockchain Technology?
Decentralization
Decentralization within Blockchain refers to shifting decision-making powers away from an individual or organization into a network through transparency. Decentralized blockchain networks use trustless exchange to reduce trust requirements between participants. Decentralized blockchain networks encourage participants from exerting authority or control over one another as this would undermine its functioning and thus disrupt its operation.
Immutability
Immutability refers to the inability to change or alter something once recorded on a shared ledger, meaning no participant may edit it further once it has been approved. Suppose an error arises with any transaction recorded. In that case, you must create another record so both transactions remain visible on the network.
Consensus
Blockchain systems use participant consent rules to record transactions. Only when most participants on the network agree can new transactions be recorded.
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How Does Blockchain Work?
The mechanisms underlying Blockchain can be complicated, so here is a simplified overview in the steps below:
Step 1: Record Your Transaction
A blockchain transaction records any exchange of physical or digital assets from one party to the next in the blockchain network, stored as a data block. It may include details like who was involved, what happened during, when, where, and why this was done, its value exchanged, or any conditions fulfilled during its completion. This transaction typically includes dates, times, and locations with details like 'who, when, where, why, and value exchanged.' The value exchanged, and any conditions met during it are recorded and included within its record.
Step Two - Acquire Consensus
To successfully execute transactions recorded in a distributed blockchain network, all participants must agree that the transaction is legitimate. Rules may differ depending on the network type; usually, however, rules are established at their onset.
Step 3: Joining Blocks
Once participants reach a consensus on a blockchain, transactions are recorded in blocks corresponding to a ledger's pages. Each block also contains an additional cryptographic hash which acts as a link between blocks; its value changes when content changes occur within them, allowing you to detect any possible data tampering attempts.
Blocks cannot be edited. Each block adds to the strength of its predecessors and, thus, strengthens the entire blockchain network. Think of stacking wooden blocks to build a tower - you must stack them on top; taking one out will cause its collapse.
What Types Of Blockchain Networks Exist?
Blockchain networks consist of four different distributed or decentralized networks:
Public Blockchain Networks
Public blockchain networks don't require permission, and anyone can join; all members enjoy equal rights. Public blockchains are typically used for mining and exchanging cryptocurrencies like Bitcoin, Ethereum, Litecoin, and Ethereum.
Private Blockchain Networks
A private blockchain is managed by one organization. They decide who may join and their rights in the network; due to access restrictions, they can only ever be partially decentralized. Ripple is a private Blockchain serving as a digital currency network for business use.
Hybrid Blockchain Networks
Hybrid blockchain networks combine elements from both public and private networks. Companies can utilize hybrid blockchains for private permission-based systems while keeping public ones running, so companies can control access to specific data on the Blockchain while leaving public transactions open for all members to check on. Smart contracts allow public members to verify whether private transactions have occurred successfully. At the same time, hybrid blockchains may give public members access to digital currencies while keeping private currency under the ownership of banks.
Consortium Blockchain Networks
An alliance of organizations runs consortium blockchain networks. Pre-selected organizations are responsible for maintaining and setting data access rights on a blockchain. Suppose many organizations share common goals or can share responsibility more quickly. Consortium blockchain networks are often preferred which seeks to digitize shipping while increasing collaboration among maritime industry operators.
What Are Blockchain Protocols?
Blockchain protocols refer to various blockchain platforms available for development. Each is explicitly tailored for specific industries or applications. Below we provide examples of such protocols.
Hyperledger Fabric
Hyperledger Fabric, an open-source software project, includes tools and libraries that enable enterprises to quickly and efficiently develop private blockchain apps as a modular framework with special features for identity management and access controls. Hyperledger Fabric makes an ideal platform for tracking supply chains, trade financing transactions, rewards & loyalty schemes, and clearing settlement financial assets.
Ethereum
Ethereum is an open-source, decentralized blockchain platform for creating public blockchain apps. Ethereum Enterprise was specifically tailored to meet the needs of business users.
Corda
Corda is an open-source blockchain project created for business. Corda allows users to construct interoperable blockchain networks with strict confidentiality. Innovative contract technology enables direct transactions involving value using Corda, most of Corda's users are financial institutions.
Quorum
Quorum, an open-source protocol for blockchains derived directly from Ethereum, was intended for private blockchain networks where one node owner owns all nodes.
Read More: Use Cases and Benefits of Blockchain Technology for Business
What Is The History Of Blockchain Technology?
Blockchain technology dates back to the late 1970s when Ralph Merkle, a computer scientist, first developed Hash Trees or Merkle trees for data storage using blocks linked with cryptography. Stuart Haber and W. Scott Stornetta later used Merkle trees in the late 1990s to implement a system that prevented document timestamps from being altered - this marked the first use of a blockchain system in history. Over three generations, technology has advanced considerably.
First Generation - Bitcoin And Other Virtual Currencies
In 2008, an anonymous individual known as Satoshi Nakamoto created blockchain technology. His Bitcoin blockchain blocks for transactions. Many features central to system can still be seen today in modern blockchain systems.
Second Generation - Smart Contracts
Developers began exploring blockchain applications beyond cryptocurrency several years after its first-generation currencies appeared. Ethereum's creators decided to integrate its blockchain technology into asset transfer transactions, its main feature being intelligent contracts.
Third Generation - The Future
Blockchain technology continues to evolve and adapt as companies find and utilize it for various uses, helping companies overcome limitations in scale and computation while offering infinite growth potential and innovation potential.
But What Are Its Advantages?
The use of blockchain technology in asset transaction management has various advantages. Here are a few:
Advanced Security
Blockchain systems offer advanced security, offering trust and reliability necessary for digital transactions today. While software could be modified to create fake money, Blockchain uses three principles - cryptography, consensus, and decentralization - to develop software with advanced security features; no single point of failure exists, and only a user has permission to change records in the system.
Efficiency Gains
Business-to-business transactions can often take too much time and cause operational bottlenecks. This is especially true when third-party regulatory agencies and compliance are involved, which makes these business transactions inefficient and slow. Blockchain's transparency and intelligent contracts help make transactions faster and more cost-effective.
Faster Auditing
Enterprises require secure e-transaction generation and auditable reconstruction. Blockchain records are immutable in time, thus enabling auditing to take place more rapidly than before.
What Is The Difference Between Bitcoin And Blockchain?
While people commonly conflate Bitcoin with Blockchain because it is its initial use case, these two entities should be seen as separate things. Most commonly associated with each other is their use in transactions on cryptocurrency networks - yet Blockchain technology goes far beyond Bitcoin alone.
Bitcoin is a decentralized digital money; initially designed to enable online financial transactions, they now function as digital assets which can be traded for any global currency such as USD or Euros. A public Bitcoin blockchain network maintains and creates its ledger.
Bitcoin Network
Servers throughout the globe maintain copies of a global public ledger that records all Bitcoin transactions. Like banks, Bitcoin servers know about every exchange made using their currency. In contrast, most banks only know what transactions occur with their customers.
Nodes are servers anyone with an extra computer can set up - similar to having your own Bitcoin bank instead of a regular banking account.
Bitcoin Mining
Mining cryptocurrency on the public Bitcoin network involves solving cryptographic puzzles to generate blocks. Each new transaction is broadcasted to all nodes across the network by the system and added to the Blockchain every ten minutes by miners.
Complex software requires sizable computational power, and mining can take some time. Miners receive small rewards in cryptocurrency as rewards. Miners serve as modern-day clerks that record transactions and collect fees.
Blockchain cryptography enables all participants to agree about who owns which coins.
What Is The Difference Between Blockchain And Databases?
A blockchain is an advanced database management system with additional features compared to regular databases. Below we outline some of the significant distinctions between them.Blockchains allow for decentralized control without jeopardizing existing data; other database systems cannot achieve this result.
Companies involved in transactions cannot share an entire database. In contrast, in blockchain networks, each company keeps its copy of a ledger that automatically syncs up. The system ensures consistency across both ledgers.Blockchain allows you to only add information, unlike most databases which allow users to delete or alter records.
What's The Difference Between Blockchain And Cloud?
Cloud computing refers to online services provided over the internet; services include Software as a Service (SaaS), Product as a Service (PaaS), and Infrastructure as a Service. Cloud providers manage hardware and infrastructure, giving you access to computing resources via the internet; moreover, they provide much more than database management - for public blockchains, you will require your hardware to store a ledger; however, some cloud providers also offer Blockchain as a Service via cloud servers - these could even provide access to databases with ease!
What Is Blockchain As A Service ?
Blockchain as a Service is a cloud-based blockchain service managed by third parties that offer the infrastructure, tools, and services required for developing apps and digital services based on existing blockchain technology. Cloud providers then facilitate its adoption more efficiently, thereby increasing the efficiency of adopting the new technology.
How Do Different Industries Utilize Blockchain?
Blockchain is an exciting new technology being employed across numerous industries. Here, we present use cases in various sectors.
Energy companies utilizing blockchain technology for renewable energy access and establishing peer-to-peer trading platforms have adopted it to enhance access and facilitate customer exchange. Some examples:
Energy companies utilizing blockchain technology have developed a platform to enable individuals to exchange electricity among themselves more easily. Homeowners with solar panels can sell excess solar energy between neighbors through this automated process: smart meters generate transactions while Blockchain records these events.
Users can now sponsor and own solar panels in communities without access to energy. They may receive rent from these communities once constructed.
Financial Services
Traditional financial systems, like banks and stock markets, use blockchain technologies to manage online transactions, accounts, and market trading more effectively. Singapore Exchange Limited - an investment holding firm offering financial trading services in Asia - implemented blockchain technology to manage interbank payments more effectively by eliminating batch processing issues and manual reconciliation for thousands of transactions.
Media And Entertainment
Companies operating in the media and entertainment industries use blockchain technologies to manage copyright data securely. Verifying artists' copyright status is vital, while copyright transfer must involve multiple transactions. Sony Music Entertainment Japan employs blockchain services for enhanced digital rights management to reduce costs while increasing productivity concerning copyright processing.
Retail companies use Blockchain to track buyers and suppliers. Some retail companies has filed a trademark application for a distributed ledger technology system that will utilize Blockchain for verifying all goods sold through its platform, as well as mapping global supply chains by permitting all participants, including manufacturers, couriers, distributors as well as end users and secondary users to add events into its ledger.
What Are The Main Components Of Blockchain Technology?
The main elements of a blockchain architecture are:
Distributed Ledger
Distributed ledger, or shared database on the blockchain network, is an electronic ledger used for recording transactions. A distributed ledger stores documents in which all members of a team can edit simultaneously; anyone with editing privileges in most text editors can delete entire files, but distributed ledger technology imposes strict regulations as to who can edit, when, and how entries are recorded - once recorded they cannot be changed later.
Smart contracts enable companies to manage their business contracts autonomously without the assistance of third-party intermediaries. Smart contracts are digital programs on Blockchain that automatically execute when certain conditions are met, providing peace-of-mind transactions are completed with confidence. A logistics company could use one to pay automatically when goods arrive at the port.
Public Key Cryptography
Public key cryptography is used to identify blockchain participants. This mechanism generates two sets of keys for every network member; one shared by all, while one is unique and personal; these keys unlock any stored information on a ledger.
John and Jill both participate in a network. John logs an encrypted transaction using his private key. In contrast, Jill uses her public key to decrypt it using her public key - this ensures she knows John carried it out; otherwise, Jill would never know because her key would not work otherwise if John had modified his private key or changed anything about its operation - this ensures true Blockchain transparency!
Due to Bitcoin's decentralized nature, anyone can view all Bitcoin transactions using either a blockchain explorer or a personal node. Each node maintains its copy, updated when new blocks are added and confirmed - you could track all your coins wherever they went!
Hackers have attacked exchanges before and caused considerable cryptocurrency thefts. Though the hackers remain unknown to us except under their wallet address being traceable on the Blockchain, their money remains easily identifiable through tracking.
Bitcoin Blockchain records (and most other blockchains) are secure;
Only those assigned an address have access to decrypt them and reveal who they are; this allows blockchain users to remain anonymous while still maintaining transparency.
Are Blockchain Technologies Secure? Blockchain technology offers decentralized security and confidence through multiple mechanisms. New blocks are added sequentially at the "end" (or end) of a blockchain; once added to that position, subsequent blocks cannot modify them in any way.
Data changes that alter hash values will result in their appearance being rejected by the network since their hashes no longer match up.
What Are The Benefits Of Blockchain For Businesses?
According to research, DLTs such as blockchains offer businesses many potential benefits by lowering risks, cutting compliance expenses, and making transactions more cost-effective while simultaneously improving automated contract fulfillment and increasing network transparency. Let's examine these potential benefits: Lower Compliance Costs and Risk. Banks use Know Your Customer (KYC) processes as part of customer retention measures - up to an annual cost of $500 Million! The new DLT system may require KYC verification for every customer, which may bring efficiency gains, cost savings, and improvements in customer experience!
Digitizing records and using a universal ledger can save time and money when making transactions. Two companies recently utilized blockchain-based letters of credit to transact nearly $100,000 worth of butter and cheese, shortening the process by four hours from issuer to approval of their letter of credit.
Secure and Automated Contract Fulfillment On a blockchain, smart contracts are instructions that run themselves under certain conditions. Contract fulfillment can thus be automated. One store began documenting all procedures and actions related to vendors and customers on its supply-chain management operations by creating smart contracts on Blockchain for each procedure, making monitoring food origins more straightforward and requiring less human effort when tracking lost items.
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Conclusion
Although Blockchain could be seen as a game-changer, its actual worth remains to be determined due to an absence of practical and scalable use cases despite all the hype, headlines, idea-stage cases, and billions in investments.
Due to competing technologies, this trend may continue. Fintech isn't the only technology disrupting payments systems - 60 percent of US fintech investments between 2021-2022 were dedicated to payments and lending alone! Given its complexity and simple solutions often working best, Blockchain may only sometimes provide the ideal answer to payment challenges.
Some experts see Blockchain's future value in applications that help democratize data, foster collaboration, and solve specific problems. Some research indicates that its most significant potential lies within these specific use cases - not financial services.
