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It is estimated that more than 1 in 10 Americans invested in cryptocurrency over the past year, according to a survey published by the University of Chicago. With the rise in fame of digital assets such as cryptocurrencies and NFTs, you must have heard of Blockchain technology, which is the underlying technology that many cryptocurrencies such as Bitcoin and Ethereum operate on.
What is a Blockchain?
Blockchain is defined as an immutable ledger of decentralized data that is securely shared across a peer-to-peer network. The term blockchain refers to the fact that data is kept in blocks, and each block is linked to the preceding block, forming a chain-like structure. You can only add new blocks to a blockchain when using blockchain technology. After a block is uploaded to the blockchain, it cannot be modified or deleted.
Distributed Ledger Technology (DLT) refers to a decentralized database that is managed by several people. Blockchain is a sort of Distributed Ledger Technology in which transactions are recorded using a hash, which is an immutable or unalterable cryptographic signature. Consider Google Docs as the most basic example of blockchain. When a user writes a document or a spreadsheet in Google Docs, they may share it with others on their company’s network. As a result, numerous individuals may access the document and modify it all at once without the inconvenience of sending a Word document back and forth. While Google Docs is not a blockchain, it is a close comparison to how blockchain works. The blockchain differs from Google Docs in that no one can change the transaction once it is in place. Blockchain’s purpose is to enable digital information to be recorded and distributed, but not modified.
As a database, blockchain information is stored electronically in digital format. A blockchain may hold several sorts of information, but the most prevalent usage so far has been as a ledger for transactions.
How Blockchain Works
When someone initiates a transaction, it is broadcasted to a peer-to-peer network consisting of computers known as nodes. Through the use of known algorithms, the network of nodes authenticates the transaction and the user’s status. When a transaction is validated, a block reflecting that transaction is produced. The new block is then permanently and irreversibly added to the current blockchain. The transaction is now complete and the Nodes are rewarded for proof of work, typically in cryptocurrency.
Although blockchain was meant to function without a central authority, transactions must still be authenticated.
This is accomplished through the use of cryptographic keys, which are strings of data (similar to passwords) that identify a user and grant access to their “account” or “wallet” of value on the system.
Each user has a private key as well as a public key that is visible to everyone. Using both of these provides a secure digital identity that can be used to verify the user via digital signatures and ‘unlock’ the transaction they intend to complete.
Once the users have agreed on a transaction, it must be approved, or authorized, before it can be added to a block in the chain.
The decision to add a transaction to a public blockchain is decided by consensus. This implies that the majority of the network’s “nodes,” or computers, must agree that the transaction is genuine. People who own the computers in the network are rewarded for verifying transactions. This process is known as ‘proof of work’.
Proof of Work
Proof of Work requires the network’s computer owners to solve a challenging mathematical problem to add a block to the chain. Mining is the process of solving the problem, and ‘miners’ are usually compensated in cryptocurrencies for their efforts. Mining entails creating a difficult-to-forge hash of a block transaction, hence assuring the security of the whole Blockchain without the need for a central mechanism.
Mining necessitates a significant quantity of computational power, which consumes a significant amount of energy.
To safeguard data, blockchain technology employs hashing and encryption, depending primarily on the SHA256 algorithm. The SHA256 algorithm transmits the sender’s address (public key), the receiver’s address, the transaction, and his/her private key data. After verification, the encrypted data, known as hash encryption, is sent across the world and stored on the blockchain. The SHA256 algorithm makes hash encryption almost impossible to crack, which simplifies sender and recipient authentication.
Types of blockchain networks
Blockchain networks are classified into four types: public blockchains, private blockchains, Permissioned blockchains, and Consortium blockchains.
Public Blockchain Networks
A public blockchain, such as Bitcoin, is one that anybody may join and participate in. The system is decentralized, with nobody supervising or controlling the network. Data on a public blockchain is secure because it cannot be changed or edited after it has been validated.
Private Blockchain Networks
Only one organization has power over the network in a private blockchain. This indicates that the public is not welcome to participate. The network is governed by a single organization, which controls who is authorized to participate, executes a consensus protocol, and maintains the shared ledger.
Permissioned Blockchain Networks
Permissioned blockchain networks, also known as hybrid blockchains, are private blockchains that grant privileged access to approved persons. Users may only conduct activities that have been permitted to them by the ledger administrators and must identify themselves using certificates or other digital means.
Consortium Blockchain Networks
Consortium blockchains, like permissioned blockchains, feature both public and private components; however, with this type of blockchain network, multiple organizations come together to manage a single consortium blockchain. A consortium blockchain is suited for commercial situations in which all parties must be authorized and share responsibility for the blockchain.
The Benefits of Blockchain
Blockchain has changed how we perceive problems and has brought tons of benefits. Let’s now look at some of these benefits.
Customers typically pay a bank to authenticate a transaction, a notary to sign a document, or a priest to execute a marriage ceremony. Blockchain eliminates the need for third-party verification, as well as the expenses connected with it. Business owners, for example, pay a tiny charge whenever they accept credit card payments because banks and payment-processing businesses must handle the transactions. Bitcoin, on the other hand, lacks a centralized authority and offers low transaction costs.
Blockchain does not store any of its data in a single location. Rather, the blockchain is replicated and distributed over a network of computers. When a new block is added to the blockchain, every computer in the network updates its blockchain. Blockchain becomes more difficult to manipulate by disseminating information over a network rather than holding it in a single central database. If a hacker obtained a copy of the blockchain, just a single copy of the information, rather not the whole network, would be compromised.
The majority of blockchains are completely open-source software. This implies that anyone with access to the code may view it. This allows auditors to evaluate the security of cryptocurrencies like Bitcoin. This also implies that there is no actual authority over who controls the Bitcoin code or how it is modified. As a result, anyone can suggest system enhancements or additions. Bitcoin can be upgraded if a majority of network users feel that the upgraded version of the code is sound and useful.
Improved Speed and Highly Efficient
Blockchain automates and eliminates time-consuming operations, increasing productivity. It also eliminates human-made mistakes through automation.
Everything is made possible by the digital ledger, which serves as the main archive for all transactions. Process streamlining and automation also implies that everything becomes very efficient and quick.
Because everything is maintained on a decentralized ledger, everyone can easily trust one another. In brief, blockchain uses its method of data storage to enable a highly efficient process that is characterized by trust, transparency, and immutability.
Blockchain technology provides higher security than earlier platforms or record-keeping systems. Any recorded transactions must be agreed upon using the consensus process. In addition, using a hashing algorithm, each transaction is encrypted and has a suitable connection to the previous transaction.
The fact that each node has a copy of every transaction ever conducted on the network adds another layer of security. As a result, if a malicious actor tries to modify the transaction, he will be unable to do so because other nodes would reject his request to post transactions to the network.
Blockchain networks are also immutable, which means that once data has been written, it cannot be undone in any manner.
Drawbacks of Blockchain Technology
Each coin has a flip side. Today, blockchain technology has progressed beyond its infancy, but several issues must be addressed before it can be extensively utilized for everyday transactions. Here are some of the drawbacks of blockchain technology.
Consumption of Large Amounts of Energy by Blockchain Solutions
Bitcoin was the first to use blockchain technology. It employs the Proof-of-Work consensus algorithm, which relies on miners. Miners are paid by completing difficult mathematical problems to add a block to the chain. The tremendous energy consumption these difficult mathematical problems require to be completed is what makes the proof of work method unsuitable for the real world.
Data is Immutable
The immutability of data has always been one of the blockchain’s major drawbacks. It improves a variety of systems, such as supply networks and financial systems. However, if you consider how networks operate, you should realize that this immutability is only possible if network nodes are distributed equally.
What I mean is that if an entity owns 50% or more of the nodes in a blockchain network, he may control it, making it vulnerable.
Another issue is that once data is written, it cannot be deleted. Every person on the earth has the right to privacy. However, if the same individual uses a digital platform based on blockchain technology, he will be unable to delete its trace from the system if he does not want it to remain there. In other words, there is no way for him to erase his imprint, severing his privacy rights.
When You Lose Your Private Key, You lose it All
Individuals must be able to operate as their bank for blockchain to be decentralized. This, however, raises another issue.
Private keys are required to access the user’s assets or information recorded in the blockchain. It is produced during the wallet creation process, and the user must keep track of it. They must also make certain that it is not shared with anyone else. If they do not, their wallet will be endangered. Furthermore, if they misplace the private key, they will lose access to the wallet permanently. One of the downsides of blockchain is its dependency on people.
So, if you, as a user, forget your private key, you will be logged out of your wallet and no one would be able to recover it. This is a significant disadvantage since not all users are technologically knowledgeable and so have a higher risk of making mistakes. If it is handled by a centralized authority, it defeats the objective of decentralization.
Blockchains are Sometimes Inefficient
There are several blockchain technologies available right now. Picking the most popular ones, such as the blockchain technology utilized by Bitcoin, reveals a multitude of inefficiencies inside the system. This is one of the major downsides of blockchain.
First and foremost, when I attempted to install the bitcoin miner on my machine, I immediately discovered that the ledger may easily exceed 100 GBs. It was inefficient in data storage, which might cause storage issues for several nodes who desire to join the network.
There must be a better method to manage this, given that nodes must copy data anytime it is altered. Furthermore, as additional transactions and nodes are added to the blockchain, its size expands. If it continues to expand, the entire network will be slowed. This is not ideal for business blockchains, because the network must be both fast and safe.
With the help of new blockchain solutions, inefficiencies are gradually being reduced. Bitcoin is also attempting to address inefficiencies through the use of lightning networks.