Blockchain technology is a decentralized, distributed ledger that stores the record of ownership of digital assets.
Any data stored on blockchain is unable to be modified, making the technology a legitimate disruptor for industries like payments, cybersecurity and healthcare.
Blockchain is an immutable digital ledger that enables secure transactions across a peer-to-peer network. It records, stores and verifies data using decentralized techniques to eliminate the need for third parties, like banks or governments. Every transaction is recorded, then stored in a block on the blockchain. Each block is encrypted for protection and chained to the preceding block — hence, “blockchain” — establishing a code-based chronological order. This means that, without consensus of a network, data stored on a blockchain cannot be deleted or modified.
Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions.
Key Components of Blockchain Technology
Distributed Ledger
A distributed ledger is the blockchain network’s shared database that stores transactions, similar to a shared file that everyone on the team can edit.
Anyone with editing rights in most shared text editors can delete the entire file.
However, distributed ledger technologies have strict rules governing who can and cannot edit. Once an entry has been recorded, it cannot be deleted.
Smart Contracts
Smart contracts are used by businesses to self-manage business contracts without the assistance of a third party.
They are programmes that are stored on the blockchain system and are executed automatically when certain conditions are met.
They perform if-then checks to ensure that transactions are completed confidently.
A logistics company, for example, could have a smart contract that automatically makes payment once goods arrive at the port.
Public Key Cryptography
Public key cryptography is a security feature used to uniquely identify blockchain network participants.
For network members, this mechanism generates two sets of keys.
One key is a public key that everyone in the network shares. The other is a private key that each member has.
The private and public keys work together to unlock the ledger’s data.
Structure and Design of Blockchain
At its core, a blockchain is a distributed, immutable, and decentralised ledger comprised of a chain of blocks, each of which contains a set of data.
The blocks are cryptographically linked together to form a chronological chain of information.
A blockchain’s structure is designed to ensure data security through its consensus mechanism, which includes a network of nodes that agree on the validity of transactions before adding them to the blockchain.
Blocks
A blockchain block is made up of three main components:
The header includes metadata such as a timestamp with a random number used in the mining process and the hash of the previous block.
The data section contains the block’s main and current information, such as transactions and smart contracts.
Finally, the hash is a one-of-a-kind cryptographic value that serves as a representation of the entire block and is used for verification.
Block Time
The time it takes to generate a new block in a blockchain is referred to as block time.
Block times vary between blockchains and can range from a few seconds to minutes or even hours.
Shorter block times can result in faster transaction confirmations, but longer block times may increase the timing for transaction confirmations while decreasing the chances of conflicts.
Hard Forks
A hard fork in a blockchain is a permanent divergence in the history of the blockchain that results in two separate chains.
It can happen if there is a fundamental change in a blockchain’s protocol and all nodes do not agree on the update.
Hard forks can result in the creation of new cryptocurrencies or the division of existing ones, and they require consensus among network participants to resolve.
Decentralisation
The key feature of blockchain technology is decentralisation.
There is no single central authority that can control the network in a decentralised blockchain.
Decentralisation distributes decision-making power among a network of nodes who collectively validate and agree on transactions to be added to the blockchain.
Blockchain technology’s decentralised nature promotes transparency, trust, and security. It also reduces the risk of relying on a single point of failure and reduces the possibility of data manipulation.
Finality
The irreversible confirmation of transactions in a blockchain is referred to as finality.
When a transaction is added to a block and confirmed by the network, the block becomes immutable and cannot be reversed.
This feature protects the data’s integrity and prevents double spending, resulting in a high level of security and trust in Blockchain Types & Sustainability.
Openness
Blockchain technology’s openness makes the blockchain available to anyone who wishes to participate in the network.
This implies that it is open to all and that anyone, as long as they understand the consensus rules, can join the network, validate transactions, and add new blocks to the blockchain.
Because it allows for participation from a wide range of stakeholders, openness fosters inclusivity, transparency, and innovation.
Public Blockchain
This is a type of blockchain that is accessible to the general public and allows anyone to join the network to perform transactions and participate in the consensus process. Because all transactions are publicly recorded, public blockchains are transparent.
How Does Blockchain Technology Work?
Blockchain is a combination of three key technologies:
Cryptographic keys
A peer-to-peer network (P2P) with a shared ledger
A computing method for storing network transactions and records
Cryptography keys are made up of two keys: private key and public key.
These keys aid in the completion of successful transactions between two parties.
Each person possesses these two keys, which they use to generate a secure digital identity reference.
The most important aspect of Blockchain technology is its secure identity. This identity is known as a ‘digital signature’ in the world of cryptocurrency and is used for authorising and controlling transactions.
The digital signature is integrated into the peer-to-peer network; a large number of individuals acting as authorities use the digital signature to reach agreement on transactions and other issues.
When they approve a transaction, it is validated mathematically, resulting in a successful secured transaction between the two network-connected parties.
To summarise, Blockchain users use cryptography keys to perform various types of digital interactions across the peer-to-peer network.
Types of Blockchain
Private Blockchain Networks
Private blockchains run on closed networks and are best suited to private businesses and organisations.
Companies can use private blockchains to tailor their accessibility and authorization preferences, network parameters, and other critical security features.
A private blockchain network is managed by a single authority.
Public Blockchain Networks
Bitcoin and other cryptocurrencies arose from public blockchains, which also aided in the spread of distributed ledger technology (DLT).
Additionally, public blockchains aid in the elimination of certain challenges and issues, such as security flaws and centralization.
DLT distributes data across a peer-to-peer network rather than storing it in a single location.
A consensus algorithm is used to verify the authenticity of information; proof of stake (PoS) and proof of work (PoW) are two commonly used consensus methods.
Permissioned Blockchain Networks
Permissioned blockchain networks, also sometimes known as hybrid blockchains, are private blockchains that grant special access to authorised individuals.
Organisations typically set up these types of blockchains to get the best of both worlds, and it allows for better structure when determining who can participate in the network and which transactions can be made.
Consortium Blockchains
Consortium blockchains, like permissioned blockchains, have both public and private components; however, multiple organisations will manage a single consortium blockchain network.
Although these blockchains are more difficult to set up at first, once operational, they can provide greater security.
Furthermore, consortium blockchains are ideal for collaboration among multiple organisations.
Hybrid Blockchains
Hybrid blockchains are a mix of public and private blockchains.
Some parts of a hybrid blockchain are public and transparent, while others are private and only accessible to authorised and specific participants.
As a result, hybrid blockchains are ideal for use in situations requiring a balance of transparency and privacy.
In supply chain management, for example, multiple parties can access certain information, but sensitive data can be kept private.
Sidechains
Sidechains are separate blockchains that run alongside the main blockchain, providing additional functionality and scalability.
Sidechains allow developers to experiment with new features and applications without jeopardising the integrity of the main blockchain.
Sidechains, for example, can be used to build decentralised applications and implement specific consensus mechanisms.
Sidechains can also be used to handle main blockchain transactions in order to reduce congestion and increase scalability.
Blockchain Layers
The concept of building multiple layers of blockchains on top of each other is referred to as blockchain layers.
Each layer can have its own consensus mechanism, rules, and functionality that interacts with the others.
Because transactions can be processed in parallel across different layers, scalability is increased.
The Lightning Network, for example, is a second layer solution built on top of the Bitcoin blockchain that enables faster and cheaper transactions by establishing payment channels between users.
Advantages of blockchain technology:
Integrity of the whole process: Blockchain technology ensures integrity of the entire process. It means that any block or even a transaction that adds to the chain cannot be edited which ultimately provides a very high range of security. They provide an unalterable document of the history of every transaction.
Traceability: With the blockchain ledger, each time an exchange of goods is recorded on a Blockchain, an audit trail is present to trace where the goods came from. This improves security and prevents fraud in exchange-related businesses. It can also help verify the authenticity of the traded assets. In industries such as medicine, it can be used to track the supply chain from manufacturer to distributor, or in the art industry to provide an irrefutable proof of ownership.
Security: Blockchain is considered to be a highly secure system due to its digital signature and encryption. This ensures that the owner of the account himself is operating the transactions. The block encryption in the chain makes it tougher for any hacker to disturb the traditional setup of the chain.
Faster processing: Before the invention of the blockchain, the traditional banking organisation took a lot of time in processing and initiating the transaction but after the blockchain technology speed of the transaction increased to a very high extent. Before this, the overall banking process takes around 3 days to settle but after the introduction of Blockchain, the time reduced to nearly minutes or even seconds.
Fraud prevention: A system that is based on data stored in a number of places is immune to hackers. Its not that easy to get access to it, and if so, any piece of information can be easily recovered
Transparency: Banks, as well as the clients, are immediately notified about the completion of transactions, which is both convenient and trustworthy. In financial systems and businesses, this adds a layer of accountability, holding each sector of the business responsible to act with integrity towards the company’s growth, its community and customers.
Disadvantages of Blockchain Technology
Technology Cost
Bitcoin mining utilises a network of high-speed computers that consume a significant amount of energy.
According to the University of Cambridge Electricity Consumption Index, if Bitcoin’s proof-of-work system were a country, it would be the 34th largest consumer of electricity, trailing Pakistan but ahead of Kazakhstan.
Private Key Issue
Individual private keys are used to create blockchain addresses. That is, each person with authorised access has his or her own private key with which to carry out their operations.
The field of cryptography is concerned with public-key blockchain processes.
This public key address is shared with individuals, who access it using their private keys, as previously stated.
If the individual misplaces their private key, the process fails. They have no control over their money or future transaction procedures.
Scalability Issue
The Bitcoin blockchain can handle approximately seven new transactions per second.
Visa, on the other hand, claims to be able to process 24,000 transactions per second. This creates a scalability issue for the Bitcoin system.
Highly Volatile
In 2021, the popularity of cryptocurrency skyrocketed, with Bitcoin reaching a record spot price of nearly $65,000.
However, by 2022, the price of Bitcoin and many other cryptocurrencies had fallen by more than half.
Illegal Activity
Criminal enterprises use cryptocurrencies such as Bitcoin as payment because of the privacy it provides, as well as to target Bitcoin holders for scams.
Customers of Silk Road, a black-market online shopping network for illegal drugs and other illicit services that was shut down by the FBI in 2013, for example, used Bitcoin.
Meanwhile, Bitcoin investment scams have increased in tandem with the currency’s recent historic rise.
Crypto Use is Niche
Many exchanges, brokerages, and payment apps now sell Bitcoin, and many companies accept Bitcoin as payment, including PayPal and Microsoft, however, payment with Bitcoin remains the exception rather than the rule.
Furthermore, selling Bitcoin for cash app purchases such as PayPal requires users to pay capital gains taxes on the Bitcoin sold, in addition to any state and local taxes paid on the product or service.
Potential applications of blockchain technology:
Governance: Blockchain technology can help in ensuring good governance. It ensures transparency of the public records through the usage of a digital form platform and allows auditing of government documents. Moreover it allows to maintain the authenticity of the document and clearly reduces the processing time.
Banking: Blockchain can help in avoiding risk of payment losses involved in banking transactions by adopting secure distributed ledger platform. It reduces transaction fees across cross-borders, corporate payments and remittances.
Food & Supply Chain: It creates a tamper proof record to check the real information about expiration date, product journey from the farm to the shop. The real information of the product can help in improving the reliability and efficiency of the supply chain system.
Insurance: Blockchain technology can change the ways the insurance documents, claim settlements and fraud handling’s are carried out. It allows the creation of transparent, secure, decentralized and immutable insurance network.
Healthcare: It helps to prioritize patient health at all costs without compromising the quality of the health care service. By establishing a secure chain of network blockchain can help in handling the patient records, consent forms, billings and public health monitoring.
Automotive: Blockchain can solve the challenges in automotive manufacturing, car deliveries, billings. It can help in the creation of an after sales support ecosystem to keep track of the maintenance record of vehicle owners.
Tourism: Blockchain can reduce the delay time of passenger document handling, creates a decentralized hotel booking ecosystem at the least transaction fee and also keeps passengers private information safe.
Blockchain in Social sectors:
Personal Identification: Governments manage vast amounts of personal data from birth and death records to marriage certificates, passports and census data. Blockchain technology offers a streamlined solution for managing all of it securely.
Fight corruption: Registering government transactions in the blockchain helps create a trusted history for any transaction and significantly eases the auditing process. This would contribute to making public procurement more transparent
Cut red tapism: As government agencies currently store data in autonomous centralized databases, they tend not to interoperate in an optimal way. This results in duplication, overlap and contradiction in the information held. Blockchain eliminates this lack of interoperability which generates unnecessary red tape in obtaining relevant information from a user, and makes the process for sharing data between agencies clear and inexpensive.
Identity and Land rights: The World Identity Network and Humanized Internet project can store identifiers such as birth certificates and university degrees on a blockchain, in the form of distributed digital lockboxes. Users can keep their information private and secure, but also give permission for anyone to access it anywhere in the world. Several governments, including those in Dubai, Estonia, Georgia, and Sweden are making early forays into blockchain-based approaches to securing property rights.
Agriculture: First of all, it can reduce contamination and food fraud. This can happen with the help of blockchain efficiency and transparency. Blockchain’s role is to improve the third party involvement by ensuring that they are tracking, collecting and managing data in the best possible way. With blockchain, farmers and distributors are going to get their payments faster than ever-improving their ability to work on their next set of projects faster.
Health: The health sector is one of those sectors that have tons of initiatives by both for-profit and nonprofit organizations. With blockchain, healthcare can improve digital healthcare records. It also improves pharmaceutical supply chain management. As usual, blockchain offers a decentralized, efficient and secure solution.
Governance and democracy: Government and civil society can also leverage blockchain technology to strengthen democratic processes and participation. Blockchain systems such as Ballot Chain can manage online elections with secure and anonymous voting that participants can verify at any time.
Environmental protection: In the environmental arena, new blockchain-supported supply chain management systems, which are transparent but cannot be tampered with, can track products from the farm to the table, and show whether or not a food product is organic or Fair Trade.
Philanthropy and Aid: Billions of dollars are invested in helping the needy. However, these aids are mostly misused due to a lack of transparency. In fact, most of the aid never reaches the intended people. This has also led people to not contribute to these non-profit organizations. Blockchain can solve all of these problems and help elevate the confidence in non-profit in utilizing the funds.
Crowdfunding: As with traditional crowdfunding, a blockchain powered crowdfunding campaign seeks to secure investment for a new project from an interested community. But in this instance, funding is most likely to come in the form of bitcoin or other cryptocurrencies.
