Oh, the blockchain! If you are a citizen of the internet you would have come across this bisyllabic word a lot many times, but do you really know what it means? With each passing second new technology is being developed and many such developments led to the making of the blockchain. It is undeniably an ingenious invention-creation that has allowed digital information to be distributed without being copied in the process. It is the backbone of the new age of the internet where the security of data is a paramount concern.
What is Blockchain Technology?
Blockchain was the brainchild of a group or a person who worked under the name “Satoshi Nakamoto.” Initially devised for the Bitcoin-the most popular digital currency- the tech community found other potential uses for it.
Why is it called a blockchain?
Well at the most basic level it is self-explanatory — a chain made up of blocks, where the block is digital information consisting of a record of new transactions, that is stored in a public database called the chain. The structure holds transactional records while ensuring transparency and security. Additionally, the blockchain technology is decentralized— it is not owned or controlled by a corporation, the government, or a bank. The blockchain is readily available for everyone on the network.
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Once information is stored on a blockchain, it becomes challenging to make changes to it or alter it. The authenticity of the blockchain can be verified and secured using a digital signature, and as all the files are stored in an encrypted format, it makes the blockchain tamper-proof.
Blockchain technology allows the participants of a network to reach a common consensus, which allows the data to be stored and be recorded digitally. The common history of the data is available for all the participants of the network only, which negates and eliminates chances of any fraudulent activity or duplication of transactions — all this without any third party; sounds neat, no?
Steps that a blockchain process follows:
Step 1: Recording of the data
Step 2: The validity of the data is checked by a network called ‘nodes.’
Step 3: The accepted records are then added to a block, where each block has a unique code, called ‘hash.’ It also contains the hash of the block previous to it.
Step 4: The block is then added to the entire series of blocks, called the blockchain where the hash codes connect the blocks together.
Advantages of blockchain technology
All this sounds straight out of a sci-fi movie, but why should you buy into this idea? What are the advantages of this technology?
The data, when in a blockchain, is stored on a distributed network. The participants on the blockchain network share the same data as opposed to individual copies of the same data which cannot be updated with the consensus from the other participants. If anyone tries to change any information in the record, it will be nearly impossible for them to do it for all the blocks that their data exists in.
Security & Privacy
In a centralized system, the central authority has full control over data, meaning the third party can compromise the user data at any given time. Furthermore, there is always the risk of getting hacked when all your data is stored in a single place. Hackers can simply access the central server and steal all the personal information.
Blockchain works differently — There is no third-party involvement, and the data is stored on a distributed network in encrypted form. Hence, blockchain is the best bet when we speak of security and privacy.
Efficiency & Speed
When there is no third party involved, all the processes and transactions are handled by the parties involved, which speeds up the entire process. Sending money, sharing data has never been easier or faster!
When the transaction speed is this fast, it will reduce the cost of the process. No third party involvement eliminates all the transactional or hidden fees in the mix. When companies store your data on servers, it takes a lot of money to maintain them. Individuals are hired to manage all of the data. When there is no central server, no maintenance is needed.
Here is a real-life example, to help you understand the advantages of blockchain technology:
Imagine this — you are looking into sending some money to someone who lives in a different location. You could obviously opt for the generic solution of going to the bank or even transfer the money via any payment transfer app (Paytm, PayPal, etc.). But this generic option involves a third party which processed the transaction and simultaneously processed a transferring fee. Why should you spend some extra cash to give your money to whomever you want to?
Moreover, third party involvement increases the security risk. A hacker could always disrupt the network and steal your money. Only a single party will suffer a loss – you.
Let’s see how things will pan out differently if we use blockchain, shall we?
Firstly, the process becomes so much easier and secure. No extra or hidden fees are involved at any given step, and funds are directly transferred and processed by you — eliminating the third party. Additionally, blockchain has a decentralized database, which means that the database is not limited to any single location, and all the records on the chain are public. No single place where all the data is stored equals no chance of corruption of information by a hacker. Win-Win.
Blockchain is a comparatively new technology, which means new uses for the same are being discovered every day. We have merely scratched the surface of what the blockchain is — all we know is that it is revolutionizing the way data is handled and has already changed the way people handle their businesses on the daily.
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How does Blockchain work?
On a blockchain network, a digital transaction is merged with other transactions from the same period to form a cryptographically secure 'block.' The block is subsequently transmitted to the whole network. In a blockchain network, the nodes, or participants, validate and send transaction data. Miners use processing power to solve a cryptographic challenge and validate a block of transactions. A reward is given to the miner who solves and verifies the block first. A chain of blocks is formed when each verified block is linked to the one before it.
Why is Blockchain used in Finance?
Security and transparency are two of Blockchain's core characteristics, and the banking industry was one of the revolution's early consumers. As a result of blockchain adoption, sectors like trade finance have experienced reduced processing times, eliminated paperwork, and become more cost-effective while maintaining security and trust. Data and information manipulation are always a possibility in Finance. With the use of distributed ledgers, companies have been able to eliminate such intermediaries that retain central control over databases. Any change to the ledger must be approved by a majority of network members and then validated by consensus.
What is a smart contact in Blockchain?
A smart contract is a computerized program that is reserved on the Blockchain. Each smart contract has code that specifies a set of inputs. Smart contracts may be used to store data as well. Under this technology, smart contracts run on every node, and the data from each contract is kept on every node, following the distributed paradigm of the Blockchain. This information is available at all times. Smart Contracts may also be used to call other smart contracts, enforce permissions, run workflow logic, and do calculations. Because smart contract code is executed within a transaction, the data recorded as a result of running the smart contract becomes part of the Blockchain's immutable ledger.