A blockchain is like a special kind of computer record that many computers share. It’s famous for its important job in cryptocurrency systems, where it keeps a safe and spread-out history of transactions. But it’s not just for money – blockchains can also lock down information in any business, making it so no one can change it.
Once something is added to a block, it can’t be changed. The only time we need to trust is when someone puts information in. This means we don’t have to rely on other people or groups to check things, like auditors who can make mistakes and cost a lot of money.
Since Bitcoin started in 2009, blockchains have become super useful. They’re not just for money; they help make different cryptocurrencies, special finance apps, unique digital items (NFTs), and clever contracts.
- How Does a Blockchain Work?
- Transaction Process
- Blockchain Decentralization
- Blockchain Transparency
- Is Blockchain Secure?
- Bitcoin vs. Blockchain
- Blockchain vs. Banks
- How Are Blockchains Used?
- Pros and Cons of Blockchain
How Does a Blockchain Work?
You’ve probably used spreadsheets or databases before, right? Well, think of a blockchain like that – it’s a place where we put and keep information. But there’s a big difference between a regular database and a blockchain in how they work and keep stuff safe.
In a blockchain, there are special programs called scripts that do the jobs you’d expect in a database: putting in info, getting info out, and storing it securely. The cool thing about a blockchain is that it’s not in one place – it’s spread out on lots of computers. And all those copies have to match up to be correct.
So, whenever there’s a transaction, like buying something with cryptocurrency, the blockchain grabs that info and puts it in a block, kind of like a cell in a spreadsheet. Once that block is full, all the info inside gets scrambled up using a special code to make a unique number called a hash.
This hash becomes part of the next block, along with more info, and it’s all scrambled together again. This keeps happening, making a chain of blocks with each one linked to the next. That’s why it’s called a blockchain!
Transactions go through a certain way depending on the blockchain they’re on. Take Bitcoin, for instance. When you use your cryptocurrency wallet to make a transaction, here’s what happens:
First, your transaction goes to a memory pool where it waits its turn. Miners or validators grab transactions from this pool. When a block fills up with transactions, it gets closed and locked using a special code.
After that, the mining process starts. Miners work to solve complex math puzzles to validate the transactions and add them to the blockchain.
All the computers in the network work together at the same time to figure out the hash. They each create a random hash but keep changing one number called the “nonce,” which stands for the number used once.
Miners begin with a nonce set at zero, added to their random hash. If the resulting number isn’t smaller than or equal to the target hash, they add one to the nonce and create a new block hash. This process goes on until one miner finds a valid hash, winning the competition and getting the reward.
When a block is finished, a transaction is finished too. But it’s not fully confirmed until five more blocks are checked. It usually takes about an hour for this confirmation because each block takes roughly 10 minutes to process. So, if you add the first block plus five more, it totals around 60 minutes.
Not all blockchains work like this, though. In Ethereum, for example, the network picks one validator randomly from all users who have either staked to confirm blocks. This makes the process quicker and uses less energy compared to Bitcoin.
A blockchain spreads data across many network nodes, which are computers or devices running blockchain software in different places. This setup not only makes copies of the data but also ensures its accuracy. For instance, if someone tries to change a record in one part of the database, other nodes prevent it. This prevents any single node from changing the information.
Because of this distribution and the encrypted proof of work, the data and its history (like cryptocurrency transactions) can’t be reversed. A blockchain can store various information, not just transaction lists, such as legal contracts, IDs, or a company’s inventory.
Because the Bitcoin blockchain is decentralized, all transactions are openly visible. You can see them either by having your node or using blockchain explorers, which let anyone watch transactions live. Each node keeps its copy of the chain, updating it with new blocks.
This setup means you can track a bitcoin wherever it goes if you want to. For instance, when exchanges get hacked, and cryptocurrency is stolen, even though hackers might be anonymous, their wallet addresses are on the blockchain. So, the crypto they take can be traced.
However, the information in the Bitcoin blockchain (and most others) is encrypted. Only the person with an address can reveal their identity. This allows blockchain users to stay anonymous while keeping things transparent.
Is Blockchain Secure?
Blockchain technology ensures decentralized security and trust through several methods. Firstly, new blocks are consistently stored linearly and chronologically, always added to the “end” of the blockchain. Once a block is appended to the end, preceding blocks become immutable; they cannot be altered.
Any alteration to data within a block alters the block’s hash. As each block includes the hash of the preceding block, a modification in one block affects subsequent blocks. Consequently, any attempt to modify a block would result in a mismatch of hashes, leading the network to reject the altered block.
Let’s say a hacker runs a node on a blockchain network and aims to change the blockchain to steal cryptocurrency from others. To succeed, they must convince other nodes that their version of the blockchain is correct.
They’d need to control most of the network, more than 50%, and choose the right moment to insert their altered version. It’s called a 51% attack due to the need to control the majority.
Timing is crucial in this attack. By the time the hacker acts, the network likely has progressed past the blocks they want to change. This is because blockchain networks hash at an incredibly rapid pace. For instance, on April 21, 2023, the Bitcoin network hashed at 348.1 exahashes per second (18 zeros).
Bitcoin vs. Blockchain
Blockchain technology was initially conceptualized in 1991 by Stuart Haber and W. Scott Stornetta. They aimed to create a system where document timestamps remained secure from tampering. However, it wasn’t until nearly twenty years later, with the launch of Bitcoin in January 2009, that blockchain found its practical application.
Bitcoin, introduced in a research paper by its pseudonymous creator, Satoshi Nakamoto, is based on blockchain technology. Nakamoto described Bitcoin as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
The crucial point to grasp is that Bitcoin utilizes blockchain to openly record a ledger of payments or transactions between parties transparently.
Blockchain can be used to immutably record any number of data points. This could be in the form of transactions, votes in an election, product inventories, state identifications, deeds to homes, and much more.
Currently, tens of thousands of projects are looking to implement blockchains in various ways to help society other than just recording transactions—for example, as a way to vote securely in democratic elections.
The nature of blockchain’s immutability means that fraudulent voting would become far more difficult. For example, a voting system could work such that each country’s citizens would be issued a single cryptocurrency or token.
Each candidate would then be given a specific wallet address, and the voters would send their token or crypto to the address of whichever candidate for whom they wish to vote. The transparent and traceable nature of blockchain would eliminate the need for human vote counting and the ability of bad actors to tamper with physical ballots.
Blockchain vs. Banks
Blockchains are seen as a big change in finance, especially in how we pay for things and use banks. However, banks and decentralized blockchains are different.
Let’s look at the banking system and how it’s not the same as Bitcoin’s blockchain. To see how a bank differs from blockchain, let’s compare the banking system to Bitcoin’s blockchain implementation.
Blockchain and banks serve different purposes and operate within different frameworks, but they can also intersect in various ways. Here’s a comparison between blockchain and banks:
Centralization vs. Decentralization:
- Banks are centralized institutions that manage financial transactions and services through a central authority or institution.
- Blockchain operates on a decentralized system where transactions are recorded and verified across a network of computers (nodes) without the need for a central authority.
Transaction Speed and Efficiency:
- Banks often require time for processing transactions, especially across borders, due to the involvement of intermediaries, regulatory requirements, and legacy systems.
- Blockchain transactions can be processed much faster, especially within the same network or using cryptocurrencies, as they are verified by the network participants directly.
- Transparency and Security:
- Banks maintain a degree of privacy and confidentiality for their customers, often requiring identity verification and centralized control over transaction records.
- Blockchain provides transparency as transactions are recorded on a public ledger, which can be viewed by anyone. However, individual transactions can be pseudonymous, depending on the blockchain design. Blockchain also offers robust security through cryptographic techniques and decentralization.
- Banks charge fees for various services, including transactions, account maintenance, and international transfers.
- Blockchain transactions can be cheaper since they eliminate intermediaries and reduce overhead costs associated with traditional banking systems.
- Banks rely on trust in the institution and the regulatory framework governing them to ensure the security and integrity of transactions.
- Blockchain relies on cryptographic algorithms, consensus mechanisms, and distributed ledger technology to establish trust among participants without the need for a central authority.
- Banks operate within a regulatory framework governed by central banks, financial authorities, and government regulations aimed at maintaining stability, preventing fraud, and protecting consumers.
- Blockchain technology is still evolving in terms of regulation. While some jurisdictions have embraced blockchain and cryptocurrencies, others are still in the process of defining regulatory frameworks to govern their use.
- Banks provide a wide range of financial services, including savings and checking accounts, loans, credit cards, investment services, and more.
- Blockchain technology enables various applications beyond finance, including cryptocurrency transactions, supply chain management, voting systems, digital identity management, and decentralized finance (DeFi).
In summary, while banks and blockchain serve different functions and operate under different paradigms, they can complement each other in certain scenarios, such as when banks explore blockchain technology to improve their processes or when blockchain-based systems integrate with traditional financial services.
How Are Blockchains Used?
We’ve learned that blocks in Bitcoin’s blockchain hold transaction data. Today, over 23,000 other cryptocurrencies run on blockchains. Interestingly, blockchain proves reliable for storing various transaction data, not just for cryptocurrencies.
Several companies are testing blockchain, including Walmart, Pfizer, AIG, Siemens, and Unilever. For instance, IBM developed the Food Trust blockchain to track how food products travel to their destinations.
Why bother? The food industry faced numerous outbreaks of E. coli, salmonella, and listeria, sometimes due to accidental contamination. In the past, it took weeks to trace the source of outbreaks or sickness caused by contaminated food.
By using blockchain, companies can trace a food product’s journey from its origin through each step until delivery. They can also track everything else it might have touched, helping identify problems much sooner, and potentially saving lives. This food tracking example demonstrates how blockchain works in real life, but there are many other ways to use blockchain.
Banking and Finance
The banking industry could benefit greatly from using blockchain technology. Banks usually only work on weekdays and during specific hours. So, if you deposit a check on Friday evening, you might have to wait until Monday morning to see the money in your account.
Even during bank hours, it can take one to three days for transactions to get verified because of the large number of transactions banks handle. But blockchain works differently—it operates continuously.
If banks start using blockchain, customers might see their transactions completed in just minutes or seconds, regardless of the time or day. Blockchain could also help banks transfer funds between each other faster and safer. Moving large sums of money carries risks, and even a few days of transit time can be costly.
Currently, it takes up to three days (or more for international trades) to settle and clear stock trades, meaning the money and shares are locked up during this period. Blockchain could significantly shorten this time.
Blockchain technology serves as the foundation for cryptocurrencies such as Bitcoin. Unlike the U.S. dollar, which is regulated by the Federal Reserve, blockchain operates without a central authority. In the current system, a person’s data and money are subject to the control of their bank or government. If a bank is hacked, the client’s private information becomes vulnerable.
Moreover, if a client’s bank fails or if they live in a country with an unstable government, the value of their currency could be in jeopardy. Back in 2008, several failing banks were rescued, partly using taxpayer money. These concerns led to the creation and development of Bitcoin.
Blockchain technology enables Bitcoin and other cryptocurrencies to function without relying on a central authority by distributing its operations across a network of computers. This setup not only lowers the risk but also decreases processing and transaction fees.
For people without state identification, using cryptocurrency wallets for savings accounts or payments is significant. In some countries affected by war or lacking proper identification infrastructure, citizens may not have access to savings or brokerage accounts. As a result, they have no secure way to store their wealth.
Healthcare providers have the opportunity to use blockchain technology to securely store their patients’ medical records. When a medical record is created and authenticated, it can be stored in the blockchain. This assures patients that their records cannot be altered. Personal health records can be encrypted and kept on the blockchain with a private key, making them accessible only to authorized individuals and ensuring privacy.
If you’ve ever been to your local Recorder’s Office, you know how tricky it is to record property rights. Right now, you have to take a physical deed to a government worker at the office. They then manually enter it into the county’s main database and public index. If there’s a disagreement over a property, it has to match up with what’s in the public index.
This whole process is not only expensive and slow, but it’s also prone to mistakes. Every mistake makes it harder to keep track of who owns what. But there’s hope with blockchain technology. With blockchain, we might not need to deal with scanning documents or searching for files in a local office anymore. If property ownership is recorded and checked on the blockchain, owners can trust that their deeds are right and always available.
In places torn by war or where there’s little government or financial support and no Recorder’s Office, proving you own property can feel impossible. But if people in these areas use blockchain, they could create clear and easy-to-understand timelines for property ownership.
A smart contract is like a special computer program that lives on the blockchain. It helps people make agreements. When folks agree to use a smart contract, they set up certain rules. Once these rules are followed, the agreement happens automatically.
Let’s imagine someone wants to rent an apartment using a smart contract. The landlord says they’ll give the tenant the door code once the tenant pays the security deposit. With a smart contract, as soon as the tenant pays, the door code is sent to them automatically. If the rent isn’t paid or other conditions aren’t met, the contract can also be set up to change the door code automatically.
In the IBM Food Trust case, suppliers can use blockchain to track where they got their materials from. This helps companies check if their products are real and if they really are “Organic,” “Local,” or “Fair Trade.”
Forbes says the food industry is starting to use blockchain more to follow where food comes from and to make sure it’s safe from the farm to when people eat it.
As mentioned earlier, blockchain could help create a new kind of voting system. By using blockchain for voting, we could reduce the chances of election cheating and encourage more people to vote, like what happened in the November 2018 midterm elections in West Virginia.
When votes are stored on a blockchain, it’s really hard for anyone to change them. Plus, using blockchain would keep the voting process transparent, meaning we’d need fewer people to run an election, and we’d get results almost right away. This means no worries about cheating or having to recount votes after the election.
Pros and Cons of Blockchain
Blockchain, despite being complex, offers boundless potential as a decentralized way to keep records. It brings benefits like improved user privacy, heightened security, lower fees, and reduced errors. However, there are drawbacks too.
- Enhanced Accuracy: Human verification isn’t needed, leading to fewer mistakes.
- Cost Savings: Third-party verification costs are eliminated, making processes cheaper.
- Harder to Manipulate: Decentralization makes tampering difficult.
- Secure, Private, and Efficient Transactions: Transactions are safe, confidential, and fast.
- Transparency: Everyone involved can see what’s happening.
- Banking Alternative: It offers a safe way to store money and protect personal data in countries with unstable governments.
- High Technology Costs: Some blockchains require significant investment.
- Low Transaction Speed: The number of transactions processed per second is limited.
- Linked to Illicit Activities: It has been used for illegal purposes like on the dark web.
- Uncertain Regulation: Regulations vary by location and are still unclear.
- Limited Data Storage: There are constraints on how much data can be stored.
These aspects highlight the complexity and challenges associated with blockchain technology.
Trade on the Go. Anywhere, Anytime
One of the world's largest forex brokers is ready for you. Enjoy competitive fees and dedicated customer support while trading securely. You'll also have access to their tools that make it easier than ever to view your trade history, copy trades, manage investments from other traders, view price charts, and make conversions with zero fees. Make an account for free and join millions of traders and investors on the global forex market.