What Is Blockchain? Meaning, Working, Types, and Uses. Blockchain is a modern database technology that facilitates decentralized, transparent data exchange. Data in blockchain databases cannot be removed or altered without the agreement of the entire network since the data remains consistent in chronological order. To keep track of things like payments, orders, and user accounts, developers can utilize this capability to build a secure, immutable ledger. The definition, operation, kinds, and applications of blockchain are discussed in this article.
What Is Blockchain Technology?
Due to its architecture, blockchain stores data in ‘blocks’ connected in a ‘chain.’ The block stores transactions, while the chain is a network of peer-to-peer databases. A ‘digital ledger’ setup allows the system to have built-in measures to prevent illegal entries. It provides a consistent ‘shared view’ of data.
Blockchain, albeit popular now, began in the late 1970s. Computer scientist Ralph Merkle patented Hash trees, laying the foundation for modern blockchain. Merkle trees, or computer science structures, link data blocks via encryption. W. Scott Stornetta and Stuart Haber developed a Hash tree-based approach to prevent document timestamps from being arbitrarily updated before 2000. The first blockchain was created.
Data is securely recorded via blockchain. Unauthorized blockchain database updates are complex. Blockchain’s “distributed ledger” replicates and transmits transaction records across network machines. Blockchain-powered databases authorize all ledger transactions using the user’s digital signature. This verifies every transaction and reduces manipulation. Blockchain databases resemble collaborative online spreadsheets. Nobody can change the sheets’ entries, but everyone can see them and who added them.
Blockchain’s openness, intelligent contracts, and reduced regulatory risk promote user efficiency. Organizations use its chronological immutability to securely create, trade, store, and retrieve digital transactions in an auditable format, making it perfect for audit processing. However, this technique has flaws. Blockchain and cryptography use public and private keys, therefore, losing private keys will cause operational issues. Scalability is an issue, as each node can only handle a certain number of transactions. This can make high transaction loads take hours. Finally, its non-editability is a plus but may be problematic when adding or editing non-malicious information after a record is established.
How Does Blockchain Work?
One of blockchain’s most important features is its ability to facilitate data recording and transit while limiting alterations. Let’s start with the basics and learn how blockchain technology generates power transaction records that cannot be simply altered or deleted.
1. Decentralization
Conventionally, contemporary databases are constructed by the interconnection and secure storage of multiple servers. The data kept on these servers is also subject to extensive control by the organization that owns them.
Although this design is great for many applications, it does have the potential to be a single point of failure. One example is the ability of the owner organization to make changes, delete, or restrict access to the data. Additionally, data could become unusable in the event of a power outage, internet outage, or natural disaster affecting the location of the servers.
Blockchain technology is resistant to such attacks. A distributed database is what it is, in theory. Many network nodes, often located in different parts of the world, work together to transport data. This ensures data integrity and strengthens redundancy. The fact that users can’t easily edit the data guarantees the latter.
2. Immutability
Is there a way to prevent unauthorized changes? Picture this: a user is trying to edit a record already present in the database. Even if they manage to change something in one node, it won’t affect the others. As a result of the subsequent cross-references, the remaining nodes quickly identify the one node’s changed data and remove it. Accordingly, the database cannot be unilaterally edited by any node on the blockchain network.
This function establishes an immutable record of all transactions and makes records permanent. Keeping track of Bitcoin transactions is where these records are most often used. Nevertheless, blockchain also keeps other important records, like user data, contracts, and product stock levels.
3. Consensus
Network consensus by the majority is required to validate new entries to any block. This implies that for every modification to take effect, most computers on the distributed blockchain network must agree. Proof of work (PoW) and proof of stake (PoS) are two examples of consensus methods that stop invalid changes or transaction mistakes from being validated.
- Proof of work is a Bitcoin-specific approach for unanimous decision-making. This process, related to “mining,” requires a lot of computational power. Blockchains safeguarded by proof of work are validated by virtual miners in a worldwide math puzzle race. The first miner to solve the challenge gets to update the blockchain with the latest verified entries. The network pays miners cryptocurrency.
- Proof of stake ‘Staking‘, consensus is achieved by mining-like methods. For money, the network chooses a user to update the blockchain with the latest entries. Each project requires a different approach. Proof-of-stake blockchains employ a “validator network” to temporarily stake already-owned cryptocurrency to validate new records, add them to the blockchain, and earn additional bitcoin.
Proof of work and proof of stake include economic penalties for network disruptions to deter undesirable actors. The former penalizes miners who submit incorrect data with energy, time, and computer power loss. Second, validators that validate a tainted block risk losing staked bitcoin. Cut amounts vary by network.
Both consensus algorithms verify transactions smoothly without a central node. Energy utilization is where they differ most. Proof-of-stake blockchains eliminate the need for miners to waste energy solving the same problem. Thus, proof of stake conserves network resources.
4. Transparency
Due to the blockchain’s decentralized design, all transactions are viewable in real time through blockchain explorers or by anyone connecting to their node. With the validation and recording of new blocks, each node in the network adds its copy to the chain. Transactions can be tracked by anyone with database access.
To ensure that no one user may access sensitive information, such as the identities of stakeholders, blockchain databases are encrypted. This ensures that users’ transactions remain secret while they remain anonymous. A public-private key pair allows database owners to decrypt their databases.
See this in action to understand blockchain transparency in action. Some time ago, hackers broke into Bitcoin exchanges and stole users’ cryptocurrency. Even though the perpetrators’ identities were not immediately revealed in these instances, the whereabouts and transactions of the stolen Bitcoins could be tracked.
5. Security
Blockchain maintains security and trust while being a decentralized database system. Strong network security enables people to engage in blockchain while discouraging bad behavior. Linear and chronological storage of fresh blocks is the easiest way to maintain security. The ‘end’ of the blockchain always receives new records. Once made, the record can only be changed by majority network consensus.
Blocks’ hash value, timestamp, and the block’s hash value chronologically preceding them increase security. Data is converted to alphanumeric strings using a mathematical process to obtain these hash values. Block data changes modify the hash value. An unauthorized person can use a blockchain network node to add cryptocurrency to their wallet. The changed record will appear on that user’s node, but it won’t match the other nodes. Once all nodes cross-reference the collective database, this modified entry will be flagged as invalid.
Malicious actors must control a majority of nodes to breach a blockchain database. The modified copy would become the most widely accepted. This is difficult since nodes are decentralized and distributed across a large area. The other, greater consideration is updating hash values and timestamps in every block before manipulating it. These security features make an assault resource-intensive and unlikely.
Finally, other network members would identify such behaviors. Users may presumably perform a ‘hard fork off’ to a new, undamaged chain. In cryptocurrencies, a hard fork would devalue the attacked token version, giving the attackers possession of a worthless asset and thwarting the attack.
Types of Blockchain
Permissioned and permissionless blockchains are the two most common varieties. There are two main categories into which all other blockchains can be classified, and occasionally both.
Permissioned blockchain may manage the network privileges of blockchain nodes and prevent nodes from accessing the network. In a permissioned blockchain system, everyone uses the same identity.
There are fewer nodes in this network compared to permissionless blockchain networks because of the access restrictions. Because fewer nodes mean less processing time for every transaction, better efficiency is a fundamental advantage of access limitations. However, with permissionless blockchain, everyone can access the blockchain network in a pseudo-anonymous manner. The ability to become a node and use the network freely is available to all users.
It may seem paradoxical, but permissionless networks are more secure than permissioned ones because of how blockchain operates. This is because with a larger network of nodes, the likelihood of malicious manipulation by conspiring users is reduced, as each transaction is validated. On the other hand, transaction processing times on these networks tend to be longer.
First, we will examine the four main categories of blockchain networks:
1. Private
A private blockchain, sometimes called a managed blockchain, is one type of permission that is overseen by an entity, typically an organization. The ability to authorize or disapprove nodes’ access to the network rests with this governing body. It is also capable of assigning distinct nodes different levels of access control to carry out specific tasks.
Private blockchain networks are only partially decentralized because they are not accessible to the broader public. A private blockchain may be vulnerable to fraud and other harmful actions because of the small number of nodes and the comparatively high level of control held by the central authority.
Hyperledger is an open-source blockchain solution collaborative effort, and Ripple is a virtual B2B currency exchange that is an example of a managed.
2. Public
Because they do not require any kind of authorization from any other party, public blockchain networks can be considered ‘genuine’ decentralized. All nodes in a public network have the same level of access, thus anyone can make and verify blocks on the network. Many people mine and trade cryptocurrencies on public blockchains. Although more secure, these networks typically have lengthier validation periods compared to private blockchains.
The cryptocurrency Bitcoin, along with Litecoin and Ethereum, are all instances of public blockchain networks.
3. Hybrid
An intriguing combination of public and private is the hybrid blockchain. This form of blockchain, similar to a private blockchain, is overseen by a single entity. On the other hand, it incorporates public oversight: In a hybrid blockchain network, public blockchains are required to validate certain transactions.
One well-known hybrid blockchain is IBM Food Trust. The whole food supply ecosystem stands to benefit from this solution’s increased efficiency.
4. Consortium
A further effort to overcome the drawbacks of both public and private blockchains is the consortium blockchain, which is characterized by the fact that multiple organizations work together to administer it. Consortium blockchains, which are permissions in nature, are less centralized than private blockchain networks.
To create a consortium blockchain, multiple businesses, typically from the same industry, must work together. There will be more nodes in the network, which improves security, but there will also be more logistical hurdles and the possibility of antitrust complaints.
Consortium blockchains can be seen in R3, which is used in the financial sector and other regulated businesses, and the shipping and supply chain domains, there is the non-profit CargoSmart Global Shipping Business Network.
Top 5 Blockchain Applications
When it comes to the trust and security needs of contemporary databases, blockchain technology is the way to go. The mix of decentralization, consensus, and transparency makes it very resistant to illegal record modification. Because it is not dependent on any one component, it is both sturdy and dependable.
The most prominent uses of blockchain technology in various industries are:
1. Finance
Blockchain has completely changed the way money is transferred in the financial industry. Especially when dealing with foreign transactions, traditional methods of transferring funds can be time-consuming and demanding on available resources. An identical transaction conducted over a blockchain network takes only minutes and is cheaper than modern international money transfers, which might take several days.
Reliably disbursing collateralized loans is another capability of blockchain-powered smart contracts that lenders can depend on. With the use of smart contracts, certain actions can be automatically carried out when certain conditions are met. As an example, a smart contract can be configured to automatically release collateral upon full loan repayment. Because of this, the entire loan processing becomes faster and cheaper, which in turn allows lenders to lower their rates and draw in more consumers.
Insurance companies and their consumers benefit from smart contracts because they increase transparency. For instance, claims adjusters and other insurance staff can benefit from a blockchain network’s permanent record of all claims. However, claimants might expect their funds somewhat sooner.
Decentralized financial exchanges are now within reach, thanks to blockchain technology. Cryptocurrency exchanges are proof that such systems would allow for cheaper and faster transactions. Investors would have more protection and control over their assets since this type of financial platform wouldn’t require them to transfer them to a central authority.
2. Data storage
Information is more secure and uncompromised when stored on a blockchain network. Blockchain databases are extremely difficult to alter or delete without proper authority due to their decentralized nature. Also, there is no need to worry about business continuity because the data is completely redundant. A blockchain database may end up costing less in the long run with the right setup and application.
3. Governance
Among the many ground-breaking uses of blockchain technology, voting stands out. So yet, blockchain-powered voting has not determined any major national election, but it is being investigated globally. The use of a blockchain-powered voting system might eliminate the possibility of fraudulent votes, verify that only qualified members cast ballots, and stop members from casting multiple votes.
In addition to enabling all qualified voters to cast their ballots with the swipe of a smartphone, this voting method would do away with problems like voter suppression. Without sacrificing ballot security, it would also drastically cut down on the time and work needed to organize elections and announce results.
Blockchain technology can enhance the effectiveness of social initiatives in addition to voting. Applicants and claimants for social programs can have their personal information recorded on a blockchain network, which will help governments reduce operating expenses and fraud. Beneficiaries would also receive funds in a considerably more efficient way.
4. Non-fungible tokens
Nobody can deny the widespread utility of non-fungible tokens (NFTs), even though views on digital art are sometimes very contentious. The capacity of the blockchain to guarantee that data can only exist in one location at the same time is used by an NFT, to put it simply. By staking an NFT, its immutability is guaranteed, as there will be no other copy floating around the web. Digital art is not required for an NFT. A cinema ticket, media rights, or even a property deed may fit the bill! It can be recorded as an NFT if it’s one-of-a-kind.
5. Internet of Things (IoT)
Despite the IoT’s many potential uses, cybersecurity concerns have slowed its broad adoption. By switching to a network, their security posture can be improved. For example, data related to freight transportation, machine maintenance, and other applications can be more easily accessed and securely stored by moving it to a decentralized network near the data collection devices rather than a central server.
Takeaway
Bitcoin and digital art are just two aspects of blockchain technology. It is state-of-the-art technology with the ability to change the way government and business are done. Blockchain technology is currently being tested by various enterprises in various areas of their daily operations. In an increasingly digital world, blockchain technology may provide future-proofing features like access control, transparency, and data security that are essential for navigating this new frontier.
