Blockchain has become one of the most important technological concepts in our digital age. But if you’re new to this concept or just want some background before you dive deeper, here’s everything about blockchain technology that you need to know.
You can say a blockchain is an encrypted distributed database with transparency features. It can be used for all kinds of purposes, including financial services, supply chain management, voting systems, and others. We’ll show you how blockchain functions and explains how important it can be.
What Is A Blockchain?
A blockchain is essentially a secure, shared record containing data across multiple nodes. Each node stores its copy of this information, which makes sure no single user has control over any part of it. This means there’s little chance of fraud because everyone sees every transaction that has been made on the same chain.
The records aren’t stored centrally either but rather spread among many different computers around the world. That’s why the word “decentralization” is often overused to describe a perfect blockchain system.
This way, even if someone hacked into one computer, they wouldn’t be able to change anything since other users would immediately notice suspicious activity. And as we mentioned earlier, each participant holds copies of these files, so they know what happened when one or two participants went rogue with their validations.
The idea of blockchain was first popularized by Bitcoin back in 2009. After Bitcoin, Ethereum was the first major project to build smart contracts upon the blockchain.
Since then, several more projects like Cardano, EOS, Algorand, Polkadot, Dfinity, Solana, Polygon, Hashgraph, and others have joined the race. There are also private blockchain solutions made by institutions where the participants are themselves and their partners (not the public).
Blockchain differs from traditional databases such as SQL or NoSQL due to their unique characteristics. For example, while regular ledgers store data using key-value pairs, blockchains usually employ hash pointers. As a result, blockchains don’t rely solely on reading operations, making them more effective than normal databases.
How Does Blockchain Work?
To better understand how blockchains work, let’s compare them to common online databases such as MySQL or MongoDB. When you enter your email address and password into a website, it sends a request to the server where your account details are located and receive a response containing your login credentials.
Once authenticated, the system will send another message to verify whether the information matches. If it doesn’t match, the original server won’t accept your request. In addition, when you delete something from your profile, servers may not update local copies until minutes later.
On the contrary, blockchains run continuously 24/7 without a central entity. They also contain thousands of copies of data that constantly synchronize through peer-to-peer networks. With this approach, every action happens instantly, and changes take effect almost instantaneously.
And unlike traditional databases, blockchains allow participants to make modifications directly within blocks rather than going through intermediaries. So if Bob wants to add his own comments to Alice’s post, he simply creates a new block containing his comment. Then, anyone who keeps track of the latest version of the file can see that.
Another interesting feature of blockchain is that it provides an automatic consensus mechanism, meaning the computers participating in a blockchain automatically agree on the state of accounts based on the current records. Users aren’t required to validate transactions themselves, yet they still receive rewards for validating the integrity of the network.
With all these great things about Bitcoin, can Bitcoin replace fiat currencies?
Criticisms Against Blockchain
However, people aren’t entirely free to choose whom they should vote for. Block producers or validators must follow certain rules set forth by the developers. One of the biggest criticisms against cryptocurrencies is how usually the biggest block producers are the same entities that are already very close to the founders of the same blockchain, leading us to question how decentralized one public blockchain truly is.
Some critics also argue that blockchains lack scalability, especially when dealing with large amounts of data or users. As we know, public chains like Bitcoin or Ethereum might struggle with processing a large number of transactions during the peak of the crypto bull market.
Others say that having only a few people controlling the narrative of the entire network isn’t democratic at all. Most of the time, the ones shaping the direction of the blockchain systems have always been the founders. Even though various projects claim to solve these issues, none of them have been successful thus far.
But perhaps the main problem worth mentioning is the cost associated with running these platforms. Most public blockchains require high computing power and energy consumption to ensure security and efficiency. This ultimately leads to higher fees for accessing tokens or performing actions on the platform. Unfortunately, companies often profit off of this model despite growing environmental concerns.
What are the differences between decentralized network vs centralized network?
When talking about blockchain, it’s important to understand the difference between a decentralized network and a centralized network. Usually, people talk about the degree to which the former allows direct access to information compared to the latter. While both types depend on third parties, the nature of their operation differs significantly.
One of the best examples of a decentralized network is BitTorrent. Here, peers share pieces of media via PEX protocol, allowing everyone to download bits simultaneously. However, they do so anonymously and independently of each other, preventing copyright owners from blocking content. You might as well say public blockchain networks were inspired by how BitTorrent worked in the first place.
Centralized networks typically operate differently. Companies host websites and processes on servers owned by trusted entities. These servers keep copies of sensitive information and communicate with clients whenever necessary. Therefore, you need to trust these centralized servers and assume their data can always be trusted. On top of that, hackers could potentially gain unauthorized access to company resources if they compromise the servers.
Due to this vulnerability, governments worldwide started taking an interest in blockchain after seeing how easy it was to hack private organizations’ funds.
Why Blockchain Matters
Nowadays, you probably hear this term quite frequently. After all, blockchains play integral roles in numerous industries. Cryptocurrencies, smart contracts, dApps development, eCommerce solutions, marketplaces, crowdfunding campaigns, IoT devices, insurance claims processing, and more. The list goes on. If you truly believe humanity can find plenty of different blockchain use cases, you might eventually believe cryptocurrency has huge potential as well.
As technology continues advancing, blockchain will continue becoming increasingly relevant. According to Statista research, $9 trillion passes hands globally via cross-border payments alone. Meanwhile, global trade volume increased by 5% per year throughout 2018-2019.
Furthermore, approximately 80% of today’s banking activities happen electronically, leaving very few opportunities to improve overall performance. That’s where blockchain can come in.
Today’s banks hold billions of dollars in assets, mostly belonging to smaller customers. Although larger institutions contribute greatly to society, small businesses represent the majority of revenue providers. Yet, they suffer from poor infrastructure and limited options for acquiring funding.
With blockchain, however, anyone can open an account and fund loans or credit lines. Furthermore, many startups already offer microloans, mortgages, and other forms of financing for entrepreneurs. This helps them grow their business without being swallowed by bigger players. The existence of blockchain will help them to innovate even further.
Smart contract functionality plays an essential role in automating complex tasks. Imagine a buyer requesting delivery of goods from seller A. Seller B responds by sending a text stating that her product arrived safely. Both sides confirm the shipment together.
That process wouldn’t normally go smoothly unless both agreed beforehand. With a smart contract, they can automate everything since all the rules are hardcoded already before deployment, and they are immutable post-deployment.
Smart contracts allow them to automate these processes by writing code once. Now, they receive updates automatically, freeing their time to focus elsewhere.
Lastly, blockchains enhance privacy and eliminate middlemen altogether. Whereas centralized networks involve big tech giants that collect huge amounts of data, blockchains isolate individual identities from service providers.
Blockchain Use Cases
Since blockchains became widely known in recent years, dozens of applications built upon this technology have emerged. From finance to gaming, several industries leverage these tools to streamline existing procedures. Let’s look at three specific areas below.
Financial Services: Today’s financial industry suffers from outdated legacy IT infrastructures and inefficient communication channels. To overcome these limitations, FinTech companies utilize blockchains to revolutionize lending practices. Using immutable ledgers, lenders create customized plans and assign borrowers to subprime risks accordingly.
Supply Chain: Supply chains are notorious for causing delays and wastage. Blockchain solves this issue by providing real-time visibility of products throughout the cycle. Manufacturers can easily check inventory levels and monitor shipments for quality assurance. Businesses can also cut costs by eliminating unnecessary storage space. At the same time, consumers enjoy reduced prices thanks to lower overhead rates.
Gaming Industry: Gaming enthusiasts love playing games on dedicated hardware. But while doing so, they face numerous inconveniences. First, publishers limit gamers’ freedom by requiring exclusive keys. Second, players spend a lot of money purchasing items individually, which doesn’t feel fair. Finally, developers might lock away content behind paywalls.
Thanks to blockchain, gamers now have a choice. Developers can release premium titles exclusively on their platforms. Players can earn crypto tokens while playing the games that they love. Some platforms even grant early access to upcoming releases for free. Not only that, but they can purchase skins and emoticons using these currencies too.
The Bottom Line
Blockchains serve pretty much every purpose imaginable nowadays. More importantly, their value extends beyond mere technicalities. Their underlying decentralization philosophy promotes greater fairness and equality, allowing people to thrive regardless of income level.