What is Blockchain Technology?
Blockchain Technology
What is blockchain technology?
Blockchain technology is a powerful database system that enables transparent information sharing within a company network. Data is kept in blocks that are connected together in a chain and stored in a blockchain database. Due to the inability to delete or amend the chain without network consensus, the data remains chronologically consistent. In order to manage orders, payments, accounts, and other transactions, you can utilize blockchain technology to establish an unchangeable or immutable ledger. The system features built-in defenses against unauthorized transaction entries and ensures that the shared view of these transactions is consistent.
Why is blockchain important?
The recording of financial transactions is complicated by the limitations of traditional database technology. Take the sale of a piece of property as an example. After the money has been exchanged, the buyer becomes the legal owner of the property. Each party can keep a record of the financial transactions separately, but neither source can be relied upon. Both the buyer and the seller can claim that they have paid the money even though they have not. The seller can also claim that they have not received the money even though they have.
Transactions must be monitored and verified by a dependable third party to prevent potential legal problems. The existence of this centralized authority not only makes the transaction more difficult, but it also establishes a weak spot. Both parties may be harmed if the main database is compromised.
Blockchain eliminates these problems by developing a decentralized, unchangeable mechanism for transaction recording. Blockchain generates separate ledgers for the buyer and seller in the hypothetical real estate transaction. Both parties must agree to every transaction before it can be recorded, and both parties' ledgers are automatically updated in real-time. The entire ledger will be tainted by any corruption in past transactions. These attributes of blockchain technology have prompted its application across a number of industries, including the development of virtual currencies like Bitcoin.
How does blockchain work in various industries?
Blockchain is a new technology that is being embraced creatively by numerous sectors. In the following subsections, we provide examples of use cases from various industries:
Energy
Blockchain technology is used by energy companies to build peer-to-peer energy trading systems and simplify access to renewable energy. Take these applications, for instance:
Finance
Blockchain services are used by conventional financial institutions, like as banks and stock exchanges, to control online payments, accounts, and market trading. For instance, Singapore Exchange Limited utilizes blockchain technology to create a more effective interbank payment account. Singapore Exchange Limited is an investment holding firm that offers financial trading services throughout Asia. They overcame a number of difficulties by implementing blockchain, including batch processing and manually reconciling thousands of financial transactions.
Media and entertainment
Blockchain-based technologies are used by media and entertainment businesses to manage copyright information. For artists to receive just recompense, copyright verification is essential. The sale or transfer of copyrighted content requires several transactions to be recorded. Blockchain technology is used by Sony Music Entertainment Japan to improve the effectiveness of digital rights management. To increase productivity and save costs associated with handling copyright, they have effectively applied blockchain technology.
Retail
Blockchain is used by retail businesses to monitor the flow of goods between suppliers and customers. For instance, Amazon Retail has applied for a patent for a distributed ledger system that will employ blockchain technology to confirm the legitimacy of every product sold on the platform. By enabling parties like manufacturers, couriers, distributors, end users, and secondary users to contribute events to the ledger after enrolling with a certificate authority, Amazon merchants may trace their global supply chains.
What are the features of blockchain technology?
The key features of blockchain technology are as follows:
Decentralization
Blockchain decentralization refers to the transfer of command and control from a centralized entity (person, organization, or group) to a dispersed network. Transparency in decentralized blockchain networks lowers the requirement for participant trust. In addition, these networks prevent users from interfering with one another in ways that harm the network's efficiency.
Immutability
Something can never be altered or changed if it is immutable. Once someone has added a transaction to the shared ledger, it cannot be changed by another participant. To correct an error in a transaction record, you must add a new transaction, and both transactions are accessible to the network.
Consensus
Rules regarding participant consent for recording transactions are established by a blockchain system. Only until the majority of network users have approved, can new transactions be recorded.
What are the key components of blockchain technology?
The following are the key components of blockchain architecture:
A distributed ledger
An editable shared file is an example of a distributed ledger, which is the shared database in the blockchain network that stores transactions. In the majority of collaborative text editors, anyone with editing privileges can erase the entire file. However, rigorous guidelines on who can edit and how to modify are present in distributed ledger technology. Once a record is made of an entry, it cannot be deleted.
Smart contracts
Smart contracts enable businesses to self-manage contractual obligations without the use of a middleman. They are applications that are saved on the blockchain system and are launched automatically when requirements have been met. In order to confidently finish transactions, they perform if-then checks. A smart contract, for instance, may be set up by a logistics business to automatically pay suppliers once the goods arrive at the port.
Public key cryptography
The blockchain network uses public key cryptography as a security measure to enable participants to be identified exclusively. Two sets of keys are generated for network users by this approach. Everybody in the network uses the same public key, which is known as one key. The other is a personal key that each member has. Together, the private and public keys can unlock the ledger's data.
John and Jill are two examples of the network's members. Using his private key, John records a transaction that is encrypted. It can be decrypted by Jill using her public key. Jill is certain John completed the purchase because of this. If John's private key had been altered, Jill's public key would not have functioned.
How does blockchain work?
We provide a quick introduction of the underlying blockchain mechanisms in the steps that follow, regardless their complexity. Most of these steps can be automated using blockchain software:
Step 1 – Record the transaction
A blockchain transaction documents how assets are transferred between parties in the network, whether they are tangible or digital. It is stored as a data block and may contain information like this:
Step 2 – Get agreement
The recorded transaction's legitimacy must be accepted by the majority of users on the distributed blockchain network. Rules of agreement can differ depending on the type of network, but they are normally set up at the beginning of the network.
Step 3 – Connect the blocks
Transactions on the blockchain are recorded into blocks that are like to the pages of a ledger book once the participants have come to an agreement. A cryptographic hash is applied to the new block along with the transactions. The blocks are connected by a chain created by the hash. The hash value changes whenever the block's contents are altered, whether on purpose or accidentally, making it possible to spot data manipulation.
As a result, the blocks and chains connect solidly and cannot be changed. The verification of the preceding block and, by extension, the blockchain as a whole, is strengthened with each new block. This is similar to building a tower out of wooden blocks. Blocks can only be stacked on top of one another; removing a block from the center of a tower causes the tower to collapse.
Step 4 – Share the ledger
All participants receive copies of the most recent central ledger from the system.
What different blockchain networks are there?
In the blockchain, there are four primary types of decentralized or distributed networks:
Public blockchain networks
Public blockchains are open to all users and have no access restrictions. The rights to access, update, and validate the blockchain are shared by all participants. Public blockchains are mostly used by people to trade and mine cryptocurrencies like Bitcoin, Ethereum, Solana and XRP.
Private blockchain networks
Managed blockchains, also known as private blockchains, are under the authority of a single entity. Who is eligible to join the network and what privileges they have are decided by the authorities. Due to access limitations, private blockchains are only partially decentralized. A private blockchain is exemplified by the digital currency exchange network for businesses known as Ripple.
Hybrid blockchain networks
Blockchains that are hybrids combine components from both public and private networks. Along with a public system, businesses can set up private, permission-based systems. They maintain public access to the remaining data while controlling access to some data that is kept on the blockchain in this way. To enable public users to verify whether private transactions have been performed, they deploy smart contracts. For instance, hybrid blockchains can allow for public access to digital currency while maintaining the confidentiality of currency held by banks.
Consortium blockchain networks
Blockchain consortium networks are governed by a collection of organizations. The blockchain's upkeep and data access rights determination fall under the purview of pre-selected entities. Blockchain consortium networks are frequently preferred by sectors where numerous firms share the same objectives and profit from shared accountability. For instance, the Global Shipping Business Network Consortium is a non-profit blockchain consortium with the goal of digitizing the shipping sector and fostering more operator collaboration in the maritime sector.
What are blockchain protocols?
The phrase "blockchain protocol" refers to several blockchain platforms that can be used to create applications. Every blockchain protocol modifies the fundamental blockchain concepts to fit particular markets or applications. The following subsections provide some instances of blockchain protocols:
Hyperledger fabric
A collection of tools and libraries make up the open-source project known as Hyperledger Fabric. It enables businesses to quickly and efficiently create private blockchain applications. It's a general-purpose, modular framework with special identity management and access control features. Due to these characteristics, it can be used for a variety of purposes, including trade finance, loyalty and rewards programs, supply chain tracking, and clearing and settlement of financial assets.
Ethereum
People can create open-source, decentralized public blockchain applications using the Ethereum platform. Ethereum Enterprise is made for usage in commercial scenarios.
Corda
A blockchain project called Corda is open-source and intended for commercial use. Building interoperable blockchain networks with stringent privacy is possible with Corda. Businesses can deal directly and with value using Corda's smart contract technology. Financial institutions make up the bulk of its users.
Quorum
An Ethereum-based open-source blockchain protocol called Quorum was created. It is specifically made for use in networks like private blockchains, where a single member controls every node, or consortium blockchain networks, where different members control different portions of the network.
How does blockchain technology change over time?
Hash trees, also known as Merkle trees, were created by computer scientist Ralph Merkle in the late 1970s, which is when blockchain technology first emerged. These trees are a type of computer science structure used to store data by cryptographically connecting blocks. Stuart Haber and W. Scott Stornetta used Merkle trees to build a system that prevented tampering with document timestamps in the late 1990s. This was the first occurrence in blockchain history.
Over these three generations, technology has kept improving:
First generation – Virtual currencies such as Bitcoin
In 2008, a person or group of people who wish to remain unidentified and go by the name Satoshi Nakamoto described the present iteration of blockchain technology. In Satoshi's original design for the Bitcoin blockchain, transactions were recorded in 1 MB blocks of data. Even today, a lot of the characteristics of Bitcoin blockchain systems continue to be fundamental to blockchain technology.
Second generation – smart contracts
A few years after the launch of first-generation currencies, developers started thinking about blockchain uses outside of cryptocurrencies. As an illustration, the Ethereum creators choose to use blockchain technology to asset transfer operations. Their major contribution was the inclusion of smart contracts.
Third generation – the future
Blockchain technology is continuing to advance and expand as businesses find and use new applications. The current blockchain revolution offers countless options for businesses as they work to overcome scalability and computational constraints.
What are the benefits of blockchain technology?
The administration of asset transactions benefits greatly from the use of blockchain technology. In the subsections that follow, we list some of them:
Advanced protection
Blockchain-based solutions offer the high level of security and trust needed for contemporary digital transactions. There is always a concern that someone may alter the underlying program to produce fictitious funds for himself. However, blockchain builds a highly secure underpinning software system that is virtually hard to tamper with using the three principles of cryptography, decentralization, and consensus. A single user cannot alter the transaction records, and there is no single point of failure.
Improved speed
Transactions between businesses can take a long time and cause operational bottlenecks, especially when compliance and third-party regulatory agencies are involved. Blockchain transparency and smart contracts make such commercial transactions faster and more efficient.
Quicker auditing
Enterprises must be able to originate, exchange, archive, and reconstruct electronic transactions in a secure and auditable manner. Because blockchain records are chronologically unchangeable, all records are always sorted by time. This data transparency speeds up audit procedures significantly.
What is the difference between blockchain and Bitcoin?
Although the terms bitcoin and blockchain are frequently used interchangeably, they are not the same thing. Because Bitcoin was an early implementation of blockchain technology, individuals accidentally began using Bitcoin to signify blockchain, resulting in this misunderstanding. However, blockchain technology has many applications outside of Bitcoin.
Bitcoin is a digital money that works independently of any centralized authority. Bitcoins were originally designed to facilitate online financial transactions, but they are now regarded as digital assets that may be transferred to any other worldwide currency, such as USD or EUR. The central ledger is created and managed via a public Bitcoin blockchain network.
Bitcoin network
All Bitcoin transactions are recorded in a public ledger, which is replicated on servers across the world. The servers are analogous to banks. Although each bank is only aware of the money exchanged by its customers, Bitcoin servers are aware of every single Bitcoin transaction in the globe.
A node, or server, can be set up by anyone with a spare computer. This is equivalent to opening your own Bitcoin bank rather than a bank account.
Bitcoin mining
Members of the public Bitcoin network mine for bitcoin by solving cryptographic equations to create new blocks. Each new transaction is broadcast to the network and shared from node to node. Every ten minutes or so, miners aggregate these transactions into a new block and permanently add them to the blockchain, which serves as Bitcoin's authoritative account book.
Because of the difficulty of the software process, mining requires large processing resources and takes a long time. Miners receive a little quantity of cryptocurrency in exchange. The miners serve as modern-day clerks, recording transactions and collecting transaction fees.
Using blockchain cryptographic technology, all network participants achieve a consensus on who owns which currency.
What is the difference between a blockchain and a database?
How Is Blockchain Different From Traditional Database Models? Well, Blockchain is a form of database management system with more functionality than a traditional database. In the following list, we describe some key distinctions between a standard database and a blockchain:
How is blockchain different from the cloud?
The term cloud refers to computing services that are accessible via the internet. The cloud provides access to Software as a Service (SaaS), Product as a Service (PaaS), and Infrastructure as a Service (IaaS). Cloud companies maintain their hardware and infrastructure and provide you with internet access to these computing resources. They offer a lot more than just database management. If you want to join a public blockchain network, you must supply your own hardware to hold your ledger copy. You might also utilise a cloud server for this reason. Some cloud service providers also deliver full Blockchain as a Service (BaaS) from the cloud.
What is blockchain as a service?
Blockchain as a Service (BaaS) is a cloud-based managed blockchain service provided by a third party. While the cloud provider provides the infrastructure and blockchain development tools, you can create blockchain applications and digital services. All that is required is to tweak existing blockchain technology, making blockchain adoption faster and more efficient.
Where is the blockchain stored?
Blockchains are typically stored on a decentralized network of computers, also known as "nodes," that work together to maintain a copy of the blockchain. Each node has a copy of the entire blockchain, and when a new block is added to the chain, the nodes work to validate and propagate the new block to all other nodes on the network. This decentralized architecture allows for the blockchain to be stored in multiple locations, making it highly resistant to tampering or censorship.
