What is Blockchain Technology and How Does it Work? A Beginner’s Guide to Understanding the Decentralized Network
The global market has undergone tremendous changes since the launch of the first cryptocurrency, Bitcoin in 2009. A new industry has taken birth with a bang built on the strong foundation of Blockchain technology. The crypto industry has been growing since then despite many challenges and security concerns. Today, the market capitalization of the crypto market is worth $206 billion, according to Coinmarketcap.
What is a Blockchain?
Blockchain is a shared, distributed ledger where users can perform transactions or track assets accurately without any third party in a peer-to-peer network. The transactions are stored in the form of blocks across networks.
Every block has certain storage capacities and when a block is filled, it closes and is linked to the previously filled block forming a chain of blocks in chronological order. Each block has encoded information about the previous block.
Blockchain was first proposed in 1982 by David Chaum, however, it became popular through Bitcoin by Satoshi Nakamoto in 2008. Blockchain uses proof-of-work and proof-of-stake consensus mechanisms (and a few more) to verify and approve transactions on the network.
Data is encrypted using cryptography. A blockchain is a decentralized network and is immutable, meaning the data recorded is irreversible. The transaction is permanently stored and cannot be altered or deleted and transactions can be viewed by anyone enhancing transparency.
The data is stored across several nodes of the computer network thus maintaining the fidelity of the data. A blockchain network is not only used for cryptocurrency transactions but also used to track orders, accounts, production, and much more. Blockchain helps to lower transaction costs and performs faster with security.
How does Blockchain work?
Blockchain uses cryptography to secure data from unauthorized access. Blockchain uses the sha-256 hash function (one of the strongest hash functions) for encryption. It uses digital signatures to validate users.
Each user will have a public key (to identify users) and a private key (to give access to their account). Each block contains the details for the previous hash, transaction details, nonce (a random value), and hash address.
What is hashing?
The process of taking raw information and passing it through a function (hash function) and the derived output is called a hash value.
Types of Blockchains
- Public blockchain: This is a decentralized network that is not owned by a single entity. Anyone who has the internet and a computer can have access to this public blockchain. Everyone in the network has a copy of the blocks. It is secure and trustable.
- Private Blockchain: This blockchain is operated in a closed network allowing only authorized users of a company/organization. As the network is small, transactions take less time to process and have privacy.
- Hybrid Blockchain: It is a combination of both public and private blockchains. Some information is controlled by the organization and other information is visible to the public. It includes both permission-based and permissionless systems. Smart contracts are used to provide access to the users. It consumes less computational cost due to less nodes.
- Consortium Blockchain: This decentralized blockchain is managed by more than one organization which solves the needs of the organization. The organizations decide which part to be made public. This is also called Federated Blockchain. A limited number of users make the process fast and it safeguards privacy.
Blockchain is used in many fields apart from cryptocurrencies including
- Retail
- Banking
- Real estate
- Voting
- Supply chain management
- Charity
- Healthcare
- Stock trading
- Music
- Travel
- Cyber security
- Human resource
- Internet of things
Benefits of Blockchain Technology
- Efficiency: The data is recorded in chronological order and stored permanently on the blockchain. The data cannot be removed or altered.
- Decentralized: The decision-making is distributed through networks rather than controlled by a single entity providing a trustless environment.
- Transparency: Every bit of the transaction is recorded and thus providing transparency for users to view the information.
- Security: The information is almost hard to tamper with because the records are distributed among all networks. So, if anyone tries to make a change to one of the data, he needs to make changes to all the computer nodes in the network which is impossible as the data is encrypted using a hash function.
- Cost reduction: As the transactions are processed without the need for a third party, it incurs a minimal cost to perform a transaction on the blockchain.
What is a Smart Contract?
A smart contract is a computer program that automatically executes a transaction between two parties when certain conditions are fulfilled. It is a form of digital agreement(contract). They behave exactly as programmed and cannot be altered or changed. They perform without human intervention.
Bitcoin introduced smart contracts and later Ethereum developed and made use of smart contracts to perform transactions on their Ethereum blockchain ecosystem. Smart contracts are used for tracking and auditing asset transfer. They can speed up transactions with accuracy.
Smart contracts are mostly used in
- Creating new digital assets
- Decentralized Finance (DeFi)
- Gaming
- Paying out insurance policies
- Store data
- Mint NFTs
- Distribution of digital assets
In conclusion, blockchain is an innovative and revolutionary technology that has the potential to transform the way businesses operate. By providing a secure, decentralized digital ledger for storing information, it ensures greater transparency, trust, and accuracy in transactions. Businesses should consider looking into implementing blockchain into their operations to remain competitive in today’s ever-evolving business world.
