Learn the Basics of Blockchain Technology
This article was published as a part of the Data Science Blogathon.
In this blog, I will talk about the new technology called Blockchain, its history, various terminologies of Blockchain, its types, its advantages and disadvantages, its applications, and its growth potential.
What is Blockchain Technology?
Blockchain Technology can be understood to be a decentralized digital record/ledger of transactions that is duplicated and distributed across the entire Blockchain network of nodes. The Distributed Ledger Technology (DLT) is used to manage the decentralized database by multiple nodes in the Blockchain Network.
All the transactions are recorded with an almost unbreakable or un-hackable cryptographic signature known as a Hash. Additionally, there cannot be any fraud, downtime, or interference for such transactions as it is secured by a very strong SHA2 256 Encryption. Hence, information records using Blockchain technology are almost impossible to modify, hack, or cheat.
History of Blockchain Technology
The idea of Blockchain was first proposed by a group of unknown persons known by the pseudonym Satoshi Nakamoto back in 2008. Satoshi’s original whitepaper created a blueprint for creating a decentralized public transaction ledger using the cryptocurrency Bitcoin. In the paper, Satoshi Nakamoto proposed Blockchain as a decentralized network that has the following features:
● No requirement for third-party entities like banks to regulate it.
● It operates 24*7 days without depending upon any external entity like a bank to regulate them.
● Has equal rules for all network participants.
● Available for anyone to use without conditions.
● Works across geographical borders
What is a Block, Node, and a Miner?
Blockchain derives from its structure where individual records/data called Blocks are interconnected in a single list known as a chain. Hence, Blocks are the primary building elements of the Blockchain Network.
Nodes are like mini servers which store the Blocks of Data. They constantly exchange data to sync with the updated Blockchain data. A Node that contains the full copy of the Blockchain transaction history is known as a full Node.
Functionally, below is what Blockchain nodes do:
- Nodes will check if a block of transactions is valid and accept or reject it.
- Nodes will save and store blocks of transactions keeping the entire transaction history.
- Nodes will broadcast and spread this transaction history to other nodes that may need to synchronize with the Blockchain. Also, transaction history must be updated for the same.
A miner is generally a computer system that tries adding a fresh transaction block to the Blockchain network. It then broadcasts the same to all the nodes on the Blockchain network. Depending upon the validity of the signature and transactions for the block, the nodes can either accept or reject the block. When a new transaction block is accepted by a node, it is added on top of the already existing rest of the blocks after saving it.
The below graph shows how various nodes in a Blockchain Network interact to create a decentralized system.
Difference Between a Miner and a Node
A full node must be executed by a miner to select legitimate transactions to form a new block. It cannot be determined what proposed transactions are legitimate and what are not as per the current Blockchain’s transaction history as it does not have complete Blockchain history access. Hence a miner is considered to be a full node.
The vice versa is always not true and hence a node is not necessarily a miner. A computer device can run a complete node without the need to create new blocks of transactions. A miner remains the same but it tries to create new transaction blocks in parallel.
Types of Blockchain Technology
There are primarily three types of Blockchain and they are as follows:
It has an open-ended one and has no access restrictions. Hence anyone can join it. Though the monetary incentive is good as it is trustless; there are greater chances of getting hacked. It is much slower and highly decentralized. Though generally permissionless, it can be permission-based upon the consensus of the nodes. It has absolutely no access restrictions and it utilizes the Proof of Stack (POS) or Proof of Work (POW) algorithm.
E.g. Cryptocurrencies like Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Monero
It is a closed Blockchain. It needs to be permitted and is a trusted network hence monetary benefits may not be high. It is very fast and less decentralized. In a permitted private Blockchain, not all nodes have the same rights and only the admin has the complete rights and not the users. Similar to a public Blockchain, it can be permission based on the consensus of the nodes. This needs a special invite from the administrator to join this network.
E.g. Hyperledger Fabric, Hyperledger Sawtooth, Quorum.
It is a combination of Centralized and Decentralized features. Every transaction can happen quickly in its private chain and commit only to the public chain as and when necessary, for example when public verification is required. This combines the solid trust of the public Blockchain and the scalability feature of the private Blockchain.
E.g. Layer 2 solutions and Side Chains are variations of this concept.
Advantages of Blockchain Technology
The advantages of Blockchain Technology are as follows:
● Process Integrity: This ensures that any block or even a transaction that adds to the chain cannot be edited which ultimately provides a very high range of security.
● Traceability: This supports easy identification of any issue at a node in the Blockchain Network and corrects if there is any. It also creates an irreversible audit trail.
● Security: This is highly secure as each entity that enters the Blockchain network has a unique identity. Solid encryption makes it almost unhackable.
● Faster processing: This technology speeds up the transaction speed to a very high extent.
Disadvantages of Blockchain Technology
The disadvantages of Blockchain Technology are as follows:
● Cost: As per the latest studies, the average cost of the Bitcoin transaction is $75 – $160 and most of the cost involved is on energy consumption. This is an extremely high cost also known as gas fees which miners need to incur to keep their Blockchain nodes up and running.
● Not well regulated: There is no central authority like banks to regulate the Blockchain network. Hence cryptocurrencies are in a highly volatile market and they can rapidly gain or lose their currency value.
● Lack of Trust factor: Some governments lack trust in Blockchain Technology and heavily tax crypto-based payments.
Applications of Blockchain Technology
Some of the applications of Blockchain technology widely used in the industry are as follows:
● Smart Contract: It is a digital ledger that is governed by a consensus or contract between two or more parties and defines the set of legal rules agreed upon by them in advance. This is based upon DLT and it governs execution, controlling, and further actions if legal rules agreed upon between parties involved in the Smart Contract are violated.
● Cryptocurrency: It is a digital currency that allows a user to send or receive peer-to-peer digital cash deducted or added from/to his/her bitcoin-based wallet without the requirement of any central authority/bank to monitor the transaction. The first created and the most famous cryptocurrency is Bitcoin.
Growth of Blockchain Technology
Even though Blockchain Technology was developed twenty years back in the year 1991, it was launched in the market only fourteen years ago in the year 2008. Initially, the markets were slow to adopt the same mainly in the form of the cryptocurrency called Bitcoin. Nowadays, people are more open to investing in Blockchain-based cryptocurrencies to get skyrocketing returns. However, some people still don’t fully trust Blockchain mainly due to the common misconception that bitcoins and other cryptocurrencies are used by hackers to trade on the dark web.
This technology has been rapidly growing and is expected to grow even faster. Blockchain Technology is soon expected to grow exponentially. The figure below gives an insight into the same.
The below image demonstrates how Blockchain Technology has penetrated the market and is rapidly expanding now.
Other than traditional Equity Markets where this technology is widely used, the following are some of the sectors where this technology is expected to make rapid gains: Healthcare, Government Administrative Sector which has a huge scope for Secure Digitisation of the Records, Insurance Sector, Consumer Good Manufacturing Sector, Automobile Sector, and Oil/Gas and Energy Sector.
Blockchain Technology has very limited competitors in the market like Coinbase, Hedera Hashgraph, Cosmos Network, Polkadot Network, and Circle. Coinbase is a major competitor. However, Coinbase itself depends on a crypto-platform hence it cannot disrupt Blockchain Technology.
In this blog, you have learned about Blockchain Technology, its key terminologies, its advantages and disadvantages, the important applications for Blockchain Technology, and finally about its growth potential. It is going to change the future of various industries.
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