What is Blockchain Technology and how does it works?

History of Blockchain Technology

The first concept of blockchain dates back to 1991, when the idea of a cryptographically secured chain of records, or blocks, was introduced by Stuart Haber and Wakefield Scott Stornetta.

The year 2008 marked a pivotal point for blockchain, as Satoshi Nakamoto (a pseudonym for a person or group) gave the technology an established model and planned application.

The first blockchain and cryptocurrency officially launched in 2009 and the first successful Bitcoin transaction occurs between computer scientist Hal Finney and Satoshi Nakamoto.

Features of Blockchain Technology

Decentralization:
Transferring of control and decision making from a centralized entity to a distributed network.

Immutability:
No participant can tamper with a transaction once someone has recorded it to the shared ledger.

Consensus:
Blockchain establishes rules about participant consent for recording transactions. A person can record new transactions only when the majority of participants in the network give their consent.

Types of Blockchain Networks

Public Blockchains

• Public blockchains are permission less in nature, allow anyone to join, and are completely decentralized.
• Public blockchains allow all nodes of the blockchain to have equal rights to access the blockchain, create new blocks of data, and validate blocks of data.
• People primarily use public blockchains to exchange and mine cryptocurrencies like Bitcoin, Ethereum, and Litecoin.

Private Blockchains

• A single organization controls private blockchains, also called managed blockchains. The authority determines who can be a member and what rights they have in the network.
• Private blockchains are only partially decentralized because public access to these blockchains is restricted.

Consortium Blockchains

• Consortium blockchains are permissioned blockchains governed by a group of organizations, rather than one entity.
• Consortium blockchains enjoy more decentralization than private blockchains, resulting in higher levels of security.
• However, setting up consortiums can be a fraught process as it requires cooperation between a number of organizations, which presents logistical challenges as well as potential antitrust risk.

Hybrid Blockchains

• Hybrid blockchains combine elements from both private and public networks. Companies can set up private, permission-based systems alongside a public system.
• In this way, they control access to specific data stored in the blockchain while keeping the rest of the data public. They use smart contracts to allow public members to check if private transactions have been completed.

How Does Blockchain Work?

Record the transaction

• The first step is to record the transaction. A blockchain transaction shows the movement of physical or digital assets from one party to another in the blockchain network.
• It is recorded as a data block and can include details like
  1. Who was involved in the transaction?
  2. What happened during the transaction?
  3. When did the transaction occur? etc.

Gain consensus

• Most participants on the distributed blockchain network must agree that the recorded transaction is valid.
• Depending on the type of network, rules of agreement can vary but are typically established at the start of the network.

Link the blocks

• Once the participants have reached a consensus, transactions on the blockchain are written into blocks equivalent to the pages of a ledger book.
• Along with the transactions, a cryptographic hash is also appended to the new block. The hash acts as a chain that links the blocks together.
• If the contents of the block are intentionally or unintentionally modified, the hash value changes, providing a way to detect data tampering.
• Thus, the blocks and chains link securely, and a person cannot edit them. Each additional block strengthens the verification of the previous block and therefore the entire blockchain.

Share the ledger

• This is the last stage. The system distributes the latest copy of the central ledger to all participants.

Applications of Blockchain Technology

01. Cryptocurrency

Blockchain’s most well-known use is in cryptocurrencies. Cryptocurrencies are digital currencies (or tokens), like Bitcoin, Ethereum or Litecoin, that can be used to buy goods and services.

When people spend cryptocurrency, the transactions are recorded on a blockchain. The more people use cryptocurrency, the more widespread blockchain could become.

02. Banking

Blockchain is used to process transactions in fiat currency, like dollars and euros. This could be faster than sending money through a bank or other financial institution as the transactions can be verified more quickly.

03. Asset Transfers

Blockchain can also be used to record and transfer the ownership of different assets. This is very popular with digital assets like Non-fungible tokens (NFTs).

04. Executing Contracts

Another blockchain innovation is self-executing contracts commonly called “smart contracts.” These digital contracts are enacted automatically once conditions are met.

For instance, a payment for a good might be released instantly once the buyer and seller have met all specified parameters for a deal.

05. Supply Chain Monitoring

With traditional data storage methods, it can be hard to trace the source of problems, like which vendor poor-quality goods came from.

Storing this information on blockchain would make it easier to go back and monitor the supply chain.

06. Voting

Blockchain voting would allow people to submit votes that could not be tampered with as well as would remove the need to have people manually collect and verify paper ballots.

07. Energy

Energy companies use blockchain technology to create peer-to-peer energy trading platforms and streamline access to renewable energy.

For instance, With blockchain-based crowdfunding initiatives, users can sponsor and own solar panels in communities that lack energy access. Sponsors might also receive rent for these communities once the solar panels are constructed.

08. Media and Entertainment

Copyright verification is critical for the fair compensation of artists. It takes multiple transactions to record the sale or transfer of copyright content. Companies in media and entertainment use blockchain systems to manage this copyright data.

Advantages of Blockchain Technology

1. Higher Accuracy of Transactions:
   Because a blockchain transaction must be verified by multiple nodes, this can reduce error. If one node has a mistake in the database, the others would see it’s different and catch the error.
2. No Need for Intermediaries:
   Using blockchain, two parties in a transaction can confirm and complete something without working through a third party. This saves time as well as the cost of paying for an intermediary like a bank.
3. Extra Security:
   A decentralized network, like blockchain, makes it nearly impossible for someone to make fraudulent transactions, because to enter in forged transactions, they would need to hack every node and change every ledger.
4. More Efficient Transfers:
   Since blockchains operate 24/7, people can make more efficient financial and asset transfers, especially internationally.

Disadvantages of Blockchain Technology

1. High Energy Costs:
   Having all the nodes working to verify transactions takes significantly more electricity than a single database or spreadsheet. Not only does this make blockchain-based transactions more expensive, but it also creates a large carbon burden on the environment.
2. Risk of Asset Loss:
   Some digital assets are secured using a cryptographic key, like cryptocurrency in a blockchain wallet. If the owner of a digital asset loses the private cryptographic key that gives them access to their asset, currently there is no way to recover it, which means the asset is gone permanently.
3. Potential for Illegal Activity:
   Blockchain’s decentralization adds more privacy and confidentiality, which unfortunately makes it appealing to criminals. It’s harder to track illicit transactions on blockchain than through bank transactions that are tied to a name.

Also Read
What is Non-Fungible Tokens (NFTs) & its Features
What is Cryptocurrency & How does it works?

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