What is Blockchain Technology? An Ultimate Guide for Beginners
February 15, 2019 | 2130 Views
Ultimate Guide to Blockchain Technology
According to Statista Report 2017, the global blockchain technology market will be 2.3 billion USD in size by 2021, assuming a CAGR of 61.5%. Blockchain is proving to be one of the most promising technologies of the 21st century.
Building upon work done by Stuart Haber, W. Scott Stornetta, and Bayer on cryptographically secured blockchains in 1991-92, Satoshi Nakamoto built the first blockchain in 2008. Satoshi Nakamoto may be a person or a group of persons using this pseudo name; no one has been able to ascertain their offline identity to date.
What is Blockchain Technology?
Blockchain is basically a digital ledger where data can be entered, verified, and then processed further by the approval of computer nodes on a peer-to-peer network. Whether you want to enter new data, validate existing ones, or delete data, a predefined number of nodes on the P2P network must validate each transaction.
The digital data is stored in blocks that are then linked together from the blockchain. To create a new block of data, any one of the nodes first needs to create a new block and then put all the new transactions in the block. This new block is appended to the existing blockchain and then broadcasted to other nodes on the network. Other nodes must verify the validity of the new transactions before they can be accepted and become part of the blockchain.
Features of Blockchain
Having a P2P network implies that all users are equal - there is no server that is superior to its clients, as in the case of the Internet. This gives rise to decentralized control over the data contained in the whole blockchain.
This involvement of all the nodes for all transactions ensures that there is no single point of control as well as failure.
The distributed data ensure that hackers cannot hack into the blockchain from any single point. Similarly, if any one node fails, the whole blockchain would not be disrupted and it will be business as usual. All the blocks are in the public domain and hence there is complete transparency. This feature of blockchain has found widespread use, as we will discuss later.
Bitcoin and Blockchain
Blockchain was first implemented as Bitcoin, a digital currency designed by Satoshi Nakamoto. Or rather, it was the other way around. Blockchain was invented so that digital currency could become a reality. This is the reason why many people think of blockchain like Bitcoin and find it difficult to believe that blockchain is a concept that can be taken much beyond cryptocurrencies. However, blockchain’s contribution to popularizing digital currency cannot be glossed over.
Blockchain was the first technology to eliminate the problem of double-spending in digital transactions.
You can also take blockchain to be a digital ledger where entries are made only after the approval of all those who have access to the ledger. Once the financial data of the ledger is replaced by any other data or document, you have a blockchain useful for other non-financial fields.
How Does a Blockchain Work?
The best part about blockchain is that you do not need to understand the technology behind it to use it. However, it sure helps to appreciate any technology better if we understand its basics. Even though blockchain has been made to sound something highly technical, it is based on a very simple concept for implementation. If you know how the Internet works, you can easily understand how a blockchain works.
The backbone of any blockchain is the P2P network formed by nodes with huge computing capabilities. A huge computing capability is required because nodes are needed to solve complex puzzles to find new blocks or validate transactions. The moment they join the network, the blockchain is automatically downloaded on their system. There is no copy of the blockchain, the node simply shares the blockchain with other nodes.
When a new block has to be created or data has to be added to an existing block, it must be done by a node. Once this new node is put out on the network, it is verified by all the nodes. This is called reconciling the transaction. The network checks itself every 10 minutes to see if any new transaction has taken place, which needs to be reconciled.
Are you wondering why any user would do reconciliation and relaying blockchains to other nodes or users?
Well, all nodes that successfully create a new block or reconcile a transaction are paid in Bitcoins. That is why bitcoins were invented in the first place – a means to incentivize joining and working on a blockchain network. This process for verifying transactions and getting paid in Bitcoins in return is called “mining.”
The users also mine for blocks to which new transactions can be added. Once the new Block with the new unverified transactions is added to the chain, it is broadcast to all the other nodes. When all the nodes are able to verify the transaction, it becomes a part of the digital ledger.
Remember that no new transactions can be added to the old block because they are already verified. This makes the blockchain tamper-proof. To change the data of any old block the rogue node needs to put out a completely new blockchain to the network, which is practically not possible because of time and resource constraints.
Impact of Blockchain Technology on Industries
Although blockchain was designed to launch the cryptocurrency Bitcoin, it has found acceptance in all major Industries like entertainment, sports, retail, finance, logistics, healthcare, etc. Here are some use cases that have the potential to change the face of many industries:
Smart contracts can be used to perform transactions without the need for middlemen.
Blockchain can be used for crowdfunding where people donating can easily track if they are donations have been put to correct use.
Securing personal identities online is one of the biggest drawbacks of current online systems. Blockchain can be used to distribute this data in a way that it becomes secure and there is no central point of hacking.
People can store records pertaining to their achievements academically and professionally on blockchain and share them with other people like prospective employers or loan managers. As it is on the blockchain, the other party can easily verify the authenticity of the information.
Data that should be in the public domain, like land title deeds, stock market value, etc. can be securely put on the blockchain so that anyone can access and view them.
Patient data can be shared across healthcare organizations to ensure better and more efficient care.
How governments are Using Blockchain
Most governments around the world grapple with issues of transparency, reliability, and security in their various programs. All these issues can be taken care of by using blockchain to maintain information. So, governments are embracing blockchain technology to implement transparency and data security issues.
As all information on a blockchain is in the public domain, which can be verified, all government measures become automatically transparent. Smart contracts are also being used to ensure that all the promises made by the government are enforced by concerned parties. Data loss or leakage is also diminished as the need to maintain data physically is not there now.
Future of Blockchain Technology
The future of blockchain technology will become self-evident when you read these numbers:
A simple search on AngelList shows more than 7500 blockchain startups
Blockchain-related jobs posted on LinkedIn tripled between 2017 and 2018
Global spending on blockchain solutions was USD 2.1 billion in 2018
However, blockchain technology faces some challenges as well, which are two-pronged. On the one hand, they need to work on their technological limitations, and on the other, they need to improve the general perception among common people. The technological challenges they face include issues like scalability, security, and decentralization.
SegWit upgrade has improved blockchain protocol to some extent but block size needs to be improved further.
While blockchain technology was gaining traction among industry experts over the past couple of years, its image was taking a beating in the eyes of the general public due to controversy over Bitcoin and other cryptocurrencies.
Also read:How Will Blockchain Impact the Entertainment Industry?
FAQs - Blockchain Technology
What is the difference between Bitcoin and blockchain?
Bitcoin is a digital currency that is maintained on a publicly verified digital ledger. Blockchain is a chain of blocks containing data verified by independent users. Bitcoin ledger is also implemented using blockchain technology.
What can blockchain do?
Due to the decentralized reconciliation of each data on a peer-to-peer network, a blockchain can help its user in the following:
Establishing digital identities
Keeping records that are immutable, i.e., they do not change over a period of time
Maintain and provide digital audit trails
Offer Blockchain as a Service (BaaS) through platforms like cryptocurrencies and smart contracts
What is Hyperledger?
Hyperledger is an umbrella organization for cross-industry open-source blockchain technologies. It is promoted by the Linux Foundation. It was launched in December 2016 and is supported by companies like IBM, SAP, and Intel. It has participants from some of the major industries like Finance, Banking, IoT, manufacturing, and retail. Starting with just four business blockchain codebases, it now hosts many private blockchain codebases
What are smart contracts?
Smart contracts are legal contracts converted into lines of code and implemented using a blockchain network. These contracts can be used to perform the allowed legal transactions without the need for a centralized authority, and that is why these contracts are also called self-executing contracts. As blockchain is used to maintain and verify transactions, all the transactions are traceable, transparent, and irreversible. By using smart contracts, you save time as well as money.
What is SegWit?
SegWit is the acronym for Segregated witness. it is a protocol Upgrade applied by Bitcoin in August 2017 and Litecoin in May 2017. It took care of two issues with the original blockchain protocol - scalability and transaction malleability.
- The original blockchain protocol had a bug that enabled a user to modify the transaction ID - specifically the witness signature - without modifying the contents.
- The original blockchain protocol limited block size to 1MB. This meant that any blockchain could handle only 7 new transactions per second, a huge limitation as the popularity of blockchains grew and more and more transactions were performed using it. SegWit upgrade enabled a greater number of transactions to be stored in each block. So, the throughput of the blockchain increased.
What are the blockchain issues and limitations?
Every coin has two sides. Blockchain is taken to be one of the most promising technologies of the 21st century. however, it has its own limitations:
- Data mining requires a great amount of electricity and high computational power. According to a study, blockchain uses more electricity than countries like Switzerland and the Czech Republic. It needs to be judged whether the benefits of blockchain far outweigh the resources required to keep it running.
- Every blockchain is prone to 51% assault. This essentially means that if 51% of the nodes are taken over by rogue elements, they can add new transactions according to their own wish. This can be taken care of only if more and more people join the blockchain network.
- Blockchain technology uses lots of terms and complex concepts. People need to be as educated in these terminologies so that they feel comfortable joining the blockchain network and making it more useful. The full benefits of blockchain technology can be utilized only if the nodes joining the network come from diverse backgrounds.
- The last mile gap between online information and the offline entity is not taken care of by the blockchain. It must be done manually and hence it is prone to human error.
Blockchain is essentially an immutable, decentralized, and tamper-proof ledger. As we have seen, it has the potential to make life easier by providing a secure, fast, transparent, and middlemen-free way of performing transactions.
As more and more people are realizing the way blockchain technology can revolutionize the way we perform transactions, both financial and non-financial, it has the potential to become the most valuable technology of the 21st century. Being one of the top blockchain app development companies, we can help you execute your idea flawlessly.
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