Blockchain technology is one of the most hyped innovations of the twenty-first century. Blockchains, which were created to support Bitcoin, now power thousands of cryptocurrencies, and developers are working to integrate the technology into businesses such as medicine, art, and finance.
To understand the growing interest, it can be helpful to understand how blockchain works, why it has value, and what makes it different from other internet technologies. In this article, we will be looking at what blockchain technology is, how it works, and the types of blockchain technology available.
What Is Blockchain?
Blockchain is an immutable, distributed ledger that is used to record transactions and track assets across a business network. It is a type of information storage that prevents anyone from changing, hacking, or cheating. Intellectual property, patents, copyrights, and other brand assets are examples of intangible assets. Houses, cars, cash, and land are examples of tangible assets.
Blockchain technology is a structure that stores public transactional records, also known as blocks, in several databases connected by peer-to-peer nodes in a network. This type of storage is commonly referred to as a ‘digital ledger.’
Every transaction in this ledger is authorized by the owner’s digital signature, which authenticates the transaction and prevents it from being tampered with. As a result, the information contained in the digital ledger is extremely secure.
In a nutshell, the digital ledger is similar to a Google spreadsheet shared among multiple computers on a network, where transactional records are stored based on actual purchases. The intriguing aspect is that anyone can see the data, but they cannot corrupt it.
How The Blockchain Works
Blockchains are decentralized data records. The blockchain is stored on every user’s computer that is given blockchain. Blockchain consists of three important concepts: blocks, nodes, and miners.
Every chain consists of multiple blocks and each block has three basic elements:
- The data in the block.
- A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash.
- The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).
When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.
Miners use the mining process to add new blocks to the chain. Every block in a blockchain has its own unique nonce and hash, but it also refers to the hash of the previous block in the chain, making mining a block difficult, especially on large chains.
Miners use specialized software to solve the incredibly complex math problem of generating an accepted hash. Because the nonce is only 32 bits long and the hash is 256 bits long, there are approximately four billion nonce-hash combinations that must be mined before the correct one is found.
Miners are said to have discovered the “golden nonce” when this occurs, and their block is added to the chain.
Making changes to any block earlier in the chain necessitates re-mining not only the affected block but all subsequent blocks as well. This is why manipulating blockchain technology is so difficult. Consider it “safety in math,” because finding golden nonces takes an enormous amount of time and computing power.
When a block is successfully mined, the change is accepted by all nodes on the network, and the miner is financially rewarded.
Decentralization is an important concept in blockchain technology. The chain cannot be owned by a single computer or organization. Instead, it is a distributed ledger through the chain’s nodes. Nodes are any electronic devices that keep copies of the blockchain and keep the network running.
Every node has its own copy of the blockchain, and for the chain to be updated, trusted, and verified, the network must algorithmically approve any newly mined block. Due to the transparency of blockchains, every action in the ledger can be easily checked and viewed. Each participant is assigned a unique alphanumeric identification number, which is used to track their transactions.
Combining public information with a system of checks and balances helps the blockchain maintain its integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.
Blockchain Use Cases
Blockchain technology is used for many different purposes, from providing financial services to administering voting systems. Below is a list of its basic use cases.
The most common application of blockchain today is as the foundation of cryptocurrencies such as Bitcoin or Ethereum. The transactions that people make when they buy, exchange, or spend cryptocurrency are recorded on a blockchain. The more people who use cryptocurrency, the more popular blockchain may become.
“Because cryptocurrencies are volatile, they aren’t widely used to buy goods and services.” However, this is changing as PayPal, Square, and other money service companies make digital asset services widely available to vendors and retail customers,” says Patrick Daugherty, senior partner at Foley & Lardner and the firm’s blockchain task force leader.
Beyond cryptocurrency, blockchain is being 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 and processed outside of normal business hours.
Blockchain technology can also be used to record and transfer ownership of various assets. This is currently very popular with digital assets such as NFTs, which are used to represent ownership of digital art and videos.
However, blockchain could be used to process the ownership of physical assets such as real estate and vehicles. The blockchain would be used by both parties to verify that one owns the property and the other has the funds to purchase it; then the sale would be completed and recorded on the blockchain.
They could use this process to transfer the property deed without having to manually submit paperwork to update the local county’s government records; it would be instantly updated in the blockchain.
Self-executing contracts, also known as “smart contracts,” are another blockchain innovation. When certain conditions are met, these digital contracts take effect automatically. For example, a payment for a good may be released immediately once the buyer and seller have met all of the deal’s specified parameters.
“We see a lot of potential in smart contracts, which use blockchain technology and coded instructions to automate legal contracts,” Gray says. “A properly coded smart legal contract on a distributed ledger can reduce, or ideally eliminate, the need for third-party verification.”
Supply Chain Monitoring
Massive amounts of information are involved in supply chains, especially when goods are transported from one part of the world to another. Traditional data storage methods can make it difficult to pinpoint the source of problems, such as which vendor supplied low-quality goods.
Storing this data on the blockchain would make it easier to go back and monitor the supply chain, as IBM’s Food Trust does with blockchain technology to track food from harvest to consumption.
Experts are looking into ways to apply blockchain to prevent fraud in voting. In theory, blockchain voting would allow people to submit votes that couldn’t be tampered with as well as would remove the need to have people manually collect and verify paper ballots.
Types of Blockchain
There are four different types of blockchains. They are as follows:
Private Blockchain Networks
Private blockchains work well for private businesses and organizations because they operate on closed networks.
Companies can use private blockchains to tailor their accessibility and authorization preferences, network parameters, and other critical security features. A private blockchain network is managed by a single authority.
Public Blockchain Networks
Bitcoin and other cryptocurrencies arose from public blockchains, which also contributed to the widespread adoption of distributed ledger technology (DLT). Additionally, public blockchains aid in the elimination of certain challenges and issues, such as security flaws and centralization.
Data is distributed across a peer-to-peer network rather than being stored in a single location using distributed ledger technology. A consensus algorithm is used to verify the authenticity of the information; proof of stake (PoS) and proof of work (PoW) are two commonly used consensus methods.
Permissioned Blockchain Networks
Permissioned blockchain networks, also known as hybrid blockchains, are private blockchains that grant special access to authorized individuals.
Organizations typically set up these types of blockchains to get the best of both worlds, and it allows for better structure when determining who can participate in the network and which transactions can be made.
Similar to permissioned blockchains, consortium blockchains have both public and private components, except multiple organizations will manage a single consortium blockchain network.
Although these types of blockchains can initially be more complex to set up, once they are running, they can offer better security. Additionally, consortium blockchains are optimal for collaboration with multiple organizations.
How Many Blockchains Are There?
The number of live blockchains is growing every day at an ever-increasing pace. As of 2022, there are more than 10,000 active cryptocurrencies based on blockchain, with several hundred more non-crypto currency blockchains.
Who Invented Blockchain?
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two mathematicians who wanted to implement a system where document timestamps could not be tampered with. In the late 1990s, Cypherpunk Nick Szabo proposed using a blockchain to secure a digital payments system, known as bit gold (which was never implemented).
As a buzzword on the lips of every investor in the country, blockchain has the potential to make business and government operations more accurate, efficient, secure, and cost-effective by eliminating middlemen.
With many practical applications for the technology already in place and being researched, blockchain is finally making a name for itself, thanks in large part to bitcoin and cryptocurrency.