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What is blockchain technology? | Introduction to blockchain

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What is blockchain?

Blockchain is a system of recording information in a manner that makes it difficult or impossible to manipulate, hack, or cheat the system and its recorded information.

A blockchain is basically a digital ledger of transactions that is replicated and distributed across an entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and whenever a new transaction occurs on the blockchain, a record of that same transaction is duplicated on every participant’s ledger.

All blockchain technologies share the following properties: security, anonymity, unanimity, immutability, time-stamping, and total distribution. All records of transactions are encrypted within each block of the chain, securing the transactions’ information. The identity of participants in the blockchain are almost always anonymous and all agree to participate in verifying the validity of the records.

To facilitate complete transparency all participants receive a duplicated copy of the ledger and its transactions. Once records within the block are distributed and validated the records become irreversible and cannot be changed as manipulation would have to occur on every participants’ distributed ledger.

Once the allotted capacity of a specific block is reached, a new block is formed and ‘chained’ to the end of the previous block, with each added block increasing the security of the entire ledger due to the increased difficulty of changing every block in the chain spanning all distributed versions of the chain.

How does blockchain technology work?

Expanding on the workings of blockchain, network participants can verify and confirm transactions on their distributed ledgers without the need for a central clearing authority due to blockchain’s decentralised nature. This, for example, allows for the possibility of trading during weekends and holidays where a traditional exchange’s operating hours would restrict such action.

Here is an overview of how a blockchain transaction works. When a participant in the blockchain requests a transaction it is broadcast to the blockchain’s peer-to-peer network, which consists of computers (participants) known as nodes. The network of nodes validates and confirms the transaction and the user’s status using established algorithms. The aforementioned transaction can involve contracts, records, cryptocurrency, or other information.

Once verified the transaction is grouped together with other transactions in tranches known as blocks, which form the building blocks for the chain of blocks hence the name ‘blockchain’. Each new block is added onto the existing blockchain, verifying all previous transactions and blocks in the chain, and adding new information from said block, upon which the transaction is completed and distributed across the network.

Further potential applications of blockchain could be in financial services, where faster and cheaper settlements could save billions of dollars from transactional fees whilst improving security and confidence. Blockchain could also be used in voting, allowing voters to cast votes through their phones or computers with immediately verifiable results, leading to fewer voting-related issues like count manipulation.

What can blockchain do?

At its heart blockchain is a system of recording information on a digitally distributed ledger that is secure, anonymous, and immutable. In the information age where everything from marketing to arbitrage relies heavily on information, blockchain provides a solution for delivering necessary information faster and more accurately. This is because it provides immediate, shared, and completely transparent information stored on a ledger that can be accessed by authorised participants.

Bitcoin is often brought up in tandem with blockchain, as blockchain is the technology that powers Bitcoin and other cryptocurrencies like Ethereum and Solana. However, blockchain as a technology has much more to offer beyond cryptocurrencies. Blockchain can store and track orders, accounts, customer information, payments, smart contracts, transactions and much more.

It may also be helpful to view blockchain as an up-and-coming business processes improvement technology. Due to the collaborative nature of blockchain and its distributed ledger it holds the potential for improving the business processes that occur between companies. For example, businesses often spend significant amounts paying for due diligence work, and blockchain can reduce that cost with its total informational transparency and immutability.

Many financial institutions are exploring opportunities to employ blockchain technology to overhaul everything from insurance to clearing and settlement, and even logistics tracking for commodities.

The utility of blockchain is not limited to the financial services sector. The food and healthcare industries have both benefitted from innovations in blockchain.

Within the food industry blockchain has been employed to establish a traceable supply chain, so that information like when, where, and how food has been grown, picked, processed, and shipped is stored safely and can be verified at every step.

And within the healthcare and insurance industry, patient’s files, histories, and policies can be encrypted and shared with multiple permissioned participants e.g. healthcare providers, hospitals, and insurance firms without the risk of privacy breaches.

What are the advantages and disadvantages of blockchain?

Blockchain’s potential as a decentralised form of record keeping seems limitless. From greater security and privacy to lower transaction costs and fewer errors due to peer-to-peer verification blockchain may very well branch into applications beyond the above items. However, blockchain is not without some disadvantages.

Although blockchain can save significant money in transactional costs, the technology itself is far from free and has significant barriers to entry. For example, the system that bitcoin employs to confirm transactions consumes massive amounts of electrical and computational power. This does not take into account the steep technological costs of setting up hardware and software for nodes. The millions of computers in the bitcoin network consumes almost what Denmark consumes annually.

There are many in the blockchain community who are wary of government regulation that may hinder the use and development of blockchain. While confidentiality on the blockchain network shields users from hackers and protects privacy, it also allows for illegal activity and trading. One commonly cited example is the use of bitcoin to purchase illicit goods like drugs and weapons. With bitcoin’s use in potentially illegal trade combined with its increasing potential for illegally transferring wealth across borders and in evading tax governments are beginning to scrutinise bitcoin and blockchain.

China recently announced a crackdown of bitcoin mining and transactions within its borders, shuttering numerous known bitcoin farms and operators and banning its citizens from holding or trading bitcoin. This sent the price of bitcoin spiraling for several days as the community assessed the impact of China’s decision. With uncertainty surrounding government regulation present it will take time for events to unfold before the future of blockchain is secured.

From improvements in accuracy through the omission of human involvement in verification, to transaction costs reduction through eliminating the need for third party confirmations, to the decentralised nature that inhibits tampering and manipulation, blockchain certainly has much to offer with its advantages in contrast to the disadvantages. Moreover, blockchain transactions are secure, private, and fully transparent allowing it to serve as software for myriad use cases and applications.

Blockchain has been years in the making, and its potential use cases are still being explored, with newly discovered applications happening on a near-daily basis. Its potential seems to be limitless with innovations occurring in the financial, food, healthcare, and insurance industries and more. As blockchain’s popularity increases many are paying close attention to developments in blockchain policy and regulation, which may very well make or break blockchain’s adoption. For now, it certainly seems that blockchain’s future is bright but is by no means fully secured.