What is the blockchain?
A blockchain is a list of transactions that anyone can view and verify, also known as a distributed ledger. The blockchain allows digital information to be disseminated, but not copied. Data lives in multiple, distributed locations, and records are public and easily verifiable.
The data inside a block depends on the type, which is why data in the Bitcoin Blockchain is unique from data in the Ethereum Blockchain. Cryptocurrencies aim to resolve the issues of centralization by distributing trust among all network members, creating an even division of power.
How does Blockchain Work?
Blockchain technology was first introduced by Satoshi Nakamoto when the anonymous developer created Bitcoin in 2008. Since then, the tech community has found various use cases for blockchain development.
Blockchain networks have no central authority, making them truly democratized systems. By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet.
When data is recorded inside the blockchain, it is very difficult to alter because each block has a unique hash and if the hash of the previous block is missing, like if one piece of a puzzle is missing, it is clear to all participants that it's incomplete. The information from the previous transaction is stored in the new block, making each block connected to its predecessor. These connections mimic a domino effect; when one falls, they all become incorrect.
One of the most attractive features of blockchain is decentralization. A centralized system, like a bank, takes away power from the people. For example, banks make billions of dollars each year for holding your cash and processing your payments. With the blockchain, you can take back this control of your finances, saving money and improving efficiency.
In a decentralized system, information isn't stored by one entity; everyone in the network owns the data, ultimately eliminating the need for third parties. With cryptocurrencies, you and only you can access your funds, reducing the possibility of government intervention or partial fund collection.
A decentralized network avoids several other vulnerabilities that exist in centralized systems. In centralized systems, all the data is stored in one spot and controlled by one entity, making them more vulnerable to hackers. Also, updates involve shutting down the entire systems, and in the event of a shutdown, no one can access the information. With blockchain, the data is always available to anyone. With banks reliant on the government, blockchain becomes more attractive in a case where the entity gets corrupted by malicious attackers, and all of the data will be compromised. Decentralization protects data from outside forces as it is a distributed ledger that is public, accessible, and verifiable.
Transparency & Accessibility
While it may sound contradictory, the openness of the blockchain gives you privacy while also allowing decentralization. The blockchain stores the sender, receiver, and amount in the transaction history. This enables the blocks to keep track of data, preventing alterations or hackings by utilizing complex cryptography to represent the sender and the receiver. Therefore data is being tracked and protected for both the user and the entire public blockchain space. If you were to look up a person's transaction history, you would not see "John sent 7 BTC" instead, you will see "1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ sent 7 BTC". Blockchain's transparency allows for both the security of a person's real identity and also visibility to all the transactions that were done by their public address. With more accessibility, cryptocurrencies aim to resolve this issue by spreading digital commerce around the globe so that anyone with a mobile phone can start making payments and accessing transactions. This is especially important for areas with unstable governments. For example, suppose you don't trust your local bank or country because of corruption and political instability; storing your money on a blockchain or in cryptocurrencies may be a secure solution.
Immutability, in the context of the blockchain, means that once something has been entered into the blockchain, it cannot be tampered with. The immutability of the data and transactions shows futuristic advancements in the finances of large companies. Hypothetically, if big companies used the blockchain, their public address would be accessible to everyone, forcing them to be honest and "on the record." This would lead to a decrease in financial crimes like embezzlement and tampering with the books. The blockchain provides this reliable property because of the cryptographic hash function. Each block, or transaction, has its own hash as well as the hash of the previous transaction, making everything interconnected by a check and balance system. If one hash is altered, let's say by a hacker, the block of its predecessor will be wrong, making it almost impossible to modify a blockchain without notice. The blockchain is maintained by a peer-to-peer network or a collection of nodes that monitor the cryptographic hash function.
Smart contracts help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman. A self-enforcing agreement embedded in computer code allows smart contracts to execute highly secure and reliable tamper-proof digital agreements. The inputs and outputs that any given contract relies on must be secure to maintain the overall reliability. Blockchains decentralization allows for the elimination of a middle man or third party to carry out the transaction. Smart contracts not only define the rules and penalties around an agreement in the same way that a traditional deal does but also automatically enforce those obligations. Because smart contracts enable the performance of credible transactions without third parties, they are rated, undeniably, faster, cheaper, and more secure than traditional systems and are being used more and more by banks and governments.