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There’s no wonder why blockchain technology and cryptocurrency concepts are ruling over the markets of digital payments. Today each one is eager to know about blockchain technology. As well as start transacting in cryptocurrencies.
“Everything will be tokenized and connected to the blockchain one day” – Fred Ehrsam.
We all are looking forward to the future of cryptocurrencies and blockchain. But great thought leaders already assumed what the future of the digital payment system would entail.
This article would help solve your queries and major concerns about blockchain. So let’s calm your curiosity by getting started with blockchain and its potential.
What is blockchain technology?
A blockchain system is a decentralized and distributed public ledger where cryptocurrencies are transacted and validated. It further generates a block which gets added up to the blockchain of the user.
Crypto transactions are recorded and verified on a ledger system and this system is called blockchain technology. This process enables the recording of transactions and digital assets over the peer-to-peer network of nodes. There is no third party involvement. The participants can easily confirm their transactions without the need for any central authority clearance.
Blockchains are growing records known as blocks which are encrypted using cryptography. Every block contains the cryptographic hash of the previous block and forms into a chain.
For what blockchain got developed?
In the initial years, the blockchain idea was invented, implemented and designed. The intent was to make digital transactions easy, encrypted for security and with no involvement of a third party.
But the major intent was to have a system to keep transactions timely stamped.
In 1991, blockchain technology was declared by the scientists Stuart Haber and W. Scott Stornetta. They aimed to introduce to the world a computational solution for time-stamped digital documents. For them not getting deferred or meddled that easily.
They come up with a solution by developing the concept to store these time-stamped documents within a cryptographically secured chain of blocks.
Then in 1992, the Merkle trees had been included within the design to increase its efficiency to enter more documents within one block. Merkle tree's major function is to create a chain of blocks.
Many series of data records could be entered and connected to the previous one. The latest record did have the history of the chain of blocks. Unfortunately, the concept didn’t get used and the patent got over by 2004.
In the same year, a cryptographic activist and a computer scientist Hal Finney introduced a system named Reusable Proof of Work. It is supposed to be the prototype for digital cash.
The system used to work by having non-fungible hash cash generated over the proof of work token in return. It created an RSA signed token that would be transferred from peer to peer.
RPoW had kept the ownership of tokens upon the trusted server minimizing the problem of double-spending. The server ensured users validate and maintain its integrity.
At last, Satoshi Nakamoto introduced the theory of distributed blockchain where a public ledger and a chain of blocks would grow without the interference of any central authority. It began making use of peer to peer nodes for time-stamping and validating every exchange. The concept gained popularity becoming the decentralized ledger for transactions in the cryptocurrency space.
What are the elements used in blockchain technology?
Blockchain has become an intriguing concept which is facilitating secured cryptocurrency transactions.
But before learning about how the technology works, let’s read about the components and the popular terms of the blockchain. Otherwise, you will not fully understand how a transaction is entered and what is needed to make a successful entry.
Each block is connected through the nodes or networks. Suppose the block value changes, and the hash value of that block would change as well. The block would be disconnected from the network. The node in the blockchain network shall update every 12.6 seconds.
Components of the blockchain technology
There are two types of nodes,
Full Node – It has the entire copy of the transactions. It could validate, accept or even deny the transactions.
Partial Node – It is maintaining the hash value of the particular transaction. It would be accessed knowing the hash value. The nodes contain lesser storage and low computational power.
It comprises the digital database of information. There have been three types of ledgers,
Distributed Ledger – Into this ledger, all nodes carry a local copy of databases. The group of nodes together can verify transactions and add the blocks within the blockchain.
Public Ledger – Within this ledger, anyone could see and write something. It is a transparent ledger and accessible to all.
Decentralized Ledger – In this ledger, not one node or node is having a central authority. Every node is involved to finish the job.
The nonce is considered as the abbreviation for the ‘number only used once. This is the number added to the hashed block in the blockchain. It randomly generates a 32-bit number, a one-time number that helps to create a block and to validate a transaction. It makes the transaction more secure.
The miner has to find out the nonce. It is typical to select the number to be used as the nonce. It can be found through trial and error. Afterwards, the miner inputs the nonce which he guessed within the header of the hash. Miner will rehash the value and compare it to the target hash.
Now it would check the hash as the resultant could meet each requirement. Once the requirements are met, this means the miner did have the answer and permits the block.
This wallet is used by users to store their cryptocurrencies digitally. The wallet is secured by the public and the private key pairs. There isn’t any need for currency conversion, as the currencies in the wallet will be accepted worldwide.
There are two types of wallets-
The wallets are used for making day to day transactions and are connected to the internet. While the wallet is connected to the web, it increases the chances of it being hacked.
Online Wallet – The wallet is connected with the cloud platform. Like MyEther wallet.
Software Wallet – These are desktop/mobile wallets. These wallets are downloaded from a desktop-like Electrum.
Mobile Wallet – They are designed to run over smartphone devices like mycelium.
These are the wallets which aren’t connected to the internet. They are much safer and cannot be hacked. These are purchased by the user.
Paper Wallet – These wallets contain a piece of paper which has a crypto address over them. These are offline wallets. Its private key is present in QR code format. The QR code can be scanned for making cryptocurrency transactions.
Hardware Wallet – It involves a physical electronic device using a random number generator which is linked to the wallet.
Through hashing, the data is generalized up to a fixed size. This plays an important role in cryptography. The hash value of one transaction is going to be the input for another transaction within the blockchain network. The following properties of the hash include,
It doesn’t collide
What are the types of Blockchain Technology?
Blockchain is the distributed ledger technology enabling time-stamped documents with peer to peer networks. Above we have discussed the components needed for the facilitation of blockchain technology.
In the last few years, we can see many businesses are making use of blockchain technology. Blockchain today is capable of handling many applications in various industries including manufacturing, finance, supply chain and so on.
Let us know about the types of blockchain technologies that help to support different business networks.
1. Public Blockchain Networks:
Bitcoin as well as other cryptocurrencies support public blockchains. Using these networks has somewhat limited the challenges and issues like secure transactions and centralization. Within public blockchain networks data is passed over the peer to peer network, not over any single location.
There is a consensus algorithm used for verification and validation of the transactions. Proof of Work (PoW) and Proof of Stake (PoS) are examples of consensus methods used amongst miners.
2. Private Blockchain Networks:
These blockchains work over closed networks. Usually supported by private businesses and organizations. The companies could use private blockchains to set their authority preferences, customize accessibility, parameters related to the network, and more security options. One authority can have control over the private blockchain.
3. Permissioned Blockchain Networks:
These blockchain networks are also known as hybrid blockchains. It involves private networks which promote access to authorized people. Companies are using these blockchain networks to improvise the structure by allowing participation of authorized parties within the network and what shall be the transactions.
4. Consortium Blockchains:
These blockchains combine public and private components. These are difficult to set up, if they are well off they can provide better security. Consortium blockchains are good for working with various organizations.
How does Blockchain work in Cryptocurrency?
Blockchain technology not only works for Bitcoin and other cryptocurrencies. But developers are also planning and executing its integration into many businesses. Where the applications would be transacting medical records, property sales, and any legal documents/contracts. Surely, anyone could be excited to use this technology and begin with digital transacting.
Let’s read how Blockchain works,
When a Bitcoin or any cryptocurrency is sold or purchased, it gets transmitted over a network of computers known as nodes.
Those thousands of nodes employing consensus methods would work throughout to confirm and validate the transaction using computer algorithms. These algorithms are called Bitcoin Mining.
The miner who cracks the code by solving the complex mathematical puzzle. For completing the new block gets rewarded with Bitcoin. The reward is paid by the newly-minted bitcoin and network fees. This shall get passed on to the seller and the buyer. The fees could experience volatility based on the number of transactions.
Once the purchase is validated cryptographically, the sale would get added to the previous block of the distributed ledger. The other networks must confirm the transaction.
The new block is then added to the previous blocks of the cryptocurrency transactions using the generated hash and the transaction is completed as well as verified.
Cryptocurrencies are today accepted anywhere and can be traded successfully. Yet there are some challenges and drawbacks about using cryptocurrency. Blockchain developers are making sure to minimize it. For ensuring secure transactions between two parties.
How Blockchain is impacting businesses?
This technology is not only limited to bitcoin and cryptocurrencies, but it is influencing many business segments as well. It is also estimated that blockchain could add up to $1.77 trillion to the international economy by 2030.
Today because of high computational power and transactional security, businesses can benefit from blockchain technology for sending and receiving payments without the use of any central authority.
The biggest reason why businesses are preferring blockchain models is because of classification. Crypto transactions provide greater transparency and security.
Many companies like Nestle and Unilever are adopting blockchain models. The model is helping companies to keep track of where every product is coming from, when it shall be processed or even stored and what is going to be the best buy date.
Blockchain technology also allows businesses to receive and send payments directly. It also eliminates the need for third-party payment gateways. It saves them transaction charges.
Businesses are using smart contracts, they’re computer programs that implement themselves and don't require any third party like brokers, agents or finance companies. Smart contracts are executed with the help of cryptographic codes. They aren’t accessible easily and provide better security.
Companies applying cyber security systems because of cybercrime pay up to $5 trillion each year. Using blockchain models for businesses can significantly reduce this amount.
As there isn’t any requirement of middlemen or central authority, transactions cannot get interfered with that easily. It eases the major problem in any industry.
As blockchain uses mathematical functions to perform complicated calculations. The system applies highly sophisticated software to solve these calculations and adds new blocks to the chain. This carries a digital footprint naming hash which cannot change the data once it is within the network.
Blockchain also helps facilitate international trade. Using cryptocurrencies, the clients can purchase or sell goods on a global level. Without any interference from legal laws or trading laws of a particular country.
Today businesses dealing with cryptocurrencies with global clients are supporting global trade providing them with a competitive advantage over other industries.
Presently many industries are planning to integrate this technology within their frameworks like healthcare documents, peer to peer insurance agents, and eCommerce channels.
Though blockchain technology is flourishing into different industries, it is used for various purposes by multiple parties. Blockchain is attractive because of many benefits.
But it also needs to be more robust to support different business functions. Hence, it is important for the business to know when they can use this technology? It is not going to be the one and all solution for every business.
Is Blockchain Technology A Good Investment?
Blockchain using Distributed Ledger Technology does synchronize and exchanges data. With verifying the correctness of the inputs and outputs. In recent years, many companies are growing exponentially using DLT. It includes financial services, accounting, and warehousing.
The truth is nothing in this world is secure and risk-free. Efforts taken to make every system secure to the best. It is certainly a good opportunity to invest in blockchain and other technologies. It will help to mitigate risks and have other benefits as well.
You could also invest within the companies and markets that are developing blockchain. Also setting up DLT services and products. The markets you can decide from are:
Financial technology is the use of technology for improving various financial services. The blockchain is enabling and supports financial functions like lending, doing transfers and banking. Example – PayPal.
2. Metaverse Companies
The metaverse is the digital world that comprises virtual reality, and augmented reality. It encourages people to experience digital life. There are many social media platforms, tech companies and game developers using hardware and software.
To provide this seamless digital experience for their audience. The person would be able to work, play and have fun all together. Meta, amazon, and Nvidia are showing their interest in metaverse services.
3. Cryptocurrency exchanges
You may trade and invest in cryptocurrencies by opening your account. There are vast opportunities to make profits through investing, day to day trading of cryptocurrency.
Coinbase is the leading example of the exchange.It has been growing into a business with its stocks being traded on Nasdaq. It allows you to access blockchain without having to deal in cryptocurrencies.
4. Decentralized Finance
This concept eliminates the use of any third party in handling transactions. It allows people to control their finances through digital wallets and so on. Cryptocurrency is one of the parts of DeFi. It controls the financial functions. But not in the traditional method for controlling the money. Cryptocurrency exchanges, and borrowers all come under DeFi.
So, as you would think about these various sectors and markets. You may realize that blockchain is the tool that accelerates many purposes. However, this year, there aren’t many methods to invest directly in the blockchain. You could invest in several companies, products and services that are using blockchain.
Would Blockchain decentralize the web?
The Internet is decentralized and is there for use by every person. Though there are centralized services which are holding their components. Like DNS services, cloud computing, email service, search engines, etc.
These services need the support of resources based on limited virtual servers. This is likely to make it easy for companies to keep their services up to date.
However, centralized architecture has experienced problems. Suppose the servers go down, we can be losing access to functionalities. If it goes hacked, we have to lose our data. They can also censor content according to their interests. And we cannot be able to do anything about it.
Due to the decentralized internet, some independent machines and users have access to and power over the necessary services. It can also expose them to hacking.
Experts say that blockchain helps to transact in a decentralized way over the web. It is crucial to get this decentralized web problem solved. As a distributed ledger it helps many parties to share data or information without any trust or having a central agent. Many companies want to use this technology for creating circulated versions of such services.
What are the pros and cons of using blockchain?
Blockchain technology is today helping people to transact anywhere. With any person for different purposes through a set of protocols. While there are benefits to using blockchain technology. There could be disadvantages too about using it.
Let’s see what shall be pros and cons of blockchain technology,
Accessible for all
Cryptocurrencies and blockchain can be used by all. None requires any authority or permission to make transactions within the distributed ledger.
Data will not be influenced by blockchain technology, as it has a decentralized structure. Any change in the numbers or codes would be reflected in each node. One couldn’t be hacked or do fraud within this system.
The data stored in blockchain technology is permanent. There are duplicate copies stored within the local nodes. So there isn’t much fear about losing the data.
Blockchain uses hashing techniques to encrypt each block to make it secure. Each block is safe and connected to the other block for data safety. It uses SHA 256 hashing technique.
Performing mathematical calculations to do the transactions. Miners require time to compute all the nonce values multiple times.
Difficulty to scale
The block size created is 1 MB which is fixed under any circumstance. Because of this, it is difficult to scale. As the blockchain could only enter fewer transactions.
Blockchain use is challenged by some financial institutions. As other supportive technologies are required to facilitate this technology.
Legally not accepted worldwide
There are some environmental and transfer issues. Some countries are banning the use of blockchain technology apps. The technology is not being supported by the commercial sectors.
The Final Thoughts
Blockchain has a global infrastructure. It helps one transact, share and receive information from anywhere in the world. It gets unified within the existing processes and systems. It is making technology accessible for general implementation. Blockchain technology is generating many career opportunities as well.
Today it may not be presenting impressive returns. But it would surely create the right platform. To ensure future growth and promote business flexibility.
Shaima Khan is a content writer and content marketer based in India. She is a book nerd, obsesses over technology and digital marketing. She is the founder of Artizone Information. In her spare time, she's a part of various communities and does counselling related to emotional intelligence and its impact on professional development. You can find her at, Twitter, LinkedIn
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.