Blockchain technology is a structured database with specific rules. Blockchain minimizes the costs and delays associated with using third-party intermediaries for financial transactions. This is the technology on which Bitcoin is built. But there are probably dozens of other ways to use blockchain apart from cryptocurrencies.
Still not quite clear? Our chief cryptocurrency and blockchain researcher, Alex, will help you understand blockchain technology and its application in today’s world. Keep reading this article; it explains in simple language all the main characteristics of this modern technology that so many talk about.
What is Blockchain?
Blockchain is a technology that organizes a database consisting of a chain of blocks designed according to specific rules. Each cell of a block carries information about the previous cell.
This technology is based on the principle of decentralization; that is, the base is not in one place, and in all the computers of the system participants, which form a network. Thus, the blocks cannot be replaced or hacked because all the computers would have to be hacked to do so.
The blockchain concept was proposed in 2008 by Satoshi Nakamoto. It was first implemented in 2009 as a digital currency component, Bitcoin, where the blockchain plays the central shared ledger’s role for all bitcoin transactions.
Blockchain technology made Bitcoin the first digital currency that solves the problem of double-spending (unlike physical coins or tokens, electronic files can be duplicated and spent twice) without the use of any authority or central server.
How Blockchain Technology Works
Despite the distribution of blocks on the Internet, essentially in a “public place,” the encryption of access to each of them allows the data stored in them to be kept safe. The blockchain itself can be freely transferred to any Internet user without the risk of losing its contents.
This is the basis of cryptocurrencies, which have a tangible value in local currency. Understanding what blockchain is will become easier if you get into the intricacies of working with this system:
- Any changes without confirmation by cryptographic keys are rejected. With this feature, it’s easy to set up identity verification without an office visit.
- The transmission of the private key gives full access to the block (money and other assets). This makes it easy to record transactions conducted through online resources.
Access to blocks is transferred automatically according to the principle of digital signature – you enter a code, confirm the transfer of rights, and the process is completed. In addition to the financial sector, such a system may demand the sale of intellectual products such as books and programs.
Considering how blockchain works, cryptocurrencies (both popular bitcoin and its analogs) work according to the proposed scheme. But this is not the only area of application. A distributed data storage system is of great interest to banking institutions and government organizations that share databases such as medical cards and pension accruals. Exemplary uses of blockchains:
- Ownership (authorship)
- Transactions with raw materials, goods
- Authentication, access rights confirmation
- Data management
- Voting tools
- Online gaming
The predominant transition of private/public companies to Internet technologies enables blockchain integration into the existing infrastructure without visible transformation. Implementation is possible by changing the internal algorithms of data storage, providing access to it by users.
If the interface remains the same, the owners of personal accounts will not even notice the difference, feeling only a noticeable increase in the speed of the resource.
Security of Blockchain Application
A key feature of blockchain technology is the decentralization of the system. While a database located on a single server can, theoretically, be hacked using any of the existing security features with blockchains, none of these methods will work. In simple terms, there is nothing to hack. That leaves the option of trying to steal the private keys of individual users.
If the blockchain method protects a transmitted file, even though an unlimited number of people may have access to it, only the user to whom the keys have been transferred can read the content. The only weak link remains the method of copying the security code, which does not exclude the human factor that could lead to its loss.
On the surface, the blockchain application looks like a transfer of money with a protection code. The recipient sees the amount, transfer date, and other information when making the payment but cannot use the funds until they receive the secret code.
Technically such a block transfer is fully secure. Many computers can be involved in the process, and each of them will contain a complete copy of the block. If a failure occurs at one of the stages, it is enough to disconnect the corrupted link and transfer the block again.
Pros of Blockchain Development
The prospects are too rosy when the technology is implemented globally. The pursuit of economic development inevitably leads to the consideration of new directions. Blockchain allows solving several problems at once:
- Significant reduction of time for financial procedures.
- Removal of material costs by eliminating the need for powerful servers, expensive data storage complexes.
- Eliminating the monopoly of large companies that try to manipulate the market with significant capital.
Optimists predict liberation from corruption and the elimination of money laundering and other financial crimes. They believe that the transparency of the system will force all of its users to comply with the law because every transaction is open. For the government, such prospects become critical because of the lack of a legally regulated transition scheme to blockchain technology.
Cons of Blockchain Development
While many experts compare the revolutionary nature of blockchain on a par with the creation of the Internet itself, it has many problems.
- To implement blockchain, large systems with many participants must be rebuilt. Each system tends to retain its properties and structure, resisting change. That’s why it’s easier to start implementing blockchain from a small place.
- Blockchain is not regulated in any way by the legal framework and is still very far from it. For the technology to gain credibility, it has to comply with standards. If there are no standards, there is no compliance.
- It takes a lot of processing power and energy to support blockchain technology.
Blockchain is a vast and fascinating topic that covers more and more applications every day. It’s the process that started it all, and it’s worth starting your journey into the world of cryptocurrency with an understanding of it.
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