What is Blockchain Technology?
There are no simple definitions available over the web that can exactly explain what is blockchain technology. However, here’s an attempt to make you as well as the uninitiated to understand Blockchain. It is a technology that allows data to be stored and exchanged on a peer-to-peer (P2P) basis. It is used in a decentralized manner, which removes the need for intermediaries or third parties to validate transactions.
Blockchain emerged from the merger of two concepts;
- Asymmetrical cryptography, which allows the use of a paired public and private key system
- Distributed IT architecture (especially P2P)
Asymmetrical cryptography uses public and private keys to encrypt and decrypt data. The system is based on a public key that can be made available to all and allows encrypted data to be sent to a third party.
The third-party accesses the encrypted data via a paired private key. The public key is similar to a bank account number, which can be provided to anyone. The private key, which remains secret, acts as the password to the same bank account.
A distributed system is a series of independent computers (nodes) that connect to a network and can communicate with each other. It is similar to the Internet, which has no central node. Downtime for one server does not affect other users.
The blockchain network is a P2P distributed system. Information is shared among different users in a shared manner. The blockchain is open-ended and operates in a decentralized, ongoing manner, thanks to consensus algorithms (notably “proof-of-work” and “proof-of-stake”) which certify the information per block (unit). Users running these algorithms are known as miners. When a block gets validated, it is added to the blockchain and shared with the network. Blocks are connected to each other in such a way that if users wish to change one block, the entire blockchain must also be changed and that’s how blockchain becomes secure.
These two pillars (asymmetrical cryptography and distributed IT architecture) make it possible to create a secure environment. They establish a new basis for trust and enable new ways of data exchange, new types of transactions, and new forms of contracts.
Types of Blockchain
- Public Blockchain
- Consortium Blockchain
- Private Blockchain
- Blocks are validated one after another and can’t be modified.
- Network Node
- The network is open to any new participants
- All participants can participate in block validation
- All participants can read data contained in blocks’ chains
- Blocks are validated one after another and can’t be modified
- Permissioned nodes are allowed to participate in the consensus
- New nodes are accepted based on a consensus
- Blocks are validated according to predefined rules
- Read rights can be public or limited to certain nodes
- Blocks are validated by an authority and can be subsequently modified
- Nodes are chosen by the authority
- New nodes are accepted by the central authority
- Blocks are validated by the central authority
- Read rights may be limited by the central authority
Need for Blockchain Technology
- Accountability: With blockchain when two or more people enter into a transaction, their digital identity is known and therefore they can easily transact without worrying about fraud. Also, since the data can’t be tampered all parties in the transaction don’t need to worry about details like amount, quantity, etc. Therefore, there could be greater accountability between parties.
- Security: Security is one of the major factors people fear when getting into a transaction whether monetary or other from another country. With blockchain technology, there is no single point where all data is stored as its decentralized and therefore it becomes fundamentally difficult for someone to hack into a system and access valuable systems like in centralized databases of banks and other financial institutions.
- Record Keeping: With blockchain its fundamental that all transactions happening peer to peer have a trace and are stored forever in the decentralized ledger database. Therefore, one need not worry of data being compromised or erased and is always available for analysis.
- Cost Reduction: Since the core idea behind blockchain technology eliminates middleman, there is greater efficiency in almost all transactions. Imagine sending money through blockchain in the form of a cryptocurrency from one country to another without the involvement of banks, Central banks, watchdogs, other institutions and various restrictions on usage, etc.
Applications of blockchain
- Banking: No other industry stands to gain from blockchain as much as the banking Industry. Without any time limitations which are usually implied by banks due to practical reasons, with incorporating blockchain they can process transactions after working hours and during holidays in a matter of seconds.
- Cryptocurrency: Cryptocurrency is fundamentally based on blockchain technology and various cryptocurrencies have come up over the last several years like bitcoin, Ethereum, Litecoin, etc. For every country like India, there is a central bank that issues its currencies and promises to earn the worth of the currencies it issues whoever holds it. However, what if the central banks were to fail, who shall fulfill that promise. It was out of this worry Cryptocurrency like bitcoin was formed where there is no need for a central bank to regulate the crypto and its value could be assigned by simple demand supply analysis through listing it in an exchange.
- Healthcare and Legal Uses: Any field where data is of utmost importance can use blockchain to store such data as then it cannot be tampered with and can be stored securely and forever. The healthcare industry can store vital patient information using blockchain whereas Lawyers can also store information about their legal proceedings and case findings.