A blockchain is a distributed database or ledger shared between nodes on a computer network. As a database, a blockchain stores information electronically in a digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, in maintaining a secure and decentralized transaction ledger. The innovation of blockchain is that it ensures the reliability and security of a data record and builds trust without the need for a trusted third party.
Difference Between Database and Blockchain?
A key difference between a typical database and a blockchain is how the data is structured. A blockchain collects information in groups, known as blocks, which contain sets of information. Blocks have certain storage capacities and, once filled, are closed and connected to the previously filled block, forming a data chain known as a blockchain. All new information following the newly added block is compiled into a newly formed block which will then also be added to the chain once filled.
A database typically structures its data into tables, while a blockchain, as the name suggests, structures its data into linked blocks. This data structure inherently creates an irreversible timeline of data when implemented in a decentralized way. When a block is filled, it is carved in stone and becomes part of this timeline. Each block in the chain is assigned an exact timestamp when it is added to the chain.
How Does Blockchain Work?
The goal of the blockchain is to enable the recording and distribution of digital information, but not to modify it. In this way, a blockchain is a basis for immutable ledgers or transaction records that cannot be changed, deleted, or destroyed. This is why blockchains are also known as distributed ledger technology (DLT).
First proposed as a research project in 1991, the concept of blockchain predates its first widespread application in use: Bitcoin, in 2009. In the following years, the use of blockchain has exploded through the creation of various cryptocurrencies, applications of decentralized finance (DeFi), non-fungible tokens (NFT), and smart contracts.
Suppose a company owns a server farm with 10,000 computers used to manage a database that contains all the account information of its customers. This company owns a warehouse that holds all of these computers under one roof and has full control over each of these computers and all the information they contain. This, however, provides a single point of failure. What happens if the power fails in that place? What happens if your internet connection is interrupted? What if it burns to the ground? In both cases, the data is lost or damaged.
What a blockchain does is allow the data contained in that database to be distributed among various network nodes in various places. This not only creates redundancy but also maintains the reliability of the data stored there: if someone tries to alter a record in one instance of the database, the other nodes will not be altered, thus preventing another node from doing so. This system helps to establish an exact and transparent order of events. In this way, no single node within the network can alter the information it contains.
For this reason, information and history (such as cryptocurrency transactions) are irreversible. Such a record could be a list of transactions (such as with a cryptocurrency), but it is also possible for a blockchain to contain a variety of other information, such as legal contracts, status IDs, or a company’s product inventory.
Is Blockchain Transparent?
Due to the decentralized nature of the Bitcoin blockchain, all transactions can be viewed transparently by having a personal node or by using blockchain explorers which allow anyone to see the transactions in progress live. Each node has its copy of the chain which is updated as new blocks are confirmed and added. This means that if you wish, you can track Bitcoin wherever it goes.
For example, exchanges have been breached in the past, where those who held Bitcoin on the exchange have lost everything. Although the hacker may be completely anonymous, the Bitcoins he mined are easily traceable. If the Bitcoins stolen in some of these hacks had been moved or spent somewhere, it would have been known.
Of course, the records stored on the Bitcoin blockchain (as well as most others) are encrypted. This means that only the owner of a record can decrypt it to reveal their identity (using a pair of public and private keys). As a result, blockchain users can remain anonymous and maintain transparency.
Bitcoin VS Blockchain
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system in which document timestamps could not be changed. But it wasn’t until nearly two decades later, with the launch of Bitcoin in January 2009, that the blockchain had its first real-world application.
The key to understanding here is that Bitcoin simply uses the blockchain as a means to transparently record a payment book, but it can, in theory, be used to immutably record any number of data points. As discussed above, this could be in the form of transactions, votes in an election, product inventories, state IDs, title deeds, and much more.
Currently, tens of thousands of projects seek to implement blockchain in various ways to help society beyond logging transactions, such as a way to vote safely in democratic elections. The immutable nature of the blockchain means that fraudulent voting would be much more difficult to do. For example, a voting system could work in such a way that a single cryptocurrency or token is issued to every citizen of a country. Each candidate will then be assigned a specific wallet address and voters will send their token or cryptocurrency to the address of the candidate they wish to vote for. The transparent and traceable nature of the blockchain would eliminate both the need for human vote counting and the ability of attackers to tamper with physical ballots.
How is Blockchain Technology Being Used?
As we now know, the blocks in the Bitcoin blockchain store data on monetary transactions. More than 10,000 cryptocurrency systems are running on it today. But it turns out that blockchain is a reliable way to store data on other types of transactions as well.
Some companies that have already incorporated blockchains include Walmart, Pfizer, AIG, Siemens, Unilever, and many more. For example, IBM created its Food Trust blockchain to track the journey food products take to reach their locations.
Pros and Cons of Blockchain
For all its complexity, the potential of blockchain as a decentralized form of record-keeping is nearly limitless. From increased user privacy and increased security to lower processing costs and fewer errors, blockchain technology could very well see applications beyond those described above. But there are some drawbacks as well.
- Improved accuracy by eliminating human involvement in verification
- Cost reduction by eliminating third-party verification
- Decentralization makes manipulation difficult
- Transactions are safe, private, and efficient.
- Transparent technology
- Provides a banking alternative and way to protect personal information for citizens of countries with unstable or underdeveloped governments
- The significant technological cost associated with bitcoin mining
- Low transactions per second
- History of use in illegal activities, such as on the dark web
- Regulation varies by authority and remains uncertain
- Data Storage Limitations
Perks of Using Blockchain
Precision of Chain
Transactions on the blockchain network are approved by a network of thousands of computers. This eliminates nearly all human involvement in the verification process, leading to less human error and accurate recording of information. Even if a computer on the network were to make a miscalculation, the mistake would only be made in one copy of the blockchain. For that mistake to spread to the rest of the blockchain, it would have to be made by at least 51% of the computers on the network, something nearly impossible for a large and growing Bitcoin-sized network.
Typically, consumers pay a bank to verify a transaction, and a notary to sign a document. It eliminates the need for third-party verification and, with it, the associated costs. For example, business owners have to pay a small fee every time they accept credit card payments because banks and payment processing companies have to process such transactions. Bitcoin, on the other hand, has no central authority and has limited transaction fees.
Blockchain does not store any of your information in a central location. Instead, it is copied and distributed over a computer network. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading this information over a network, rather than storing it in a central database, the blockchain becomes more difficult to manipulate. If a copy of the blockchain falls into the hands of a hacker, only one copy of the information would be compromised, rather than the entire network.
Transactions made through a central authority can take a few days to clear. For example, if you try to deposit a check on Friday night, you may not see the funds in your account until Monday morning. While financial institutions operate during business hours, typically five days a week, the blockchain operates 24 hours a day, seven days a week, and 365 days a year. Transactions can be completed in as little as 10 minutes and can be considered safe after a few hours. This is particularly useful for cross-border transactions, which often take much longer due to time zone issues and the fact that all parties have to confirm payment processing.
Many blockchain networks function as public databases, which means that anyone with an internet connection can view a list of the network’s transaction history. While users can access the details of transactions, they cannot access the identifying information of the users making those transactions. It is a common misconception that blockchain networks like bitcoin are anonymous when in reality they are just confidential.
When a user makes a public transaction, their unique code, called the public key, as mentioned above, is recorded on the blockchain. Your personal information is not. If a person has made a Bitcoin purchase on an exchange that requires identification, the person’s identity is still linked to their blockchain address, but a transaction, even if linked to a person’s name, does not reveal any identity.
Once a transaction is recorded, the blockchain network must verify its authenticity. Thousands of computers on the blockchain scramble to confirm the purchase details are correct. After a computer validates the transaction, it is added to the block of the blockchain. Each block in the blockchain contains its unique hash, along with the previous block’s unique hash. When information in a block is changed in any way, the hash code for that block changes; however, the hash code in the next block will not. This discrepancy makes it extremely difficult to change information on the blockchain without notice.
Most blockchains are completely open-source software. This means that anyone can see your code. This gives reviewers the ability to look into cryptocurrencies such as Bitcoin for security purposes. This also means that there is no real authority over who controls the Bitcoin code or how it is modified. For this reason, anyone can suggest changes or updates to the system. If most of the users of the network agree that the new version of the code with the update is valid and useful, then Bitcoin can be updated. Bank unbanked him
Perhaps the deepest aspect of blockchain and Bitcoin is the ability for anyone, regardless of ethnicity, gender, or cultural background, to use it. According to the World Bank, approximately 1.7 billion adults have no bank accounts or means of storing money or wealth.7 Almost all of these people live in developing countries, where the economy is in its infancy and relies entirely on liquidity.
These people often make some money which is paid in cash. They, therefore, need to keep this physical money in hidden places in their homes or other places they live, leaving them prone to unnecessary theft or violence. The keys to a bitcoin wallet can be stored on a piece of paper, a cheap mobile phone, or, if necessary, even stored. For most people, these options are likely to be hidden more easily than a small stack of cash under a mattress.
The Bottom Line
With many practical applications for the technology already implemented and explored, blockchain is finally making a name for itself in large part thanks to bitcoin and cryptocurrencies. A buzzword in the language of every investor in the nation, blockchain stands out for making commercial and government operations more accurate, efficient, secure, and convenient, with fewer intermediaries.
As we prepare to enter the third decade of blockchain, it’s no longer a question of whether legacy companies will grab onto the technology, but when. Today we are witnessing a proliferation of NFTs and the tokenization of assets. The next few decades will prove to be a significant period of growth for the blockchain.
Frequently Asked Questions:
What is a blockchain in layman’s terms?
Simply put, a blockchain is a shared database or ledger. Pieces of data are stored in data structures known as blocks, and each node on the network has a replica of the entire database. Security is guaranteed as if someone attempts to edit or delete an entry in a copy of the ledger, most will not reflect this change and will be rejected.
How many blockchains are there?
The number of live blockchains is growing every day at an ever-increasing rate. In 2022, there are more than 10,000 active blockchain-based cryptocurrencies, with several hundred blockchains unencrypted.
What is the difference between a private blockchain and a public blockchain?
A public blockchain, also known as an open or permissionless blockchain, is one where anyone can freely join the network and establish a node. Due to their open nature, these blockchains need to be protected with cryptography and a consensus system such as proof of work (PoW).
A private or licensed blockchain, on the other hand, requires each node to be approved before joining. Since the nodes are considered reliable, the security levels don’t have to be that strong.