You may have heard the term ‘blockchain,’ often used in crypto, but ever wondered what it is? A blockchain is basically a shared, inflexible ledger that allows the process of recording transactions and tracking assets based on cryptographic principles. On a blockchain network, anything of value can be trailed and traded virtually. This reduces risk and lowers cost for all involved.
It is no secret that after Bitcoin was introduced in 2009, blockchain uses since then have exploded via the creation of various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.
One thing to note is that in a blockchain, data is encrypted typically using hash codes, and digital tokens are stored as values.
A blockchain is somewhat similar to spreadsheets and databases considering the fact that it is a database where information is entered and stored. However, the core difference between a traditional database or spreadsheet and a blockchain is in the way, data is structured and accessed.
Consisting of programs called ‘scripts’ that carry tasks one would usually do in a database, a blockchain enters and accesses information. It also saves and stores it somewhere. Since a blockchain is distributed, multiple copies are saved on many machines. To top it off, all these copies must match for it to be valid.
What a blockchain does is, after it collects transaction information, it enters it into a ‘block’, which is similar to a cell in a spreadsheet holding information. Once the block is full, the information is run through an encryption algorithm, that generates a hexadecimal number called the ‘hash’.
This hash is then entered into the following block header and encoded with the other information in the block. This then generates a series of blocks that are chained together.
Let us look and expand our knowledge on the benefits of blockchain:
As blockchain cannot be altered or reversed, it proves that the data that are presented to the participants are valid and can be trusted.
Blockchains work on decentralised systems, which means that there is no central authority, and platform governance is handled by the platform’s stakeholders.
Blockchains are confidential in nature. It protects users from identity theft, making it attractive to consumers and businesses alike.
As mentioned earlier, blockchains run on a decentralised system, which means since there is no central authority, the transaction is faster and accessible anytime.
Due to its lower costs for businesses, blockchains are very popular, especially for those that have high-value and volume transactions that cause an increase in fees.
One interesting fact about blockchain is that anyone, literally anybody, regardless of their background can use it.
Now that we have looked at its benefits, let’s look into its drawbacks:
Though blockchains do save users money on transaction fees, the technology doesn’t come free. One example is that vast amounts of computational power are consumed just to validate transactions of the Bitcoin network's proof-of-work system.
Blockchain networks can manage very less transactions per minute. Let’s take the example of Bitcoin whose proof-of-work (PoW) system takes about 10 minutes to add a new block to the blockchain. At that rate, it is estimated that the blockchain network can only oversee about three transactions per second (TPS).
Each block in a blockchain can only hold a considerable amount of data, which has led to and still continues to be one of the most concerning issues for the expansions of blockchains going forward.
Though blockchains provide confidentially by protecting the privacy of their users from hackers, at the same time it also allows for illegal trading and activity on the blockchain network. One famous example is ‘Silk Road’, which was an online dark web illegal-drug and money laundering marketplace. It was active from February 2011 until October 2013, when it was shut down by the FBI.
Due to its potential use cases, Blockchain has span across industries, including marketing services, retail, healthcare, and many more. Here are some examples:
So as to engage with their tech-savvy customers or brand aficionados, retailers are now using NFTs which are digital assets that sit on a blockchain
Blockchains are also being used by luxury resale retailers in order to certify the authenticity of their products and make the transfer of ownership more transparent.
In marketing, blockchain is used to increase the security and transparency around the sharing of customer data, either between a customer and a company or between two companies.
In healthcare, blockchain has a wide range of applications, which include improvement in the processing of payment, electronic medical records, etc.
Having implemented and explored many practical applications for its technology, blockchain is not just making a name in the crypto world but also in other fields. Though the technology surely has its drawbacks, it has still managed to become a buzzword amongst its users and investors.