Blockchain Technology is a public digital ledger of transactions that records information to make it impossible to change, hack, or cheat the system. It is duplicated and distributed through the entire network of computer systems on the Blockchain, where each block in the chain contains several transactions, and whenever some new transaction occurs on the Blockchain, the record of that transaction is added to every participant’s ledger. This decentralised database managed by multiple participants is known as Distributed Ledger Technology (DLT).
Blockchain is a type of DLT where with an immutable cryptographic signature called a hash, the transactions are recorded. The design of the original Blockchain was to operate without any central authority (i.e. with no bank or regulator controlling who transacts), but transactions still have to be authenticated.
The key feature of this database is that it cannot be altered except without the consensus of a significant fraction of the users of distributed database. The use of cryptographic functions ensures that all transactions can be authenticated originating from a particular identity and the successful completion of transactions without any central authority. IBM is the largest Company in the World that embraces Blockchain.
Core features of Blockchain
Record-keeping on a time-stamped, fault-tolerant ledger
Blockchains make it economically infeasible to modify any record that is already added to the Blockchain. After adding, all nodes of the transaction record the time-stamp transaction, the digital signature of the parties involved, the metadata contained within the transaction. This data cannot be modified unless most of the nodes in the network collude.
Smart Contracts for decentralized, corruption-proof, self-triggering applications
The code executed on a blockchain network is known as a ‘smart contract’ because it acts as a legally binding document; it cannot be tampered with once the code is published. If encoded conditions are met without allowing any room for corrupt parties to intervene, it can self-trigger blockchain transactions.
Digitization of assets and new economic models
Blockchains are a perfect platform for asset digitization as it represents either full or partial ownership of the underlying economic resource of an asset to be represented as a token. Blockchain tokens are traded frictionless between parties, i.e. without intermediaries, creating liquidity despite the underlying asset being illiquid for innovative economic models. These tokens implemented on blockchains cryptographically secure the identity of the token’s owner that can be verified but not faked or modified, and transfer of such tokens on blockchain systems is incorruptible since double-spending is inherently impossible as middlemen cannot steal funds.
Accuracy of the Chain
Since, in the verification process, transactions on the blockchain network are approved by thousands of computers, it removes almost all human involvement, resulting in less human error and an accurate record of information. In order for an error to spread to the rest of the Blockchain, it requires at least 51% of the computers to make that mistake (a near impossibility for the large and growing size of Bitcoin’s).
Blockchain technology removes the need for third-party verification and its associated costs.
Instead of storing any information in a central location, the Blockchain is copied and spread across a network of computers so that, whenever a new block is added to the Blockchain, all the computers on the network update their blockchains to show the change, which makes it more difficult to tamper Blockchain.
Transactions can even be completed within ten minutes and can be secured after just a few hours. This is useful for cross-border trades, which usually take much longer because of time-zone issues and also, all parties have to confirm payment processing.
Here, users can access details about transactions but cannot access information about the users making those transactions because blockchain networks are confidential.
After a transaction is recorded, it is necessary to verify its authenticity by the blockchain network. Thus, thousands of computers on the Blockchain give confirmation about the details of the purchase being correct and then the transaction is added to the blockchain block. Such discrepancy makes it extremely difficult to change the information on the Blockchain without notice.
Usually, blockchains are entirely open-source software that gives auditors the ability to review cryptocurrencies for security which means that there is no real authority on who controls Bitcoin’s code.
Banking the Unbanked
Blockchains of the future are looking for solutions to expand their scope of wealth storage by storing medical records, property rights, and a variety of other legal contracts.
Disadvantages of Blockchain
There are significant challenges to the adoption since the real challenges are political and regulatory. Some of the challenges of widespread blockchain adoption are:
The lack of understanding of the concept of blockchain technology is the primary challenge in its adoption and growth. There are also some misconceptions that blockchain technology will be replacing the current systems. However, it just gets integrated with the existing systems and takes them to the next efficiency level.
Although Blockchain saves users’ money on transaction fees, the technology is far from free since the “proof of work” system to validate transactions, for instance, consumes vast amounts of computational power. Despite the costs of mining bitcoin, users continue to use their electricity bills to validate transactions on the Blockchain.
Bitcoin’s “proof of work” structure takes around ten minutes to add a new block to the Blockchain. At this rate, the estimated blockchain network can be around seven transactions per second (TPS). Solutions to this issue have been under development for years.
While confidentiality on the Blockchain prevents hacks and preserves privacy, it also allows illegal trading on the blockchain network.
The government regulation over cryptocurrencies has been a matter of concern. Since the decentralized network of Bitcoin grows, governments could make it illegal to own cryptocurrencies or participate in their networks theoretically.
Part II of this article will follow next week. Stay tuned to understand the stand of blockchain technology in India.