In the fintech industry today, the term “Blockchain technology” has become more than a buzzword, thanks to the rapid growth of Bitcoin and cryptocurrencies in general.
Created in 2008 by an individual or group of persons known by the pseudonym, Satoshi Nakamoto, the same entity who invented Bitcoin, a year later in 2009.
While the creation of Bitcoin may have helped to spike the popularity of the Blockchain technology, seeing as Bitcoin was the block chain’s foremost application, there is a lot more to the blockchain technology than Bitcoin and cryptocurrencies as a whole.
Despite the overwhelming popularity of this revolutionary technology, very few people outside the fin-tech industry fully understand what the blockchain technology is all about.
If you are one such person, then you are in luck.
This guide will give a detailed breakdown of the blockchain technology to help you understand the fundamentals.
Here, you will learn what the blockchain technology is, how it works, what it’s used for and what the future holds for it.
What is the Blockchain Technology?
In the most basic sense, as the name implies, the blockchain is a chain of blocks.
In a more technical sense, the blockchain is an open and distributed digital ledger which serves as a database of information.
This information stored on the blockchain can be anything from cryptocurrency to insurance claims. Now, every new bit of information added to the blockchain is called a block and it is linked in chronological order to the already existing blocks on the database.
Every block has a unique timestamp and a link to the previous block on the digital ledger. These blocks are interconnected to one other using cryptography, hence the name, blockchain.
The blockchain has a modification resistant design. In essence, once a block has been added to the blockchain, it can neither be edited nor deleted. Every block recorded in the blockchain is entered into the permanent database where it is tamper-proof.
By this function of being a distributed database, information that is on the blockchain is not stored on one central server, rather, it is distributed across a wide network of computers referred to as nodes.
Due to the absence of a central server on the system, there is no central point of failure on the blockchain. It is managed autonomously in a decentralized fashion.
How does the Blockchain Technology work?
The blockchain technology provides an easily verifiable and permanent way of recording transactions.
But how does it work?
To understand how the blockchain works, you must, first of all, understand how a block is added to the permanent database.
Now, when a user on the network of nodes carries out a transaction on the system, the transaction is represented as a block.
Before the block can be accepted permanently into the database, at least 51 percent of all currently active nodes on the peer-to-peer network have to verify the authenticity of the new block.
As earlier explained, a node is a term used to refer to a computer or the individual behind the computer on the blockchain.
A network can have as many as thousands and maybe millions of nodes distributed all over the net. As such, there is no central point of authority in the network.
The system is decentralized and one entity can not singlehandedly verify and add blocks to the blockchain or make any changes to the system without the approval of other nodes.
Thus to validate the block, it is broadcast on the network to every node.
A new block can only be moved to the permanent database when a majority of the computers on the network have reached a consensus.
Once verified and validated, the block is added in chronological order to the previous chain of blocks such that the blocks are arranged in a linear form. This action completes the transaction.
No two blocks on the blockchain are the same as everyone has a unique history and timestamp. Once a block has been recorded, it is virtually impossible to alter the information.
This is because every block is securely linked to the previous block using a cryptographic hash and trying to change the record retroactively would mean altering the whole chain of blocks in millions of instances.
The blockchain is also a distributed system meaning its immutable ledger is open and shared for all nodes to see. Everyone has a copy of the blockchain and even if a node falsified their records, it will not match the records of other nodes on the network and as such will be automatically ignored by the blockchain.
The cryptographic principle is what ensures that every node’s copy of the distributed blockchain is kept in sync. Thus, any system that is built on the blockchain is by design, transparent and every node on the network is accountable for their actions.
What are the benefits of the blockchain?
The blockchain technology eliminates the need for a single central authority. In traditional systems, there is a central server where information is stored and copies of that information are accessed through external servers.
In this situation, the entity controlling the central server can add, remove or change information on the system without the approval of other users in the network.
Several things could go wrong in systems that make use of a central server. First off, because all the information is stored in one place, this makes the central server a target for hackers
If the central server is hacked, the information stored on the system automatically becomes compromised and could get corrupted or worst-case scenario, lost.
With the blockchain technology, centralization becomes a non-issue. In the decentralized system of the blockchain, there is no single entity or central server responsible for the information.
Every node in the network owns the information. The elimination of a central authority makes the blockchain the ideal ledger for affiliate relationships and joint businesses built on an equal footing with no need for a third party or middleman.
One of the most widely debated and misunderstood features of the blockchain technology is the transparency and privacy it offers to its users.
Now, while the blockchain technology offers privacy and anonymity to its users, all transactions are can be viewed on the shared public ledger by anyone in the network. It offers transparency without compromising your real identity.
The blockchain technology can bring an unmatched level of transparency to any system it is integrated into. From the finance industry to the supply chain, by allowing for transparency in the system, the blockchain brings a level of accountability to the network.
Thanks to the cryptographic hash function, once information has been recorded in the permanent database of the blockchain, it can neither be altered or deleted.
Imagine how beneficial this tamperproof system will be if it is introduced into the finance sector. The rate of embezzlement and money laundering in the sector could be greatly curbed as they would be unable to manipulate the records or falsify information to accommodate the inconsistencies.
Use Cases of the Blockchain Technology
The blockchain technology is no doubt an innovative and ingenious concept. It was first implemented in Bitcoin, serving as the digital ledger for all transactions on the Bitcoin network.
However, blockchain technology today is much bigger than Bitcoin. It has a wide variety of uses and below, we are going to review some of the use cases of blockchain technology.
You can not talk about the blockchain technology without mentioning cryptocurrency as cryptocurrency is technically built on the infrastructure provided by the blockchain technology.
The blockchain technology powers the virtual currency space, from Bitcoin to Ethereum to Ripple, there are over 1500 cryptocurrencies in the crypto sphere all developed on the digital ledger of the blockchain.
It takes a lot of computing power to run the blockchain and nodes in a network are rewarded with cryptocurrencies native to their blockchain for their efforts in helping to secure the network and verify transactions, through a process known as crypto mining.
• Smart contracts
As earlier stated, the blockchain is a public ledger for storing digital information and this information is not restricted to transactions. The blockchain can be used to store snippets of computer code as well.
The code can be programmed to automatically execute a specific set of actions whenever certain conditions are met, thus agreeing to a contract. These are known as “smart contracts”.
Smart contracts are essentially like a physical contract, only that they are digital, in that once a party in the contract has met the required conditions, the smart contracts can automatically execute the terms.
Smart contracts can be used in the management of intellectual property, to control the number of times a user can access, copy or share something.
The digital contracts can also come in handy in the building of censorship-resistant information dissemination systems, fraud-proof voting systems and many more.
When it comes to smart contracts on blockchain technology, the possibilities for their use are limitless.
• Supply chain management
The counterfeiting industry is booming and this is aided by the fact that there is little to no transparency in the supply chain. The integration of blockchain technology in the supply chain industry can help to disrupt the operations of the counterfeiting industry. Blockchain can bring transparency to the industry by providing a system where the details of every manufactured item are added to the blockchain and every new bit of information regarding the product such as purchase and change of ownership is recorded.
The blockchain would work well by tracking the movement of goods in a supply chain, from the manufacturers, through the transportation lines, to the vendors, and their final locations. This way, consumers can easily determine the authenticity of a product and its history in the supply chain before they drop money on it. Industry giants like IBM, Amazon, DHL, Walmart, and Maersk are all exploring innovative ways to improve the current systems in the supply chain industry with blockchain technology.
• Internet of Things (IoT)
The Internet of Things, simply put, refers to the network of Internet-supported devices, from smartphones to cars to televisions and other consumer appliances.
The blockchain technology can be used to facilitate the communication between these devices to increase the efficiency of the system.
For example, if a company wants to monitor the temperature within a storage facility, rather than employ human labor to regulate the temperature, the blockchain technology, via a combination of smart contracts, network facilities, and temperature sensors, can automate the temperature regulation by the exchange of data between mechanisms and devices.
Thus, if the temperature drops below or rises above a certain system, the data has met the terms of the smart contracts that will cause the activation of the air control system to either to raise or lower the temperature.
It is expected that by 2020, there will be about 20 billion connected devices and at least 20% of those devices will be blockchain-enabled.
From data analytics to predictive maintenance of body parts, IoT applications and blockchain technology when used together will be a lot.
The blockchain has undeniably established itself as a revolutionary new technology.
It is a technological advance with far-reaching applications that will disrupt and transform many businesses and industries. IBM, Microsoft, Ford Motors and American Express are just a few of the industry heavyweights that are already exploring the blockchain technology to improve business efficiency.
The blockchain technology is being heralded as a new type of internet and while potential applications of the technology are vast, it will be interesting to see the ways the tech community will put it to good use in hopefully, the very near future.