What is the Blockchain?
The most simple definition of this technology is a type of distributed database (or ledger) between the nodes (participants) of a computer network. This is known as distributed ledger technology (DLT). With its help, people can transfer money online without a middleman. It’s very easy to view and check a specific transaction which is very beneficial for the security of the system that implements it because it makes it transparent.
Also, due to the cryptographic nature of the technology, the personal data of its users is safe because they don’t have to provide any personal data to make a transaction. It is used by almost all major cryptocurrencies such as Bitcoin, Ethereum, Bitcoin Cash, Litecoin, etc. Not only cryptocurrencies but also NFTs rely on it because the majority of NFTs are based on Ethereum’s cryptosystem which utilizes the blockchain technology.
How does it work?
When a new transaction has to be processed, it’s checked whether it’s legitimate or not. To do so, blockchain security relies on consensus mechanisms (usually PoS or PoW) which grants the users of the system that they won’t be scammed. When the transaction is validated it’s put in a block with other already validated transactions (usually around 1000). Then the block is added to the previous block of the chain consisting of other blocks. That’s where the tech has its name. The consensus mechanisms that are used for verification grant security without a third party. The decentralization of the system also means that it’s visible to any user. The data in it can’t be edited which can prevent fraud. This system also enables the usage of smart contracts. Smart contracts usually are used to execute an agreement after certain conditions have been met. Nonfungible tokens (NFTs) are also minted on smart-contract blockchains like Ethereum.
How are blockchain, cryptocurrency, and decentralized finance connected?
This technology enables sellers and buyers to exchange cryptocurrencies without using intermediaries like a bank or other institutions. The main idea behind the blockchain technology is to decentralize the traditional financial system. This decentralization gives people more control over their own money which is the reason why many people prefer decentralized finance (DeFi). Without this tech, the storage of data would have to be centralized. The whole idea of this technology is to make transactions transparent because, by doing so, users can reject any attempt of altering the database. In centralized institutions, the database isn’t visible to everyone but only to a handful of people who operate the financial institution.
Is it Secure?
As we previously mentioned there are consensus mechanisms for blockchain security. The two major types are Proof of Work and Proof of Stake. Both mechanisms dissuade users of the network to scam other users effectively. In terms of privacy, the biggest problem with banks is that their database is centralized and private. If their servers are hacked, lots of personal data can come into hackers’ hands.
On the other hand, if a crypto project, like Bitcoin, has been purchased anonymously, it’s impossible to track its buyer because he isn’t required to share any personal data to be able to trade (here we refer to the process of buying crypto assets on DeFi platforms. Most CeFi platforms would require you to pass KYC to be able to purchase digital assets). Also, members of the network may decide if and how much of their personal information can be shared with the public or with certain people. The inability to alter the existing blockchain unless 51% of the nodes agree with the proposer also grants tremendous security.
What else can it be used for? Advantages of the Technology
One of its biggest benefits is the lack of need for paper documents which makes everything faster and lowers the chance of mistakes. Unlike banks, this technology enables a financial system can work non-stop. The time needed to verify the transaction is also significantly lower. Usually, a bank processes a transaction in 2 to 4 hours while on the other hand blockchains using Proof of Work consensus mechanisms need around 10 minutes. If the consensus mechanism that is used is Proof of Stake, the time needed can be even smaller.
That’s why some banks have implemented this technology to process transactions of their clients faster. In healthcare, this technology is used to store information about some hospitals’ patients. Due to the easiness to track down things in the blockchain, it is used also by food companies to find the sources of outbreak diseases like salmonella down the supply chain in order to address the problem faster.
What’s the future of it?
Due to the diverse options for the usage of this technology, experts predict that its usage will increase even further in the bank and supply industries. In the following years, the most likely ways in which it will develop are:
- Growth as a service – it can develop into a cloud-based service that builds digital products for blockchain environments without any setup requirements for infrastructure.
- Interoperability across different networks and outside systems – different blockchains will be able to work and share data together better. Hardware standardization and scalable consensus algorithms will enable cross-network use.
A potential problem is the energy consumption needed to verify the new transactions. That’s why some systems like Ethereum have changed their consensus mechanism to PoS because it needs much less energy to verify transactions. The uncertainty of government control and regulations also can impede its progress.