Before we understand how blockchain technology works, let’s first understand the problem it aims to solve. How do we know if something is fake or real in today’s world? For example, how do we know that a dollar bill is authentic or counterfeit? How do we determine that a vote in any election is genuine?
The answer is, we keep a record. For instance, each dollar bill has a serial number that the Federal Bank records. Voting documents track who has voted and who hasn’t yet. It also ensures that the same person won’t vote twice.
Whenever you need to know if a document is legitimate, you have to verify it with the relevant authority who has kept its record, which means there’s a central authority, be it a bank, government, or a person who has the power to confirm information.
In 2008, a man named Satoshi Nakamoto published a paper called “Blockchain — a peer-to-peer network” and introduced the world to its first cryptocurrency called Bitcoin. It was the first form of money that removed the need for a central authority. The records are managed on a digital ledger called blockchain, which duplicates and distributes it across a network for verification.
What is a Blockchain?
A blockchain is an open digital ledger distributed across a network that can record and store data efficiently and permanently. Each ledger is hosted and managed by an interested party. Whenever a new transaction occurs on the blockchain, a new transaction record is added to every participant’s ledger. This record is called a block. Once a block is added to the blockchain network, it cannot be changed or tampered with, reducing the need for a single authority to maintain records.
The technology was originally introduced in 1991 by a group of researchers and was intended to timestamp digital docs so that it’s impossible to backdate them or tamper with them. The technology went completely neglected until Satoshi Nakamoto used it in 2008. Today the blockchain technology is at the heart of Bitcoin and other cryptocurrencies.
Advantages of a Blockchain:
Due to its decentralized and distributed nature. Blockchain technology has numerous benefits:
- Blockchain’s most remarkable characteristic is that it can go completely decentralized, removing the need for a centralized authority to improve the system’s transparency.
- Because every transaction is encrypted and linked to the previous transactions, it is far more secure than other record-keeping methods. On top of that, once a block is created on a blockchain, it is impossible to change its data.
- Due to its immutable nature, each time a new record is added, it creates a new block, and an audit trail is present to trace the records. It helps prevent fraud and improve the overall security of the system.
- A blockchain can be programmed to automatically perform certain actions, using smart contracts that remove the need for intermediaries in many processes and increase efficiency.
Disadvantages of Blockchain
- Some blockchain networks use complex mathematical problems to validate a block, requiring much energy. Bitcoin that uses proof-of-work consensus uses electricity equivalent to Switzerland’s annual energy usage (source).
- Blockchains are not scalable like centralized systems. The more nodes join the network, the slower the network becomes.
- There is one security flaw in the blockchain network. If someone gets 51% access to the nodes on a network, they can control the network.
Blockchain technology has evolved a lot since its inception. Today, innovators in various fields are starting to realize the benefits of blockchain technology. From technology to finance, many sectors are looking for ways to incorporate blockchain into their infrastructure.
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