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Anyone in the financial technology space must have heard about blockchain technology. However, not many people know how it works and the technology behind it. Blockchain technology is an invention of an anonymous individual or a group of people under the pseudonym Satoshi Nakamoto which powered the first cryptocurrency, Bitcoin, released in 2008. Technology has been in play ever since.
Since blockchain technology release, the IT industry has massively evolved. However, several people are still skeptical due to a lack of understanding of this groundbreaking technology. Let’s break it down for an easier understanding of what it’s all about.
Blockchain is a chain of encrypted blocks that contain information. Each block has a cryptographic hash that is managed by a cluster of computers.
A blockchain collects and stores data in groups called blocks. Blocks have specific storage capacities, and when filled, they are chained onto a previously filled block, forming a chain hence the name blockchain. Any new information freshly added is compiled into a newly created block. The filled block is then added to the chain when filled.
Blockchain has three major concepts: blocks, nodes, and miners.
Blocks store data in the chain. The information on blocks depends on the blockchain type. Blocks contain 32-bit whole numbers called nonces that are randomly generated at the block creation. The nonce generates the block identifying header known as a hash. The hash is a 256-bit number wedded to a nonce. It’s uniquely tied to every information it holds, and any change in the information in the block will also update the hash.
It’s easy to know if the block’s information has been tampered with because all you need to check is if the hash has changed. Blocks ensure the network’s safety and any change is immediately noticed and tracked, thus affecting its verification.
Nodes are connection points that create, store, and send data across a network. Nodes are accessible on devices where blockchain software is installable and can access Bitcoin, e-wallet, and other Bitcoin-related services.
Below are the types of nodes:
Full nodes: Full nodes verify the incoming blocks and store all the data in the blockchain. Full nodes need ample storage space for them to hold the blockchain.
Partial nodes: Partial nodes, also known as light nodes, verify the incoming blocks but lack adequate storage space for the blockchain.
Users perform activities such as making transactions, receiving and transmitting transactions, tracking, and verifying transactions.
Mining is an integral part of cryptocurrency that generates and releases new cryptocurrency tokens for circulation. Additionally, mining helps verify, authenticate, and add the ongoing transaction to a public ledger.
Miners perform an activity known as proof of work. The first miner to do a proof of work for blockchain generates rewards in Bitcoin. The goal of proof of work is to prevent miners from duplicating coins they didn’t earn.
Mining is a costly process because it requires a vast amount of computing power.
How Proof-of-Work Functions
Proof of work is an algorithm that secures cryptocurrencies such as Bitcoin or Monero. The function helps solve the problem of double-spending, which is difficult to solve without a ledger. If the user can double-spend a coin, the coin becomes unpredictable and worthless. Additionally, double spending inflates the overall supply debasing everyone else’s coin.
Other ways to ensure blockchain secure networks include peer-to-peer networks, hashing, and work proof. Hashing acts like a unique fingerprint to the blocks that help identify it and the information it contains. Proof of work and peer networks decentralize the network from a single entity.
Peer to Peer Network
Peer-to-peer (P2P) is a decentralized platform whereby two individuals interact to buy and sell goods or services to each other. The platform has access for anyone to join. One becomes a node after joining the blockchain and has a full copy of the blockchain. In case of a change in the blocks, all nodes with access to the blockchain notify them that the transaction is legitimate.
Importance of Blockchain
Sharing information through online platforms has been made decentralized over the years. However, when it comes to transferring valuables like money, ownership rights, and intellectual properties, one is forced to fall back to centralized institutions like banks. There are also online centralized institutions like PayPal that require integration with a bank account.
Blockchain ensures such ‘middlemen’ are never required for any single transaction to happen. Blockchain achieves decentralization through recording transactions, establishing identity, and establishing contracts. The technology ensures a massive increase in inefficiency.
Blockchain can store any digital information, including computer codes. The users could program the codes to become “smart contracts” that create automatically filled contracts when certain conditions are met. Smart contract possibilities for their use are endless. The codes are read from external data feeds, stock prices, weather reports, news headlines, and anything parsed by a computer.
Is Blockchain Secure?
When it comes to security, blockchain has its users covered. The digital world is filled with hackers looking to breach information. The blockchain’s massive security features make it impossible to hack.
Another critical aspect of blockchain is its transparency. Therefore, everything is displayed on the network, minimizing the chances of a discrepancy. Blockchain is also inexpensive compared to other traditional financial models. Furthermore, economic efficiency is increased by this decentralized platform. The non-involvement of third parties aided in saving a lot of money and has reduced security risks when making transactions, unlike the centralized platforms.
Blockchain technology has taken the digital transaction market by storm, and it seems to be the future of digital transactions. Blockchain creates an immutable and permanent record of every transaction. This impenetrable digital ledger prevents fraud, hacking, and data theft. This technology has positively influenced several industries in the world. The industries affected include transportation, healthcare, and real estate companies such as Google, Microsoft, American Express, Hitachi, and Walmart. These companies are working to become early adopters of blockchain. Users of the traditional ledger system will only evolve as technology evolves.