Picture a digital ledger that maintains a record of transactions in a database.
When stored on one computer and managed by a single entity, such a database could be vulnerable to manipulation, hacks, power outages, hardware corruption, and other undesirable events.
But what if identical copies of the data were distributed on an extensive, decentralized network of peer-to-peer computers that used sophisticated tools to securely exchange information on the latest transactions?
This system, known as the blockchain, offers users more transparency, security, and efficiency whether they’re tracking assets, transactions, contracts, and so on.
What is a blockchain in simple terms?
In simple terms, blockchain is a highly secure system of recording data. It maintains its integrity by using sophisticated technology and relying on a network of computers. Unlike other ledgers, like ones used by banks, blockchain is decentralized. In other words, no single entity controls or manages the system. The decentralized and transparent nature of blockchain creates trust amongst its users.
How does blockchain work?
The immutable digital ledger stores information, or blocks, on a chain of computers, or nodes. These nodes can quickly validate and verify new transactions by utilizing cryptography, digital signatures, and hash functions, before irreversibly adding them to the block.
- Cryptography techniques allow blockchain to secure transactions between nodes through encryption.
- Digital signatures authenticate transactions by proving user authorization to nodes without revealing keys.
- Hash functions secure blockchain data by coding them into an unreadable text.
It’s almost impossible to breach the integrity of blockchain because the digital ledger of transactions is copied, distributed, and updated across the entire network of computers in the system. While blockchain technology is most famous for kickstarting the first cryptocurrency known as Bitcoin, it can also carry all types of records on its peer-to-peer network.
Is Bitcoin a part of blockchain?
Although the terms “Bitcoin” and “blockchain” seem to go hand-in-hand, they’re not the same thing. Blockchain is a decentralized system that documents data. Bitcoin is a cryptocurrency that leverages blockchain technology to maintain and secure its record of transactions.
What are the disadvantages of blockchain?
Blockchain technology can be expensive, inefficient, and technologically challenging for companies to implement.
Moreover, while blockchain offers transparency by allowing viewers to see transactions publicly, the lack of a central overseeing authority can be a double-edged sword. The absence of user identification can attract criminal activity to blockchain transactions. It’s one of the reasons why some cybercriminals use cryptocurrency for illegal transactions.
Additionally, using blockchain to create secure backups involves some pitfalls. For example, if someone can find a way to provide more than half of the computing power active on a network, they can create a false fork and gain control because blockchain technology is constructed so that the majority decides. However, this scenario is highly unlikely in a mature blockchain.
What is blockchain used for?
Most cryptocurrencies use blockchain to record transactions. In fact, blockchain technology rose to popularity due to Bitcoin. Other cryptocurrencies to use blockchain include Litecoin, Ethereum, and Dogecoin.
Blockchain is serving other areas of the FinTech (financial technology) industry too. For example, financial institutions use blockchain to offer a faster settlement, and the immutable data recorded via blockchain helps financial companies satisfy compliance processes and reduce fraud risks. Blockchain can also help with trade and cross-border payments in countries with underdeveloped banking services.
The real estate industry has traditionally suffered from a lack of transparency. The property technology industry, also known as PropTech, is changing this by utilizing blockchain in order to manage and record transactions, agreements, and referrals. The added transparency is helping reduce fraud.
The healthcare industry can track products more quickly through the supply chain when managed by blockchain technology. Blockchain can also help the pharmaceutical industry recall potentially unsafe products more efficiently, meaning patient records, contracts, and other sensitive data are less likely to be misplaced when part of a blockchain.
Like the healthcare industry, the automotive industry can recall potentially unsafe parts when their movement across the supply chain is recorded with blockchain technology. The automotive industry can isolate and identify counterfeits with authentic parts fully traceable on the blockchain. This is critical because substandard counterfeit parts can put lives at risk.
Entertainment and art
Artists and customers in the entertainment industry can eliminate the costs of paying intermediaries, mitigate the risk of fraud, and boost transaction visibility by using blockchain. Already, we’re seeing NFT-based transactions help artists sell digital assets directly to investors. Blockchain should also minimize disputes by helping digital rights management companies track intellectual property ownership.
Jewelry companies are tracking and tracing precious materials with blockchain technology to avoid trading items from conflict zones. Blockchain can also help the jewelry industry with fraud detection and shield the integrity of supply chains. For example, smart contracts backed by blockchain are allowing the industry take goods manufactured in rogue nations off the market.
Since coming into focus for powering cryptocurrency, blockchain technology has caught the attention of multiple industries worldwide. Developers are now leveraging blockchain in many interesting ways. For the end user, it means greater security, transparency, and privacy in a number of sectors that touch their lives.