What is Blockchain?

Page Summary

Blockchain is a technique that allows a network of users to maintain a secure database. This database can contain transactions and smart contracts. The technique uses linked blocks by cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.

Many databases consist of a network of computers. If one of the computers goes down, the information isn’t lost. This is also the case with blockchain.

What is Blockchain?

How does blockchain work?

The blockchain collects information in groups known as blocks. The blocks consist of approved transactions. New transactions add new blocks to the chain. The majority of the participants must approve the new blocks. Participants receive rewards for this. This way the chain never ends. If a transaction is far enough down the chain, it becomes irreversible. This is why blockchain is so secure. 

There are public and private blockchains. Anyone can participate, write or audit data on a public blockchain. A public blockchain isn’t controlled by a single authority. A private blockchain is controlled by an authority. This authority decides who can use the system and has the right to alter the blockchain.

How is blockchain used?

Blockchain provides a way to secure and create a tamper-proof database. Blockchain technology has many purposes. Providing financial services and administering voting systems are the most common use cases.

Cryptocurrencies

Cryptocurrencies like Bitcoin or Ethereum use blockchain technology. The blockchain records all transactions.

Banking

Transactions in fiat currency like dollars and euros also use blockchain technology. Ripple’s XRP allows users to send and receive money faster than through a bank.

Asset transfers

Blockchain technology can record and transfer ownership of assets. At the moment NFT trading is a good example of this. 

Smart contracts

Smart contracts are digital contracts that enact once certain conditions are met. Blockchain technology enables the automation of these contracts. Most smart contracts run on the Ethereum blockchain.

Supply chain monitoring

Blockchains can store supply chain data. This makes it easier for companies to check their supply chain. The blockchain can check food from its harvest to its consumption, for example.

Voting

Blockchain technology allows people to submit votes which other users can verify. It also removes the need to collect and count all the votes.

What are the advantages of blockchain?

Blockchain increases trust, transparency, security, and the traceability of data shared among users. It is also cost-efficient.

It is almost impossible to commit fraud with blockchain. The blockchain gives each transaction an encrypted fingerprint and stores them. The data stored in the blockchain is difficult to change or delete because the entire network validates each component. All devices in the network have the same information. There is no device that does not have the information. This makes the data transparent. The processes are automatic and users no longer need any companies or intermediaries. This saves costs.

What are the disadvantages of blockchain?

The disadvantages of blockchain are the high energy costs, the risk of asset loss, and the potential for illegal activity.

It costs a lot of electricity to have all the nodes in the blockchain verify transactions. This increases the costs of blockchain transactions and creates a large carbon burden on the environment. Most digital assets need a cryptographic key.  The owner of a digital asset loses access to its asset forever if he or she loses this key.  The anonymous nature of blockchain transactions appeals to criminals and fraudsters. Illicit transactions are harder to track down on the blockchain. 

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