Capital investment options like Entherueum, Bitcoin, Cryptocurrency, Bitcoin cash, and Blockchain are a buzz in the financial world. However, people often lack an understanding of these terms and the reason cryptocurrency has suddenly become popular.
Due to the increasing digitization, people today expect financial transactions to be cost-effective, secure, and efficient. Blockchain technology is the apt solution for those hoping to make profits off these latest technologies.
Definition Blockchain Technology
Blockchain technology was found by a pseudonymous person or group of people in 2009. They operated it under the pseudonym of Satoshi Nakomoto. It was a method to complete transactions between two parties without requiring any verification by a third party.
In technical terms, blockchain technology provides a medium to save transactional records, called a block, of people in numerous databases, called a chain in a web network interlinked via peer-to-peer nodes.
Blockchain technology can be understood easily by an analogy of a Google doc. After generating a document in a Google doc, it is distributed among a group rather than transferring or copying. It results in the creation of a distribution chain that is decentralized. It means that the document is accessible to everyone at the same time. The document modifications are recorded live, and every change made to it is very tracked, thus making the system transparent.
How does Blockchain Technology Work?
Blockchain technology is still evolving and is open to new developments. Blockchain technology has immense potential to be a game-changer in the future.
It constitutes of three evolving technologies-
- Cryptographic keys
- A peer-to-peer network involving a distributed ledger
- A computing structure for the storage of transactional records
Cryptographic keys involve two kinds of keys- the Public key and the Private key. These keys provide the mechanism to complete the transaction between two parties successfully. Both the keys are available to the concerned parties. These keys help develop a secure and safe digital identity that plays a prominent role in Blockchain technology. This identity is usually known as a digital signature in the cryptocurrency market. It helps in controlling and authorizing the transactions.
The digital signature is combined with a peer-to-peer network. The concerned parties use the digital signature through this network to authorize the transaction. After authorizing the deal, a mathematical verification certifies the paperwork, allowing a safe and secure transaction.
Process of Transaction
Blockchain technology provides a safe way to authorize and complete transactions. For instance, if two people want to complete a transaction with a private key and public key each, the first person will use their private key to link the information to the other person’s public key. This piece of information is combined to form a block.
This block consists of a timestamp, a digital signature, and other significant information. It is essential to know that the block does not contain any information regarding the concerned party’s identity. Simultaneous passing of the block goes on to various nodes of the network. The transaction is a complete success when the private key matches with the block.
Along with financial transactions, one can use blockchain technology to exchange details related to vehicles, properties, and more.
Detailed explanation on the working of Blockchain technology-
- Hash Encryptions
Hash encryptions are used in Blockchain technology to secure transactional data. It mainly uses the SHA256 algorithm to safeguard the data. The sender’s address (public key), the transaction, and the receiver’s address (private key) are communicated through the SHA256 algorithm.
The information is secured through this hash information. It is passed around the world and is verified before adding it to the Blockchain. SHA256 algorithm is very secure as it is impossible to hack the hash encryption. These aspects make the authentication of the sender and receiver very easy and safe.
- Proof of Work
Each block of the Blockchain is made of mainly four headers-
- Previous Hash– Used in identifying and locating the previous block.
- Transaction details– It consists of the complete details of the transactions performed.
- Nonce- It is a random number given to each block to differentiate them from each other.
- Block’s Hash Address- The above points ( nonce, transaction details, and previous hash) is transmitted using the (hash) algorithm. The algorithm produces an output consisting of 64 characters and 256 bits. It is termed the “hash address”. It is unique to each block and is known as the block’s hash.
Many people try to find the correct hash value using various algorithms to reach the already calculated condition. In simple words, blockchain miners try to find answers to a mathematical problem, known as proof of work. The first person to find the solutions to the problem gets rewarded.
The action of including details of the transactions to the already existing public/digital ledger is known as mining in blockchain technology. The term is popular for bitcoin, but it is also essential for mentioning different blockchain technologies. Mining includes the generation of a hash for the block transaction. It is impossible to imitate. Hence it is very safe and secure and does not require a central system to monitor.
Mining in terms of bitcoin can be explained as follows-
The founder of bitcoin technology Satoshi Nakamoto laid down one prominent rule. It stated that only 21 million bitcoins in total can exist. The figure was estimated based on calculations on how many transaction blocks will be “mined” or discovered per day.
Compared to the previous cycle, the released number of bitcoins decreases by 50% every four years. This includes the rewards of the miners for finding new blocks. Hence, the number of bitcoins in the market will be near 21 million but never meet the actual figure. It means there is no chance of inflation in bitcoin.
The main disadvantage is that a cyberattack or a hack can collapse the bitcoin and can sweep the bitcoin wallets without a chance of getting them back.
Electrical energy is required to mine bitcoin. One needs to solve mathematical puzzles to get rewarded with bitcoins. Miners authenticate and restrain fraud, making the transactions more secure and reliable.
Satoshi Nakamoto has designed bitcoin in a way that the more the number of miners more the mining difficulty.
What is cryptocurrency?
Cryptocurrency is generally digital money, or digital tools exchanged with cryptography and Blockchain technology for anonymous and secure transactions. Cryptocurrencies have gained immense popularity over the past few years. Bitcoin is the most famous cryptocurrency that has put forward the word for cryptocurrencies in late 2000. There are many cryptocurrencies available in the market, but none is famous like bitcoin.
Difference between cryptocurrency and Blockchain technology
Blockchain is typically a digital ledger. Maintaining records of transactions and data is an essential task in any business. Third parties like bankers, lawyers, or brokers carry out this job, thus consuming more money and time. It is not the case in blockchain technology. It bypasses this lengthy process and enables a quick flow of transactions, thus saving money and time.
Many people believe that Blockchain and bitcoin are the same however, it is not the truth. Blockchain is a technology used for numerous applications in various sectors such as supply chain, finance, manufacturing, etc.
Bitcoin whereas is a type of cryptocurrency that secures itself with the help of blockchain technology.
Following are the main features of Blockchain technology-
- Very Secure
The technology uses a digital signature as it is risk-free and ensures the transactions to be flawless, and requires authorization to make any changes to the encrypted document. It also records any changes made to the document in real-time.
- Decentralized system
In conventional transactions, one needs to take permission from banks or governments for completing the transactions. In the case of blockchain technology, transactions are completed based on the mutual agreement of the concerned parties, making it safe and fast.
The technology saves a lot of time owing to its programmable nature. Automatic generation of payments, actions, and events is possible upon meeting the approved criteria.
Types of Blockchain networks
Blockchain networks are built in multiple ways. Following are the types of blockchain networks-
- Public Blockchain Networks
Public blockchain networks are accessible to anyone, and anyone can participate in them. Bitcoin is the best example of a public blockchain network. The major disadvantage of a public network is that it requires high computation power. It does not provide any privacy to the transactions. It also offers minimal security to the transactions.
- Private Blockchain Networks
A private blockchain network is just a public blockchain network that is decentralized based on a peer-to-peer network. Unlike a public blockchain network, an organization controls the private blockchain network. It decides who will participate in the network and who will look after the distributed ledger. Private blockchain networks can enhance the confidence and trust among the participants. It is protected by a firewall that also enhances security measures.
- Permissioned Blockchain Networks
Permissioned blockchain networks are built by organizations having a readily available private blockchain network. Permissioned networks are also accessible to public blockchain networks however, it restricts the participants in the network and some specific transactions. Permission or invitation essential for joining the blockchain network.
- Consortium Blockchains
The responsibility of maintaining a blockchain can lie with multiple organizations. Such Blockchain is called Consortium Blockchain. These chosen organizations rule the network and decide who can and cannot join the network and access the information. As participants share equal responsibility and can mutually decide on other participants in the network, this network is suitable for businesses.
Implications of Blockchain Technology
There is a massive impact of blockchain technology on society-
- Blockchain technology was developed mainly for bitcoin. It has provided essential financial services to its users involving digital wallets. It has lent microloans to people and allowed them to make micropayments in the worst economic situations. Hence generated new aspects in the financial world.
- It has generated immense trust in the transactions, especially the international ones. Earlier, this trust was ensured between the concerned parties with the help of lawyers. However, it consumed more time and money.
- The introduction of blockchain technology and cryptocurrency has bypassed all this. Several organizations do not have access to the resources and fall prey to corruption. Blockchain technology has rescued such organizations by making them self-reliant for safe and secure transactions.
- The Internet of Things (IoT) has made it possible to transfer vital information through the internet without any human interference. Similarly, managing public services like traffic, waste collection, and transportation is possible with technology. Hence IoT also allows making smart contracts and automates tasks not requiring any human intervention.
- Blockchain technology helps develop a peer-to-peer, decentralized network for various applications or organizations like Ola and Airbnb. It enables the user to make numerous payments like parking, toll fees, ride fare, and more.
- Healthcare organizations can also make use of blockchain technology to store the confidential and private data of patients. These organizations can also use the technology to develop a centralized database that only allows the authorized people to access the data.
- People can also use this technology for making private transactions between the concerned parties.
These kinds of private transactions need to have all the details regarding the transactions on which both the concerned parties mutually agree before proceeding-
- What are the terms and conditions of the transactions?
- Are all the points and content of the transaction clear?
- When does the transaction begin?
- When does it end?
- When is it unjustified to stop the transaction?
The concerned parties can get these answers for the transactions as blockchain technology consists of distributed ledger, shared ledger, or a decentralized network.
- Blockchain technology provides a way for the users to monitor the transactions from the beginning to the end.
- Blockchain technology reduces cost, enhances workflows, and improves the efficiency of the work in any organization.
Blockchain technology has many applications. Various mechanisms can secure the transactions by allowing only authorized people to access the data and refraining everyone else.
Bitcoin has shown the potential use of blockchain technology. The founders of blockchain technology are trying their hands on various applications to harness this evolving technology. There is a definite increase in the use of this technology, and it is the future of the digital world.