Blockchain is the innovative database technology that is at the heart of almost all cryptocurrencies. By distributing mirror copies of the database across an entire network, the blockchain makes it extremely difficult to hack or spoof the system. While cryptocurrency is the most common use of blockchain at the moment, the technology offers the potential to serve a very wide range of applications.
What is Blockchain?
In essence, a blockchain is a distributed digital ledger that stores data of any kind. The blockchain can record information about cryptocurrency transactions and ownership of non-native tokens (NFTs).
While any traditional database can store this type of information, the blockchain is unique in that it is decentralized. Instead of being kept in one place by a central administrator – think of an Excel spreadsheet or a bank database – many mirror copies of the blockchain database are kept on multiple computers spread across a network.
These individual computers are referred to as nodes.
How does Blockchain work
With the blockchain, a digital ledger is described as a “chain” made up of individual “blocks” of data. As new data is periodically added to the network, a new “block” is created and attached to the “chain”.
This includes all nodes that update their copy of the blockchain ledger to remain identical.
How these new blocks are created is key to why the blockchain is considered so secure. The majority of nodes must verify and confirm the legitimacy of the new data before a new block is added to the ledger. For cryptocurrencies, it may include making sure that new transactions in the block were not fraudulent, or that the coins have not been spent more than once.
This is different from a standalone database or spreadsheet, where one person can make changes without supervision.
“Once consensus is reached, the block is added to the chain and underlying transactions are recorded in a distributed ledger,” says C. Neil Gray, partner in fintech practice areas at Duane Morris LLP. “The blocks are securely linked together, forming a secure digital chain from the beginning of the ledger to the present.”
Transactions are usually secured using cryptography, which means that nodes need to solve complex mathematical equations to process the transaction.
“As a reward for their efforts to validate changes made to the shared data, nodes are typically rewarded with new amounts of the original blockchain currency, such as new bitcoin on the bitcoin blockchain,” says Sarah Schellman, a blockchain and fintech consultant with Perkins Coie.
There are both public and private blockchains. In a public blockchain, anyone can participate, which means they can read, write or audit the data on the blockchain. Notably, it is very difficult to change the transactions that are recorded in the public blockchain as there is no single authority controlling the contract.
Meanwhile, the private blockchain is controlled by an organization or group. Only he can decide who is invited to the system, plus he has the power to go back and change the blockchain. The process of a private blockchain is similar to an internal data storage system except that it is distributed over multiple nodes to increase security.
How is Blockchain used?
Blockchain technology is used for many different purposes, from providing financial services to managing voting systems.
The most common use of the blockchain today is the backbone of cryptocurrencies such as Bitcoin or Ethereum. When people buy, exchange or spend cryptocurrency, the transactions are recorded on the blockchain. The more people use cryptocurrency, the more blockchain will spread,
“Because cryptocurrencies are volatile, they have not been used much in the purchase of goods and services. But that is changing as PayPal, Square and other money services companies make digital asset services more widely available to sellers and retail customers,” notes Patrick Dougherty, Senior Partner at Foley & Lardner. and leader of the company’s blockchain work team.
Unlike cryptocurrencies, the blockchain is used to process transactions in fiat currency, such as the British pound, the dollar, and the euro. This may be faster than sending money through a bank or other financial institution as transactions can be verified more quickly and processed outside of normal business hours.
Blockchain can also be used to register and transfer ownership of various assets. This is currently common with digital assets such as NFTs, which is a representation of ownership of digital art and videos.
However, the blockchain can also be used to process the ownership of real assets, such as title deeds and vehicles. The two parties of the party will first use the blockchain to verify that one of them owns the property and the other has the money to buy. Then they can complete the sale and register it on the blockchain.
Using this process, they can transfer title deeds without manually submitting paperwork to update land registry records – they will be instantly updated on the blockchain.
Another innovation in the blockchain is self-executing contracts commonly called “smart contracts”. These digital contracts are automatically activated once conditions are met. For example, a payment for an item may be released immediately once the buyer and seller meet all the criteria set for the transaction.
“We see great potential in smart contracts, using blockchain technology and cryptographic instructions to automate legal contracts,” says Gray. “A properly encrypted legal smart contract on a distributed ledger can reduce, or preferably eliminate, the need for third parties to verify performance.”
Supply Chain Monitoring
Supply chains involve huge amounts of information, especially as goods move from one part of the world to another. With traditional data storage methods, it can be difficult to trace the source of problems, such as the source of poor quality goods to a seller.
Storing this information on the blockchain will make it easier to go back and monitor the supply chain, as is the case with IBM’s Food Fund, which uses blockchain technology to track food from harvest to consumption.
Experts are also looking into ways to implement blockchain to prevent voting fraud. In theory, voting via the blockchain would allow people to submit votes that cannot be tampered with, as well as removing the need for people to manually collect and verify paper ballots.
Higher accuracy in transactions
Since a blockchain transaction has to be validated by multiple nodes, this can reduce error. If one node has a database error, the other node will see that it is different and will detect the error.
By contrast, in a traditional database, if an individual makes a mistake, they are more likely to go through it. In addition, each asset is identified and tracked individually on the blockchain ledger, so there is no chance of doubling its spending (such as someone withdrawing their bank account, thus spending the money twice).
No need for middlemen
With a blockchain, two parties to a transaction can confirm and complete something without working through a third party. This saves time as well as the cost of paying to a broker, a bank for example.
“It has the potential to bring greater efficiency to all digital commerce, increase the financial empowerment of the world’s unbanked or unbanked populations and power a new generation of Internet applications as a result,” Schellman says.
In theory, a decentralized network, like the blockchain, makes it nearly impossible for someone to conduct fraudulent transactions.
To enter into fraudulent transactions, they would need to hack every node and alter every ledger. While this is not necessarily impossible, many cryptocurrency blockchain systems use transaction validation, “Proof of Stake” or “Proof of Work” methods that make it difficult to add fraudulent transactions, plus it is not in the interest of the participants. .
More efficient conversions
Since blockchains operate 24/7, people can make money and asset transfers more efficiently, especially internationally. They don’t need to wait days for a bank or government agency to manually confirm everything.
Disadvantages of Blockchain
Limit on transactions per second
As the blockchain relies on a larger network to approve transactions, there is a limit to how quickly it can move. For example, Bitcoin can only process 4.6 transactions per second versus 1,700 transactions per second with Visa. In addition, an increase in the number of transactions can cause network speed issues. Until this improves, scalability is a challenge.
high energy costs
The work of all nodes to verify transactions consumes much more electricity than a single database or spreadsheet. This not only makes blockchain-based transactions more expensive, but also creates a significant carbon burden on the environment.
For this reason, some industry leaders are starting to move away from some blockchain technologies, such as Bitcoin. For example, Tesla CEO Elon Musk said last year that his company would stop accepting Bitcoin in part because he was concerned about harm to the environment.
risk of losing assets
Some digital assets are secured with a cryptographic key, such as a cryptocurrency in a blockchain wallet. You need to protect this key carefully.
“If the owner of a digital asset loses the private cryptographic key that gives them access to their assets, there is currently no way to recover it — the asset is permanently gone,” says Gray. Since the system is decentralized, you cannot contact a central authority, such as your bank, to request that access be restored.
Possible illegal activity
Blockchain decentralization adds more privacy and confidentiality, which unfortunately makes it attractive to criminals. It is difficult to trace illicit transactions on the blockchain through banking transactions associated with the name.
How to invest in Blockchain
You cannot actually invest in the blockchain itself, as it is just a system for storing and processing transactions. However, you can invest in assets and companies that use this technology.
“The easiest way is to buy cryptocurrencies, such as Bitcoin, Ethereum, and other tokens that run on the blockchain,” says Gray.
Another option is to invest in blockchain companies using this technology. For example, Santander Bank is experimenting with blockchain-based financial products. If you are interested in having exposure to blockchain technology in your portfolio, you can buy its shares.
For a more diversified approach, you can buy into an exchange-traded fund that invests in blockchain assets and companies.
Despite its promises, blockchain remains something of a niche technology. Gray sees the potential for blockchain to be used in more situations, but it depends on future government policies. It remains to be seen when and if regulators will take action. One thing is clear – the goal will be to protect markets and investors, he says.
Shtylman likens the blockchain to the early stages of the Internet. “It took about 15 years of having the Internet before we saw the first release from Google and more than 20 years for Facebook. It’s hard to predict where blockchain technology will be in another 10 or 15 years, but like the Internet, it will dramatically change the ways we interact We will interact with each other in the future.”
Hurdles remain, especially with transaction limits and energy costs, but for investors who see the technology’s potential, blockchain-based investments may be a bet worth the risk.
#Blockchain #Forbes #consultant