Blockchain is a revolutionary database technology at the heart of almost all cryptocurrencies. By distributing identical copies of the database throughout the network, blockchain makes it extremely difficult to hack or cheat the system.in the meantime Cryptocurrency is currently the most popular use of blockchain, and the technology offers the potential to serve a very wide range of applications.
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What is blockchain?
Blockchain is essentially a distributed digital ledger that stores all kinds of data. Blockchain can record information about cryptocurrency transactions and ownership. Non-fungible token (NFTs).
Traditional databases can store this kind of information, but blockchain is unique in that it is decentralized. Think of an Excel spreadsheet or a bank database. Many identical copies of the blockchain database are kept on multiple computers distributed throughout the network.
These individual computers are called nodes.
How blockchain works
In blockchain, the digital ledger is described as a “chain” made up of individual “blocks” of data. As new data is added to the network on a regular basis, new “blocks” are created and connected to the “chain”.
This includes keeping all nodes updated to the same version of the blockchain ledger.
How these new blocks are created is the key to why blockchains are considered so secure. Before adding a new block to the ledger, the majority of nodes must verify and confirm the correctness of the new data.for Cryptocurrencyit may be necessary to verify that new transactions within a block are not fraudulent or that a coin has not been used more than once.
This is unlike a standalone database or spreadsheet where a single user can make changes without oversight.
“Once consensus is reached, the block is added to the chain and the underlying transaction is recorded on a distributed ledger,” said C. Neil Gray, Partner in Fintech Practices at Duane Morris LLP. “Blocks are securely linked to form a secure digital chain from the beginning of the ledger to the present day.”
Transactions are usually secured using encryption. This means that nodes must solve complex mathematical formulas to process transactions.
“As a reward for their efforts to validate changes to shared data, nodes are typically rewarded with new amounts of the blockchain’s native currency. Bitcoin About the Bitcoin Blockchain,” says Sarah Stillman, Fintech and Blockchain Counsel at Perkins Koi.
There are both public and private blockchains. A public blockchain allows anyone to participate. This means you can read, write, or audit data on the blockchain. Especially since no single institution controls the nodes, it is very difficult to modify transactions recorded on public blockchains.
Private blockchains, on the other hand, are controlled by an organization or group. Only the system can decide who is invited into it, and it also has the power to go back and change it on the blockchain. This private blockchain process is similar to our internal data storage system, except that it is distributed across multiple nodes for added security.
How is blockchain used?
Blockchain technology is used for a variety of purposes, from providing financial services to managing voting systems.
The most common use of blockchain today is as a backbone for cryptocurrencies such as: Bitcoin Also ethereumWhen people buy, exchange or use cryptocurrencies, the transactions are recorded on the blockchain. The more people who use cryptocurrencies, the more likely blockchain will become popular.
“Because of the volatility of cryptocurrencies, they are still not widely used for the purchase of goods and services. As time goes on, that’s changing,” said Patrick Daugherty, Senior Partner at Foley & Lardner and leader of the company’s Blockchain Task Force.
Beyond cryptocurrencies, blockchains are being used to process transactions in fiat currencies such as pounds, dollars and euros. This can be faster than sending money through banks and other financial institutions, as transactions can be confirmed and processed more quickly outside of normal business hours.
Blockchain can also be used to record and transfer ownership of various assets. This is currently popular with digital assets such as NFTs that represent ownership of digital art and videos.
However, blockchain can also be used to handle ownership of real assets, such as deeds for real estate and vehicles. Both parties first use blockchain to verify that one owns the property and the other has the money to buy it. The sale can then be completed and recorded on the blockchain.
This process allows you to transfer real estate deeds without manually submitting paperwork to update your land registry records. Instantly updated on the blockchain.
Another blockchain innovation is self-executing contracts, commonly referred to as “smart contracts”. These digital contracts are automatically enacted once the conditions are met. For example, an item may be immediately released from payment once the buyer and seller have met all specified parameters of the transaction.
“We see great potential in the field of smart contracts, which use blockchain technology and coded instructions to automate legal contracts,” said Gray. “A smart legal contract, properly coded on a distributed ledger, can minimize or preferably eliminate the need for an external third party to verify performance.”
Supply chain monitoring
Supply chains involve a large amount of information, especially as goods move from one part of the world to another. With traditional data storage methods, it can be difficult to pinpoint the source of a problem, such as which vendor a poor quality product came from.
Storing this information on the blockchain makes it easier to monitor it back into the supply chain, such as IBM’s Food Trust, which uses blockchain technology to track food from harvest to consumption.
Experts are also looking at ways to apply blockchain to prevent voter fraud. In theory, blockchain voting will allow people to submit votes that cannot be tampered with, eliminating the need to manually collect and verify paper ballots.
Advantages of blockchain
Improve transaction accuracy
This can reduce errors, as blockchain transactions must be validated by multiple nodes. If one node’s database is wrong, the other nodes will know it is different and catch the error.
In contrast, with traditional databases, if an individual makes a mistake, it is more likely to pass. Additionally, all assets are individually identified and tracked on a blockchain ledger, so there is no possibility of double spending (such as overdrawing a bank account and double spending).
No middlemen required
Blockchain allows two parties to a transaction to confirm and complete something without a third party involved. This saves time as well as the cost of paying intermediaries such as banks.
“It has the ability to improve the efficiency of all digital commerce, to financially empower the unbanked and unbanked around the world, and consequently to power a new generation of Internet applications,” said Shtylman. says Mr.
In theory, a decentralized network like blockchain makes it nearly impossible for someone to conduct fraudulent transactions.
Entering a forged transaction requires hacking every node and changing every ledger. While this is not necessarily impossible, many cryptocurrency blockchain systems use “proof of stake” or “proof of work” transaction verification methods, making it difficult to add fraudulent transactions. and is not in the best interests of the participants. .
more efficient transfers
Blockchain operates 24/7, allowing people to make more efficient financial and asset transfers, especially internationally. No need to wait days for your bank or government agency to manually verify everything.
Disadvantages of blockchain
Transactions per second limit
Given that blockchain relies on large networks to approve transactions, there are limits to how fast it can travel. for example, Bitcoin Visa can only process 1,700 transactions per second. Additionally, network speed issues can occur as the number of transactions increases. Until this is improved, scalability is an issue.
high energy costs
Running all the nodes to validate transactions requires far more power than a single database or spreadsheet. This not only makes blockchain-based transactions more expensive, but also creates a greater carbon footprint on the environment.
For this reason, some industry leaders are starting to move away from certain blockchain technologies such as Bitcoin. said it would stop accepting
Asset loss risk
Some digital assets are protected using cryptographic keys, like cryptocurrencies in blockchain wallets. This key should be carefully protected.
“If a digital asset owner loses the private encryption key that grants access to the asset, there is currently no way to recover it. The asset is lost forever,” said Gray. Because the system is decentralized, you can’t call a central authority such as a bank and ask them to restore access.
Potential Illegal Activity
The decentralization of the blockchain makes it more private and confidential, which unfortunately makes it attractive to criminals.Illegal transactions are harder to track on a blockchain than bank transactions tied to a 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 use this technology to invest in assets and companies.
“The easiest way is to buy a cryptocurrency like Bitcoin. ethereum and other tokens that run on the blockchain,” Gray said.
Another option is to invest in blockchain companies that use this technology. For example, Banco Santander is experimenting with blockchain-based financial products. If you’re interested in touching blockchain technology in your portfolio, you might buy the stock.
A more diversified approach is to buy exchange traded funds that invest in blockchain assets and companies.
Despite its promise, blockchain remains a niche technology. Gray believes blockchain could be used in more contexts, but that will depend on future government policy. One thing is clear: the goal is to protect the market and investors,” he said.
Shtylman likens blockchain to the early days of the Internet. “It took about 15 years for the internet to come out before the first version of Google came out and over 20 years for Facebook to come out. It’s hard to predict when, but like the Internet, it will transform the way we transact and interact with each other in the future.”
Hurdles remain, especially transaction limits and energy costs, but for investors who see the potential of the technology, blockchain-based investments may be worth the bet.