Blockchain is considered by some experts as the ‘next generation of the Internet’ and the ‘Internet of value’. The fundamentals of the blockchain include concepts such as smart contracts, distributed ledgers, and Bitcoin. In simple terms, it is a new way of storing data – a decentralised database or a real-time ledger of anything that can be recorded (financial transactions, contracts, physical assets, supply chain information, etc.). Understanding the intricacies of the blockchain requires some background and historical information.
Before Blockchain
Businesses and individuals, in their daily operations, generate a constant flow of data which is usually recorded and centrally stored. Traditionally, mediators, like banks, store the data in one database or data centre and everyone involved has access to it – in theory, because it occurs asynchronously and retroactively. Apart from the fact that those intermediaries are trusted to treat the data with integrity and that only one final version of a document is filed, the fact that data is centrally stored, makes it vulnerable to attacks. Additionally, inconveniences include, in the case of contracts, for example, that two parties cannot work on the same document simultaneously, which creates problems of versions that might be lost, files moving between parties concerned, and time delays.
The solution: Blockchain
The blockchain is built on the principle that all information should be distributed across numerous locations instead of just one, using the highest level of cryptography. Thus, every party or ‘node’ in a process can see all transactions in the system and should receive a copy of each “block” to update its data and, essentially, approve it. It means that all participants are connected to each other and have the same copy of given data’ and no one person or organisation is in charge of the entire chain. It is open and everyone in the chain can see the details of each record or block. Each block is time stamped and encrypted; the only person who can edit a block entity who ‘owns’ it. Owners gain access to their blocks through a private key that only they have. When there are changes to an individual block, everyone’s distributed blockchain is updated and synchronised in real time.
The result is a decentralised version of the database or a digital ledger of transactions that are available to anyone in the network which means increased transparency and immediacy. Blockchain technology establishes a peer-to-peer network within one system, bypassing third parties (data storages or ‘the middle man) and the complexity of using disparate ledgers and processes throughout the lifecycle of any transaction. For example, a stock purchase transacted in a blockchain would be settled in minutes. There is no need to have another entity process the transaction while waiting for them to do so. Every transaction goes into a block, and each block connects to the one before and after – hence a chain of blocks.
As part of a system, participants are given two keys: public (e. g. a username) and private (a password) key. All the blocks are located across all the existing connected computers or nodes simultaneously which makes it very difficult for hackers to crack. Blockchains are encrypted with special mathematical functions (user’s private keys). Each block contains a cryptographic hash function (CHF) of the previous block, a timestamp, and transaction data generally represented as a hash or Merkle tree used for distributed systems for efficient data verification. In cryptography, a hash tree or Merkle tree is a tree in which every leaf node is labelled with the hash of a data block, and every non-leaf node is labelled with the cryptographic hash of the labels of its child nodes. Typically, Merkle trees have a branching factor of two, meaning that each node has up to two children.
Cryptocurrencies
Most cryptocurrencies use blockchain technology to record transactions. For example, the Bitcoin and Ethereum networks are both based on blockchain. A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies use decentralised control as opposed to centralised digital currency and central banking systems.
Industries that Blockchain may affect
The financial world will undoubtedly benefit by integrating this technology since it gives everyone around the world access to financial services, including those who don’t have access to traditional banking. Blockchain-based transactions are borderless, more secure and at a reduced fee.
Perhaps the most significant area of society that blockchain may disrupt is governments and voting. It may eradicate the rigging of election results by legitimising vote counting and guaranteeing that no votes are altered or removed, in addition to the unchangeable publicly-viewed registry, making elections fairer and more democratic.
Blockchain may also make it easier to verify and manage our identities or introduce some level of trust between parties willing to interact. Individuals may build some cohesive online identity from fragmented information because of a large number of profiles we have on the Internet. Blockchain allows an open, global platform to store all the credentials for every individual.
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