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We've all heard about Blockchains, but how can they be used in the real world? How does it work in crypto? What problems can they solve? In the following article below, everything about the blockchain will simply be explained for you.
What is Blockchain?
A blockchain is a distributed database that is shared among the nodes of a computer network, which means everyone can get a copy of it. It is a chain of blocks that contain information. As a database, a blockchain stores information electronically in digital format. As new data comes in, it is entered into a fresh block. Once the block is filled with data, it is chained onto the previous block, which makes the data chained together in chronological order.
Blockchain technology has a strict "non-tampering" feature. Once several transaction records are packaged into blocks and chained together, no single node can change this fact. The record is completely open to everyone. Transparency and safety are guaranteed.
Decentralization is the main feature of the blockchain. Information on a Blockchain network is not controlled by any centralized authorities, unlike modern financial institutions and governments. Like Bitcoin, the amount of Bitcoin is fixed at 21 million, unlike the amount of US dollars controlled by the Federal Reserve.
How does Blockchain work?
In the blockchain technology, each block contains the data, hash and the hash of the previous block. For example, in a Bitcoin block, we may see the details of a transaction as data, including the sender, receiver and the amount of coins.
The hash acts as a fingerprint of a block, which means each block has a unique and unrepeatable hash as the identification of each block. If someone wants to change the data of a block, this will lead to the change of Hash. The block will not be the same as the original one.
Not only that, each block contains the hash of the previous block. If the data in a block is changed, the hash of the block will change. It will lead to the following blocks being invalid as they no longer store a valid hash of the previous block. In order to make the blockchain more secure and prevent someone from changing and recalculating the hash of the whole chain, blockchain is distributed. It uses a peer-to-peer network, which means anyone is allowed to join. There is no centralized authority to manage the chain.
When a new block is created, the new block is sent to everyone on the network. Each node verifies the block. If someone even makes a few changes, he has to take control of more than 50% of peer-to-peer, which means a huge cost of time and effort.
Blockchain: Pros and Cons
As you now know how the blockchain works, the pros of the chain are obvious. Security and transparency is guaranteed on the blockchain.
Since the blockchain is not controlled by any financial authorities or governments, the data on the chain is open to anyone. Everyone in the chain helps you secure the transaction and the change of data.
If someone wants to make any changes to your data, if someone plans to change any of the blocks, even makes a few changes, he has to make changes to all blocks on the chain, redo the proof of work and take control of more than 50% of peer-to-peer, which means a huge cost of time and effort.
For example, smart contracts can be created which are just like the contracts in the real world. They actually are tiny computer programs inside a blockchain.
As smart contracts are immutable and distributed, which means if a smart contract is created, it can never be changed again. The security and transparency of smart contracts is protected.
There are also some cons to the blockchain. The transaction on the chain is irreversible. If you have made some mistakes during the transaction, for example, transfer the wrong amount of coins or transfer to a wrong person, the transaction is irreversible.
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Public vs. Private blockchains
There are two main categories of blockchains in common, the public and private blockchain.
Public blockchain is open and transparent. It is open to anyone. Any individual or institution can set up a transaction through a public chain at any time. Each node then verifies the block. The common blockchains are usually public blockchains. The Bitcoin blockchain is an example.
Compared to the public blockchain, the private blockchain is completely closed off from the public. The right of verification is centralized by blockchain technology. It is not open and transparent. The main purpose of the private blockchain is for recording the account information and the private transactions which are used by companies or individuals. Most of the data on private blockchains is confidential.
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