The invention of Bitcoin in 2008 propelled a technological innovation. Blockchain technology, the reason behind the success of Bitcoin, is one of the most explored technological solutions of this century. Although invented in 1991, the technology gained significance with its first application- Bitcoin.
Bitcoin’s invention amidst the financial crisis of 2008 was to signify the alternative to the current financial ecosystem. The foundation of Bitcoin lies in the fundamentals of blockchain technology. More than a decade later, blockchain technology is currently explored for a multitude of domains across numerous industries. As per a report by the World Economic Forum, around 10% of the global GDP will rest on the blockchain by 2025.
In this blockchain explained guide, we seek to understand what is blockchain, its key principles, and how it works.
Why Blockchain Matters?
Major banking institutions like JPMorgan Chase, automobile makers like BMW, technology players like Facebook, Amazon, Microsoft, retail corporations like Starbucks, Nestle, and Fintech firms like Visa, PayPal- are some of the multi-billion dollar firms that are exploring blockchain applications in their respective industries. Even governments across the globe are leveraging blockchain technology tools for applications in the public sector.
As per this research, the global blockchain market size is expected to grow at a CAGR of 67% from 2020-2025. A survey conducted by Deloitte consisting of senior executives revealed that 53% of respondents stated blockchain to be a top priority for their organizations. Research institute Gartner estimates that blockchain will generate $3.1 trillion in new business value by 2030. Another study from PWC comprising of 600 executives revealed that 84% of their organizations are actively involved in blockchain technology.
The unprecedented growth of blockchain technology is owing to its applications in various sectors. While cryptocurrencies are one of the top innovations of blockchain, the use-cases of blockchain are explored in a myriad of fields including healthcare, supply chain, Internet of Things (IoT), governance, real estate, online gaming, voting, charity, and more.
After analyzing the scale of the impact of blockchain, the key question is what is blockchain technology and how does it work?
Blockchain Explained: What is Blockchain Technology?
In simple terms, a blockchain is a ledger that records data, documents, and transactions. The term blockchain represents a combination of the words block and chain. The data recorded on the ledger is stored on the blocks. The blocks are chained to each other in a cryptographical sequence.
A blockchain protocol encompasses three fundamentals: decentralization, a peer to peer network, and distributed storage of data. Let’s look at these elements one by one.
A blockchain is a decentralized network made up of multiple nodes or members. It does not have a central authority. Instead, the control over the network is distributed among the participants. In a centralized structure, the entire system fails if the main node is compromised. The decentralized distribution ensures that the blockchain network continues to function even if one or more nodes fail or are compromised.
These members directly interact with each other on a peer to peer network. For instance, transactions on the Bitcoin blockchain are conducted directly between two unknown entities without any intermediary organization like banks. Similarly, two unknown entities can directly transact finance or data without any intermediary organization monitoring the process. The basic fundamentals of the blockchain distributed ledger instill trust among the members thereby eliminating the requirements of middle-men.
The blockchain ledger stores data in a distributed network. Instead of a centralized cloud structure, the data is stored on the hardware of multiple nodes of the system. Under the cloud infrastructure, the data remains vulnerable to hacks in case if the cloud is attacked. With distributed storage, hackers cannot gain control over the blockchain network’s data as it is distributed across multiple locations. Since it enables a distributed database that does not require a central authority, blockchain is also known as Distributed Ledger Technology (DLT).
Features of Blockchain Technology
Apart from the fundamentals of blockchain protocol, the decentralized ledger incorporates key features and enables a streamlined process for storage and management of data.
- Shared Ledger – Unlike current infrastructure for data management, there is a single version of the blockchain ledger. The ledger is shared among the participants with all the nodes gaining access to the same bundle of information.
- Transparent – The data stored on blockchain ledger is transparent across all the participants of the network. The nodes of a blockchain can easily access the data thereby removing the loopholes to engage in fraudulent activities.
- Accountability – As data added and stored remains transparent across the network, each participant is accountable for any activity undertaken.
- Cryptography – The information or transactions are bundled into blocks and secured through cryptography. Cryptographic protocols ensure that the data does not get tampered by a hacker.
- Traceability – Each piece of data can be traced back to its history. Any document added to the blockchain as well as its subsequent actions can be traced back to its origins.
- Immutability – The blockchain ledger stores information in an immutable manner. In other words, the data once stored on a ledger cannot be modified or deleted.
- Real-time – The data on a blockchain ledger is updated in real time.
- Time-stamp – Each piece of information or document is time-stamped when it was added to the ledger.
In order to seek a better understanding of these key features, let’s consider Bitcoin blockchain. Bitcoin network facilitates peer to peer transactions on a decentralized network. The nodes of the Bitcoin blockchain are the millions of participants accessing its blockchain. All the transactions are recorded and stored on its shared ledger i.e. blockchain network.
The Bitcoin ledger is transparent and any node can view these transactions. Each transaction, irrespective of its duration, can be traced through its blockchain. All the transactions are conducted in real time and subsequently the data is updated on the blockchain ledger. Furthermore, a transaction once conducted cannot be reversed as the blockchain is immutable.
How Does a Blockchain Work?
While Bitcoin and cryptocurrencies have become a value-added application of blockchain technology, the scope of the decentralized ledger is far and wide. As mentioned previously, the blockchain ledger is accessed in multiple industries to record, manage, store, and access data.
So, how does a blockchain function? What are the different steps for blocks to be formed and connected in the form of a chain? Let’s take a step by step guide to visualize a blockchain in action.
A participant of a blockchain network performs a transaction. This can be a transaction of money, uploading a document, or transaction of data. Since blockchain does not have a centralized entity, the transaction lands in a decentralized peer to peer network in order to get verified. Other nodes or members of the blockchain network start verifying the authenticity of data/ transaction.
The process of verification is conducted through consensus mechanism. In other words, if maximum members/ nodes agree that the transaction is legit, it is approved. The approved transaction along with other transactions within a specific duration is bundled and recorded in a block. The newly formed block is connected to the previous block through cryptographic hashing protocol. These blocks are connected in a sequential manner such that any modification of information in any one block results in incorrect sequencing of all the blocks succeeding it as well. The cryptographic sequencing ensures that it is impossible for a bad actor to tamper with the data on the blockchain network. It also eliminates the loopholes for any participant to engage in fraudulent activities.
Each block is time-stamped with the time when it is added to the blockchain network. Once a data is updated on a ledger, the copies of all the members are updated in real-time. The data cannot be reversed or modified. A new piece of data can be entered but the previous transaction remains immutable.
While the first application of Bitcoin represented a revolution in the financial sector, the applications of blockchain have moved far beyond banking and finance. Fortune 500 companies, big league corporations, banking institutions, and governments are leveraging blockchain in different capacities.
While it is considered to be one of the top innovations currently, the industry yet has challenges to overcome. Questions of scalability of a blockchain network, vulnerabilities, security, and regulative compliance in its applications are yet to be addressed. Having said that, the technology does have the potential to bring revolution in multiple sectors. In the next five to ten years, we are likely to witness practical developments of blockchain on-ground.