What Is Blockchain Technology? How Does Blockchain Work?

Blockchain isn’t something new not even the latest technologies we are using are new. All the things have been documented or once discussed as an idea over television or radio.

Blockchain has progressed from a cryptic technical jargon to a daring new frontier for our collective digital infrastructure over the last few decades. Its potential spans sectors and can transform everything from healthcare to online gaming.

From corporate businesses to Government authorities, Blockchain technology became a new niche of exploration. Blockchain is the new container for storing and managing data with more security. If we look into the big picture, Blockchain is a fused domain of data integration and cyber security.

In this article we will go through all the aspects of Blockchain, What is Blockchain, Blockchain applications, History, Mining, and What is blockchain Explorer.

What is Blockchain Technology?

Blockchain is a technique of preserving pieces of information that makes it hard to modify, hack, or manipulate the system. A blockchain is a distributed ledger that copies and distributes transactions throughout the blockchain's network of computers.

The basic meaning of blockchain is that it is a separate ledger system that can’t be closed or altered by any person or system by any means. The data get stored in a form of a block and then makes a unique address for the same so it could be accessed by the person in charge.

Blockchain technology is a framework that maintains public transactional information, also known as blocks, in many databases connected by peer-to-peer nodes in a network. This type of storage is sometimes referred to as a 'digital ledger.'

Every transaction in this ledger is approved by the owner's digital signature, which authenticates the transaction and prevents it from being tampered with. As a result, the information contained in the digital ledger is extremely safe.

More simply, consider a blockchain mart where each rack and shelf are partitioned. Every row contains items related to a specific category and every shelf contains a variety of that category. If a certain item let’s say an oreo cookie is being sold, then the vacant place will be filled with another oreo packet to maintain the category distribution. Although, the transaction history will be recorded on the bill. That’s how a blockchain also works. 

Types of Blockchain

There are four types of Blockchain Public Blockchain, Private Blockchain, Hybrid Blockchain, and Consortium Blockchain. Let’s define each of them.

Public Blockchain

These blockchains are entirely receptive to the concept of decentralization. They have no limits; anybody with a computer and access to the internet may join the network.

• As the name implies, this blockchain is open to the public and not owned by anybody.

• Anyone with access to the internet and a computer with adequate hardware can join this public blockchain.

• Every computer in the network has a copy of every other node or block in the network.

• We can also do transaction or record verification on this public blockchain.

 Private Blockchain

Private blockchains run on closed networks and are best suited to private corporations and organizations. Companies may utilize private blockchains to tailor their accessibility and permission choices, network characteristics, and other critical security features. A private blockchain network is managed by a single authority.

• These aren't as accessible as a public blockchain.

• They are only accessible to certain authorized users.

• These blockchains run on a closed network.

• Few people are permitted to participate in a network within a company/organization.

Hybrid Blockchain

Permissioned blockchain networks, also known as permission blockchains, are private blockchains that grant specific access to approved persons. Organizations generally build up these sorts of blockchains to get the best of both aforementioned blockchains, and it allows for better organization when determining who may join the network and which transactions can be made.

• It is a hybrid of public and private blockchains.

• There are permission-based and permissionless systems in use.

• Smart contracts provide users with access to information.

Consortium blockchain

Consortium blockchains, like permissioned blockchains, feature both public and private components; however, many companies will operate a single consortium blockchain network. Although these blockchains are more difficult to set up at first, once operational, they can provide more security. Furthermore, consortium blockchains are ideal for collaboration across various enterprises.

• Consortium Blockchain is also known as Federated Blockchain.

• This is a novel approach to meeting the demands of the company.

• Part of it is public, and part of it is private.

• The blockchain is managed by more than one entity in this case.

Applications of Blockchain

Blockchain uses extend well beyond cryptocurrencies such as bitcoin. With its capacity to increase openness and fairness while also saving organizations time and money, the technology is having an influence on a wide range of areas, from contract enforcement to making government run more efficiently.

Cryptocurrencies and Payments

Cryptocurrencies are one of the most widely used blockchain applications. The blockchain technology we're discussing today was designed primarily and deeply for Bitcoin.

Bitcoin has grown in popularity to the point where retailers, restaurants, and even bars are beginning to accept it as payment. In major places such as New York, you can live entirely on bitcoin, however, this isn't necessarily the most practical option.

Because bitcoins are traded on an open market, speculators such as the Winklevoss twins can speculate on future price swings.

Other cryptocurrencies, like Ripple, Litecoin, and Ethereum, can also be used to transfer payments or for market speculation, but each has its idiosyncrasies. Ripple is positioned to accelerate international transactions while lowering transaction fees.

Cross-Border Payments

Sending money from one nation to another is a tedious job. It counts several steps to make a valid transaction in cross-border payments. This may be a lengthy and involved procedure, and the money may not arrive for many days. By enabling end-to-end remittance services without the need for intermediaries, blockchain has aided in the simplification of these cross-border transfers. Many remittance businesses have Blockchain services that may be used to conduct international payments in less than 24 hours.

Supply Chain Management

Blockchain as mentioned could be incorporated in many ways. Supply-chain management is very crucial for retailers and big corporates. The transfer records, product lists, categories, orders and all other important details in the system database are always prone to be corrupt.

Blockchain could be one of the accurate solutions to this problem. Blockchain in supply chain management could increase traceability, maintain the dispatch flow bills and could easily manage counterfeit losses.

Supply-chain management is a process which goes through many steps before handing the product or service over to the end user. These steps could be optimised and can make effective changes if Blockchain technology is incorporated into it. The main purpose served is to create an ecosystem where two or more parties could communicate seamlessly without interruption or delay. Also reducing the risk of any in-between frauds or human error.

Medical Health Care

Using smart contracts, blockchain can have a significant influence on healthcare. These smart connections imply that a contract is formed between two parties without the use of an intermediary. The contract specifics are known to all parties concerned, and the contract is automatically implemented when the contract criteria are satisfied. Wearable personal health records can be encoded using Blockchain so that they are only available to primary healthcare professionals with a key. They also aid with the enforcement of the HIPAA Privacy Rule, which assures that patient information is kept private and not available to the general public.

Asset Management

Blockchain is becoming increasingly important in the financial sector, and it is no different in asset management. Asset management entails the managing and trading of various assets that a person may possess, such as fixed income, real estate, stock, mutual funds, and so on. Normal trading operations may be quite expensive, especially when numerous nations and cross-border payments are involved. In such cases, Blockchain can be of great assistance because it eliminates the need for middlemen such as brokers, custodians, brokers, settlement managers, and so on. Instead, blockchain technology offers a clear and transparent approach that eliminates the possibility of inaccuracy.

NFTs and Digital Collectibles

Just as blockchain introduced fungibility to the digital environment, allowing us to trade value like-for-like in the form of cryptocurrencies, blockchain is also introducing non-fungibility in the form of NFTs.

The immutability, reliability, transparency, and decentralization of blockchain give the new potential for the smooth trading, swapping, and sharing of digital representations of any sort of asset, and this is expected to inspire new blockchain-based innovation for many organizations.

NFTs can be deployed on any blockchain that supports smart contract programming, the ERC-721 standard on the Ethereum blockchain is the most widely used industry standard.

Unlike fungible token standards, ERC-721 allows for the inclusion of detailed metadata about an asset, such as previous ownership. It also enables each token to have unique attributes that distinguish it from other tokens; these properties are specified in an off-chain file accessible via the token's metadata.

Defi

The adoption of decentralized finance (Defi) has expanded at an exponential rate, from less than $1 billion in May 2020 to more than $80 billion in May 2021. As a consequence, this blockchain-based form of traditional financial trading has risen to the top of cryptocurrency trends, prompting many to question whether its meteoric rise can be replicated or even expanded upon. As more Defi use cases emerge in the financial industry, the concept's future is likely to be determined by its increasing market accessibility and usefulness.

Blockchain Gaming

Blockchain gaming is picking up the pace for several years. Gaming has been changed from old-school versions to SEGA, to PSPs, and now to Metaverse. Play-to-earn games are one of the most toggled features within the metaverse and NFT marketplace. Surprisingly, both use blockchain to make the model work seamlessly in which users could participate easily without any haze. 

The concept of Blockchain gaming was to introduce a common, engaging, and competitive environment for gamers. The ecosystem serves as a common point for both gaming and crypto enthusiasts where users could experience a sense of responsibility while earning some rewards such as NFTs or Crypto tokens.

Major blockchain protocols engaging with gaming are Ethereum, Polygon, Solana, Binance, Hyperledger, Cardano, and so on.

How Blockchain Technology Works?

A blockchain, at its foundation, enables a network of users to share potentially valuable information in a tamper-proof manner. The data type in question is frequently determined by the industry or purpose of the blockchain. A cryptocurrency-based blockchain, for example, keeps information about crypto transactions, such as the trader, recipient, and amount of money traded.

Smart contracts, or programs that activate when predefined criteria are satisfied, also help to simplify blockchains. Smart contracts are lines of code that operate as an agreement between two parties, and they are used in a blockchain to automatically perform transactions without the need for a third party to monitor the trade.

Blockchain's data is extremely difficult to manipulate or steal since it is encrypted, cross-checked, and decentralized. To exploit this data, you'd have to simultaneously penetrate all blocks in a single blockchain, which is almost hard to do.

Blockchain is a hybrid of three key technologies:

• Cryptographic or encryption keys.

• Peer-to-peer network with a shared ledger.

• A computer method for storing network transactions and records.

Cryptography keys are made up of two keys: private and public. These keys aid in the completion of successful transactions between two parties. Each person possesses these two keys, which they use to generate a secure digital identity reference.

P2P is a decentralized network communications paradigm that consists of several devices (nodes) that jointly store and transfer data, with each node acting as an individual peer. P2P communication takes place in this network without the need for a central administration or server, which means that all nodes have equal power and execute the same responsibilities.

Bitcoin Blockchain Technology

The Bitcoin blockchain is a record of encrypted transactions that are validated by peers. This is how it works. The blockchain is spread among numerous computers and systems inside the network rather than being stored in a single location. These systems are referred to as nodes. Every node has a copy of the blockchain, and each copy is updated whenever the blockchain is verified.

The blockchain is made up of blocks that record information about transactions, previous blocks, addresses, and the code that performs transactions and manages the network.

Queued transactions are added to the block, the block is closed, and the hash is generated by the blockchain. Because each block contains information from previous blocks, the blockchain cannot be changed because each one is "chained" to the one before it. Mining is a procedure that validates and opens blocks.

Mining is not universal to all blockchains; it is only one form of consensus mechanism (Proof-of-work) that is being employed by Bitcoin, Dogecoin, Litecoin, and other cryptocurrencies.

When you transmit Bitcoin, you pay a modest charge (in bitcoin) to a network of computers to certify the validity of your transaction. Your transaction is then combined with other outstanding transactions in a queue to be included in a new block.

The computers or nodes then work together to validate the block's list of transactions by solving a complicated mathematical problem to generate a hash, which is a 64-digit hexadecimal integer.

The block is then added to the blockchain. And that’s how a Bitcoin Blockchain works.

Benefits and Drawbacks of Blockchain

While blockchain's decentralized architecture has several advantages, the technology also has several potential drawbacks. Here is a closer look at blockchain's significant benefits and drawbacks:

Benefits

Blockchain Security

One of the most significant advantages of blockchain is its ultra-secure network. Because blockchain data is intrinsically encrypted, it is far more secure than the typical username-password security method. The true security benefits, however, come from the blockchain's user network.

Hash functions make it simple to determine when a block has been tampered with. The hashes from one block are appended to the data in the following block. Anyone attempting to modify a block will end up modifying the hash, raising a red flag and deactivating the block.

Anonymity is also provided via blockchain. Systems without blockchain rely on information such as names, addresses, credit card numbers, and social security numbers to validate transactions. All of this sensitive information is subject to theft. Only the private key is important in a blockchain.

Transfer Speed

Blockchain technology is quick and efficient. Manual data input is time-consuming and error-prone. Most businesses have many record systems for various functions.

Examining individual records takes a long time. All of this information is kept and confirmed as it is created via blockchain.

The speed of blockchain verification offers several advantages. A simple crypto transaction, for example, might take up to a week to verify using existing procedures. The procedure involves several pieces of paperwork, organizations, and a crazy number of acronyms.

Due to the inclusion of all the necessary data in the ledger, blockchain eliminates the need for third parties to validate transactions.

Decentralization

There is no need for anyone else to know or trust anyone else in a decentralized blockchain network. Each network participant has a copy of the same data in the form of a distributed ledger. If a member's ledger is changed or distorted in any manner, the majority of network members will reject it.

Drawbacks

Without proper monitoring, blockchain's greatest capabilities might become its doom. For example, network consensus is commonly described as 51 per cent node acceptance, and "51% attack" is a theoretical danger based on this similar notion. In other words, a hacker who gains 51 per cent control of a blockchain network may alter the chain's hashing power, interrupt transactions, and risk stored data.

When positive data updates are required, the immutability of blockchain might be a barrier (hence the difficulty of the mining process). Changes are typically quite demanding and might result in the chain being divided into two different networks: the original version, which is eventually abandoned over time, and a new version based on the modifications.

Top 3 Prominent Blockchain Protocols

Bitcoin

Bitcoin is a decentralized virtual currency. It runs on a decentralized network of computers known as a blockchain, which records all transactions involving the cryptocurrency. To validate transactions and add them to the blockchain, Bitcoin employs a proof-of-work method. Bitcoin was the first cryptocurrency and is still the most well-known.

Ripple

Ripple is a cryptocurrency comparable to Bitcoin. Ripple keeps track of all transactions conducted with the currency via a decentralized network of computers. Ripple validates transactions and adds them to the blockchain using a proof-of-work method. Ripple was founded in 2012 and is the second most valuable cryptocurrency in terms of market value.

Ethereum

Vitalik Buterin first introduced the Ethereum blockchain in a white paper in 2013. Buterin, a programmer born in Russia and reared in Canada, has been associated with bitcoin from its inception. He was intrigued by the technology, but he believed that it required a scripting language for application development. He decided to build a new platform that would be broader than bitcoin.

Difference Between a Blockchain and a Database

As both methods are used to store and organise data and records, Blockchain and Database differ in many aspects. The below table shows the difference between both.

 

Blockchain Technology Predicted Market Size

The worldwide blockchain technology market was estimated at USD 5.92 billion in 2021, and it is predicted to increase at an 85.9% CAGR from 2022 to 2030. The increased venture capital investment in blockchain technology startups can be related to market expansion. The legalization of cryptocurrency in countries such as Ukraine and El Salvador is expected to open up new market opportunities.

Source: Grandviewresearch

Below are some key points which led to the adoption of Blockchain technology faster and broader:

• The legalization of bitcoin pushes companies and investors to increase their investments in blockchain technology.

• Furthermore, it pushes market participants to make greater attempts to enhance their services to acquire a competitive advantage.

• DeFi is a blockchain-based emerging financial system that limits banks' control over financial services and money.

• Over the projected period, the expanding strategic activities in the decentralized finance domain are likely to fuel market growth.

• For example, Square, a payment company, said in July 2021 that it will begin a DeFi business utilizing bitcoin.

• Companies such as PayPal and Xbox are anticipated to stimulate industry expansion by accepting cryptocurrencies as payment.

• Several restaurants are cutting deals with bitcoin solution providers to accept cryptocurrency payments from their consumers.

• This experiment allowed Quiznos customers to pay using bitcoin at limited locations.

• Several organizations are attempting to integrate Artificial Intelligence (AI) capabilities with blockchain to improve their offers and create new chances for market growth.

• The collaboration sought to create AI-enabled smart banking solutions for financial institutions and banks.

• To digitalize and automate back-office procedures, this smart banking system combined AI and blockchain technology.

History of Blockchain Technology

Stuart Haber and W. Scott Stornetta Concept

Stuart Haber and W. Scott Stornetta, two research scientists, described blockchain technology in 1991. They wished to present a computationally feasible approach for time-stamping digital records to prevent them from being backdated or tampered with. They create a system that stores time-stamped documents in a cryptographically secure chain of blocks.

Merkle Trees Were Added

Merkle Trees were integrated into the architecture in 1992, making blockchain more efficient by allowing several documents to be aggregated into a single block. Merkle Trees are employed in the construction of a secured chain of blocks.' It saved a succession of data records, each one linked to the one before it. The most recent record in this chain covers the whole chain's history.

Hal Finney’s RPoW

Hal Finney, a computer scientist and cryptography campaigner, presented Reusable Proof Of Work (RPoW) as a prototype for digital payment in 2004. It was a critical early milestone in cryptocurrency history. In exchange for a non-exchangeable or non-fungible Hashcash-based proof of work token, the RPoW system generated an RSA-signed token that could be transferred from person to person.

Satoshi Nakamoto’s Theory

Satoshi Nakamoto also theorized the principle of distributed blockchains in 2008. He enhances the system in a novel way, allowing blocks to be added to the original chain without having to be signed by trustworthy parties. The updated trees would keep a secure record of data transfers. It timestamps and verifies each trade via a peer-to-peer network. It may be administered independently, without the need for a centralized authority. Because of these advancements, blockchains have become the backbone of cryptocurrencies.

Frequently Asked Questions (FAQs)

What is Blockchain technology?

Blockchain technology is a shared digital ledger that allows users to securely and tamper-resistant record transactions and exchange information. A distributed network of computers maintains the register, and each transaction is confirmed by consensus among network members.

Is Blockchain safe?

Blockchain's practically unhackable foundation is intended to make considerations like trust and safety an afterthought, yet its intrinsic security remains a hot topic. In general, blockchain is secure because it is extremely difficult to hack or edit.

What Blockchain is used for?

A blockchain is designed to store critical data in a highly secure, unchangeable manner. Data stored on a blockchain is nearly hard to manipulate or hack, which has led to growing blockchain deployment across a wide range of industries. Blockchain's application across industries has expanded to include everything from health records and digital notarization to tax records and even limited-edition music releases.

What Is the Importance of Blockchain?

Blockchain technology is crucial because it has the potential to transform the financial industry. Banks must be faster to react to the changing requirements of the digital era, and Blockchain allows them to do so. Banks may provide their clients with a more safe and more efficient way to conduct transactions by utilizing Blockchain. Furthermore, Blockchain can assist banks in streamlining their processes and lowering expenses.

What are the benefits of Blockchain technology over Traditional Finance systems?

Blockchain provides numerous benefits over traditional finance. One of the most stated benefits of Blockchain is that it is decentralized, whereas traditional finance is centralized. This means that a blockchain system has no single point of failure. Another advantage of Blockchain over traditional finance is that it is more transparent.