Blockchain technology
What is blockchain technology
The blockchain is a kind of database. But what exactly is a database? A database is a system in which information is stored electronically. Users can search and filter this information to find exactly what they are looking for. Databases are used everywhere - for example at banks, which use them to store information about accounts and transactions. But not all databases work on the same principle.
A blockchain is a kind of ledger in which all transactions are documented - except that this ledger is not managed centrally in one place, but decentralized. Unlike many other decentralized databases, the blockchain has a very specific functionality.
In principle, blockchain technology can be summed up in the following word: security. Because blockchain technology makes it possible to record information without being able to edit or change it afterwards. Let's take a closer look.
What is blockchain
Wondering what makes blockchain technology so special? A blockchain is a database structured as a chain of blocks. Each of these blocks contains information. These cannot be changed or edited once added to the chain. If new information is added, then only in the form of a new block.
Blockchains are basically like digital ledgers for accounting and have many uses. In this article you will learn more about blockchain technology, why it offers security and transparency for popular cryptocurrencies such as Bitcoin or Ethereum and what disadvantages it has.
How does blockchain work
The information in a blockchain is recorded in blocks. A specific group of data is stored in each of these blocks. As soon as a new group is added, it forms a new block that is appended to the previous block - hence the name "blockchain".
It is precisely in this chain structure that the decisive difference between a blockchain and other database types lies. But how exactly does the chain work? First, let's take a closer look at the three most important elements of a single chain block. Each block contains:
- Your own hash code. A hash code is an alphanumeric representation of data. The hash code is unique to each block and will change if the underlying data changes in any way.
- The hash code of the previous block in the chain. With this hash code, the blocks are kept in a linear, chronological order. So he's kind of a reference. As long as each block points to the unique hash code of the block before it, the chain remains intact. Important: As soon as the information in a block changes, the hash code also changes.
- A timestamp. The timestamp indicates when the block was created. So it also helps keep the chain in chronological order.
Together, these three elements ensure that the blocks of a blockchain cannot be changed. If someone tried to change a block, the hash value and timestamp of the corresponding block would also change. The subsequent block in the chain would then no longer contain the hash code of the previous block. So it would be noticed very quickly that the blockchain was changed.
Is blockchain technology secure
The hash codes and timestamps in a blockchain make it extremely difficult to change the data in a block once it's attached to the chain. Therefore, the blockchain is considered extremely secure. Still, there are some potential trust issues.
Here's an example: If only a few people are allowed to create blocks in the ledger, they could possibly enter incorrect information or abuse the system in some way for their own purposes. The security of the blockchain also depends on the trustworthiness of the people who have access to it.
The early developers of cryptocurrencies - above all the Bitcoin inventor Satoshi Nakamoto - recognized this problem and developed the concept of a decentralized blockchain. The advantage? Thanks to the decentralized structure, transactions do not have to be validated by a trustworthy third party. But how exactly does that work?
What is a decentralized blockchain
With a decentralized blockchain, the above security features are reinforced by a peer-to-peer network. The members of the network do not have to trust or know each other. However, each participant receives a copy of the same blockchain ledger. There is no “master version” stored in one central location. Instead, countless copies exist, with which the accuracy of the blockchain is constantly checked.
This division makes a central instance for validating the data superfluous. In addition, the blockchain is also protected against hacker attacks. In fact, should a hacker try to alter or edit the blockchain in any way, they would only alter their own copy. This freshly manipulated copy would not match the copies stored on the other computers on the network. So the error would be noticed quickly.
Let's take Bitcoin's network as an example. The corrupted version of the blockchain created by the hacker would need to be confirmed by at least 51% of the computers on the network before it would be considered legitimate. Given the cost and computing power that would be required to manipulate the numerous computers on the decentralized network, it is all but impossible to successfully introduce a bug into the blockchain.
How is the blockchain used
Blockchain technology can be used in different industries - from banking to logistics. However, most people are familiar with blockchain technology, especially in the field of cryptocurrency.
Blockchain has enabled the proliferation of Cryptocurrency like bitcoin. Cryptocurrencies use blockchain technology to transparently record monetary transactions. The terms blockchain and bitcoin are used almost synonymously today. However, numerous other cryptocurrencies are also based on decentralized blockchain networks. A decentralized blockchain eliminates the need for a trusted third party to verify transactions. Therefore, the opinion often expressed in the crypto community is that a decentralized blockchain makes currencies more democratic and reliable.
Advantages and disadvantages of blockchain
Blockchain technology is becoming increasingly important in many areas where data needs to be stored. In contrast to other types of databases, it offers some clear advantages. You have already met some of them here. In the next section you will find out what advantages cryptocurrency blockchains in particular have. In addition, we also address some disadvantages.
Benefits of blockchain technology
Increased security: The data in a decentralized blockchain is not stored in a central location, but in copies within a peer-to-peer network. As new blocks are added to the blockchain, the legitimacy of the blocks must be verified by the computers within the network. Together with the three security elements integrated in the blockchain technology, this ensures more security compared to many other databases.
Greater Accuracy: Humans play little role in verifying transactions on a cryptocurrency blockchain. Instead, the computer network validates and approves all newly entered information. Therefore, the risk of human error is also minimal. This provides greater accuracy compared to some other methods of data storage.
More Efficient Payments: When a bank processes payments, transactions are typically managed and processed by a central entity. As a rule, banks only work during business hours and not around the clock. A transfer made just before the weekend may therefore not be processed until Monday. A blockchain usually does not have these restrictions. In most cases, a transaction can be processed 24 hours a day, 7 days a week.
Verified Transactions: All information entered into a blockchain is verified by the network's computers. After confirmation, this information is appended to the chain in the form of another block. This ensures that any new transaction data added to the commonly agreed version of the blockchain is legal and accurate.
Disadvantages of blockchain technology
Criminal activity: A blockchain like Bitcoin is designed to protect user confidentiality. It is therefore difficult to hack. However, this is precisely why there is a risk that criminals will use blockchain technology for illegal currency transactions. Banks generally have strict procedures in place to verify customers' identities. However, this is not always the case with cryptocurrencies.
Costs and Speed Issues: Depending on the testing system, a blockchain can consume enormous amounts of computing power. Bitcoin's "proof-of-work" system, for example, incurs significant energy costs and also places a heavy burden on the environment. Processing a transaction can take a long time on certain blockchains. Adding a new transaction or block to the chain may only take a few minutes. However, as the number of users increases, this process can slow down.
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