Blockchain Technology Explained
Bitcoin and other cryptocurrencies are based on blockchain technology. But what is blockchain technology, exactly? And how does it work?
In this article, I’ll try to explain blockchain technology in a way that is easy to understand. I’ll also discuss the benefits of using blockchain technology, and why it is becoming popular. If you’re interested in learning more about blockchain, keep reading!
What is blockchain?
Blockchain technology is a method of storing information in a database where each new entry to the database is encrypted and added to a chain consisting of other encrypted bundles (blocks). In other words, a blockchain is a distributed database that allows for secure, transparent, and tamper-proof transactions.
Here is an example of the blockchain transaction process.
- Transaction request – Requests can be composed of digital currency, contracts, records, or other information.
- Broadcast transaction – The movement of a transaction is broadcast to a network through nodes.
- Validate transaction – The transaction is validated in a decentralized manner by the network of nodes.
- Add to blockchain – The new block is then added to the existing blockchain after the transaction is complete.
This is only an example of how blockchain transactions are completed. Of course, there’s a lot more to it than this, and specific transaction processes are determined by the type of blockchain.
How blockchain works step by step
A blockchain is a chain of blocks that store data. The way that transactions are accepted and validated varies depending on the type of blockchain. However, blocks of data will always contain information that makes them identifiable.
A block in a blockchain will have a form of the following information:
- Transaction data;
- Hash of the previous block.
This allows blockchains to be used as a ledger that can be verified and audited by anyone.
For example, if you’re transferring cryptocurrency from your wallet to someone, you’ll input the receiver’s wallet address and the number of tokens you wish to send.
Data is then pushed into a block on the chain. These blocks aren’t just one piece of information, they’re made up of many different chunks of data.
However, each block has 2 important parts:
- It has an encrypted password (called an “address”) that tells you where it goes in relation to other blocks. This encrypted password is how the blockchain stays secure and can’t be tampered with.
- The second important part of each block is the hash. The hash is a unique identifier for that block and is created by running the transaction data through a cryptographic function.
When a new block is added to the blockchain, its hash is also added to the hash of the previous block. This creates a chain of blocks that can be verified and audited by anyone.
This explains how blockchains operate and why they are considered to be cutting-edge technology. Next, let’s examine more advantages that this technology provides.
How blockchain technology works [Infographic]
Below is a visual presentation of how transactions happen via blockchain technology.
The benefits of using blockchain technology
The benefits of using blockchain technology include increased security, transparency, and efficiency. This makes it a very appealing option for businesses and individuals who want to conduct transactions in a secure and transparent manner.
Here are the main advantages of blockchain technology:
- Resilience – Blockchain is a distributed database, so it is not susceptible to downtime or hacking.
- Time reduction – Blockchains can help to reduce the amount of time needed to complete transactions.
- Reliability – A distributed database like the blockchain has no single point of failure.
- Proven transactions – Data is bundled into blocks that are chained together and can’t be changed or tampered with.
- Prevent fraud – All transactions are recorded and can be easily verified.
- Collaborate – Custom smart contracts can be created and stored on the blockchain to automate business processes.
- Decentralization – Transactions can be verified and completed without relying on a third party.
Where blockchain technology can be used
Blockchain technology is being utilized in a wide range of fields from financial services to healthcare and beyond. Industries are discovering that this technology outperforms current use patterns for important elements of the job.
Let’s take a look at the top five industries where blockchain is currently having an impact.
- Financial services – The financial services industry is one of the most obvious beneficiaries of blockchain technology. Blockchain can be used to streamline the entire industry process from clearing and settlement to insurance.
- Healthcare – The healthcare industry is another area where blockchain is having a major impact. Blockchain can be used to securely store and share patient data which can help reduce fraudulent activity.
- Gaming industry – Blockchain technology can be used for P2E games to facilitate in-game micro-transactions in a secure and transparent manner. It can be used to trade game items (NFTs) in a secure and transparent manner. Also, it helps create fair play for online gambling platforms.
- Supply chain management – Blockchain is a perfect solution for supply chain management because it creates a tamper-proof history of transactions. This helps companies to ensure the quality and safety of their products.
- Voting – Blockchain can be used to securely store voting records and prevent electoral fraud.
- Government – Governments are starting to explore the potential of blockchain technology as a way to improve the efficiency and transparency of government operations.
Pros and cons of blockchain technology
There are pros and cons to using blockchain technology. Here are a few of the main ones:
- Secure – Blockchain is a distributed database that is very difficult to hack.
- Transparent – All transactions on a blockchain are publicly viewable and cannot be tampered with.
- Efficient – Transactions on a blockchain can be completed much faster than traditional methods.
- Complex – The technology behind blockchain can be difficult to understand for some people.
- Unreliable – As with any new technology, there is always the risk of things going wrong.
- Unproven – The full potential of blockchain has yet to be realized and it remains to be seen.
The future of blockchain technology
The future of blockchain technology is uncertain, but there is no doubt that this is an exciting and rapidly-growing field.
There are many potential applications for blockchain technology, and it is likely that we will see even more industries adopting this technology in the future.
Blockchain technology is still in its early stages, and there are some areas where it could be improved. However, the potential benefits of this technology are clear and it is likely that we will see even more innovation in this area in the coming years.
The NFT industry is a good example of blockchain technology in action. Non-fungible tokens are a form of digital asset that are unique and cannot be copied. This equips them with great potential as a source of digital scarcity in blockchain games and collectibles.
» Learn more: Blockchain Gaming Guide for Beginners
I believe that the NFT industry will continue to grow and have multiple applications because this technology provides a number of clear benefits, such as security, transparency, and efficiency.
The potential uses for NFTs are still being explored, and I think we will continue to see new and innovative applications for this technology in the future.
» Learn more: How to buy an NFT
In this article, you learned about the pros and cons of blockchain technology as well as how it is being used in different industries. As we enter the digital age of Web 3.0, I think that the future for blockchain looks promising.
Blockchain has been shown to provide superior levels of efficiency and transparency which can help to improve existing systems or create entirely new ones. It will take time before we see what kind of impact blockchain will make on our society but I am excited by the possibilities!