Bitcoin and other cryptocurrencies are based on blockchain technology. But what is it, 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 comprise 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 completing the transaction.
This is only an example of how blockchain transactions are completed. Of course, there’s a lot more to it than this, and the type of blockchain determines specific transaction processes.
How blockchain works step by step
A blockchain is a chain of blocks that store data. The way transactions are accepted and validated varies depending on the type of cryptocurrency and blockchain. However, blocks of data will always contain information that makes them identifiable.
A block in a blockchain will have the 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 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 previous block’s hash. This creates a chain of blocks that anyone can verify and audit.
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 securely and transparently.
Here are the main advantages of blockchain technology:
- Resilience – Blockchain is a distributed database that is not susceptible to downtime or hacking.
- Time reduction – Blockchains can help reduce the 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 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 utilized in various fields, from financial services to healthcare. Industries are discovering this technology outperforms current use patterns for important job elements.
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 has 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 securely and transparently. It can be used to trade game items (NFTs) securely and transparently. 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 securely store voting records and prevent electoral fraud.
- Government – Governments are starting to explore the potential of blockchain technology to improve government operations’ efficiency and transparency.
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 we will likely see even more industries adopting this technology in the future.
It is still in its early stages, and some areas could be improved. However, the potential benefits of this technology are clear, and we will likely 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 and how it is being used in different industries. As we enter the digital age of Web3, I think the future of blockchain looks promising.
Blockchain has been shown to provide superior efficiency and transparency, which can help improve existing systems or create entirely new ones. It will take time to see what kind of impact blockchain will make on our society, but I am excited by the possibilities!