Blockchain technology made its name in the world for its association with bitcoin. However, for the past decade, blockchain has become more than just about bitcoin and cryptocurrency. Blockchain is now also transforming the way information is shared in other industries like finance and healthcare. Funds are also now being invested in blockchain R&D to explore more of its untapped and unexplored opportunities.
But what makes blockchain so popular, and where does its potential come from? Learn more about blockchain and how it works right here.
What is Blockchain?
Blockchain is a type of database that collects and stores electronic data on a computer system.
As its name suggests, blockchain technology groups data into blocks chains them together and distributes (duplicates) the chain among multiple participants. As new transactions occur, the new data are recorded in a new block that is then chained to the previous block. The system creates an irreversible timeline of data, making it difficult to tamper with.
The term is generally used together with Bitcoin as it is the technology that supports the cryptocurrency. However, blockchain and Bitcoin are not the same things.
Bitcoin is a digital currency or a decentralized peer-to-peer electronic payment system. In contrast, blockchain is the method of recording cryptocurrency transactions in blocks and securing them with an unchangeable cryptographic signature. Bitcoin is only one of the many cryptocurrencies that blockchain technology powers. Blockchain has wider applications beyond bitcoin and cryptocurrency.
The Origin of Blockchain
The origins of blockchain can be traced back to 1991 with Stuart Haber and W. Scott Stornetta. In an academic paper, the two proposed the use of hash (a unique identifier) and timestamping in digital documents to make backdating or tampering impossible. Their work allowed for the verification of the integrity of data, as well as using private key signatures to sign the submitted data.
However, it was not until 2008 that blockchain technology was used for a relevant application. Satoshi Nakamoto adopted the concept of blockchain to create Bitcoin and presented this idea through the white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The white paper outlines blockchain technology, its decentralized system, and how it is equipped to enhance digital trust.
In 2009, Nakamoto launched blockchain when the first block of Bitcoin, the Genesis Block, was mined. It was considered the pioneering piece of work in the cryptocurrency movement and the fintech revolution. Since then, blockchain technology has evolved, resulting in numerous applications that go even beyond cryptocurrencies.
How Blockchain Works
Each block in the blockchain has three essential elements. First is the data, which could be any details like the date, cost, or participants of the transaction.
The second is the hash. The hash is the series of characters that identifies a block and its content. It acts as the fingerprint of the block. The hash is unique for every block, and it is calculated or generated as a block is created. And as the hash is calculated depending on the contents of the block, changing any content in the block will also change its hash.
The third element is the hash of the previous block. The previous block’s hash is stamped into the new block to mark its place in the chain. Once a new block is added, its order in the blockchain is fixed and cannot be changed.
This system of grouping data, identifying them with hash, and chaining them in sequential order is what makes blockchain secure. Tampering with one block changes its hash, making it unrecognizable to the succeeding block and all the blocks after that. A person cannot tamper with one block without tampering with the other blocks.
However, the attributes of blockchain do not just end there. Hashes are not enough to prevent resourceful cybercriminals from committing ill deeds. Blockchain reinforces the system by going away from the centralized system of storing data. Instead, blockchain uses a peer-to-peer (P2P) network that allows transaction verification without the need for intermediaries or central systems.
When someone joins the network, the new member gets a full copy of the blockchain. When a new block is created, that block is also duplicated to everyone’s chain in the network. But before it is added to the chain, each computer connected to the network – the nodes – first verify the new block to ensure it has not been tampered with. If everything checks okay, only then shall the new block be added to the chain.
All the nodes must create a consensus on which block is valid and which is not. Blocks that were tampered with will be rejected by the other nodes in the network. Therefore, to successfully tamper with a block, the perpetrator needs to modify all hashes in the chain, as well as take control of more than 50% of the network.
Blockchain Applications in Bitcoin and Beyond
Bitcoin and cryptocurrencies are the most popular uses of blockchain technology. Because of it, bitcoin and cryptocurrency trading are more secure, transparent, traceable, and efficient. Not only that, because of its decentralized system, bitcoin and other cryptocurrencies can operate without the need for a central authority, thereby reducing risks and hefty fees. And because no central authority regulates it, cryptocurrency is easily accessible to everyone, with no meticulous documentary requirements necessary like in most financial institutions.
Moreover, different industries are also seeing the potential of blockchain technology in improving business processes and lowering the “cost of trust.” Financial institutions are exploring blockchain to remove frictions and delays in consumer banking, lending, trade finance, and other transactions.
In the pharmaceutical industry, companies are exploring the use of blockchain in tracing products through the supply chain, preventing counterfeits, and locating recalled products within seconds. Insurance companies are already using blockchain and smart contracts in automating processes, thus increasing speed, reducing costs, and preventing fraud.
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