Blockchain, the major technology disrupting the industry of the past few years, is an essential part of today’s financial industry. However, there might be some jargons that make it difficult to comprehend all the concepts in blockchain. This article will take you through the definitions, types, history, important elements, advantages and challenges of blockchain. Without further ado, let’s get started!
What is blockchain?
Blockchain is a peer-to-peer (P2P) network that could be simply defined as a shared, immutable ledger where transactions are permanently recorded by appending blocks.
To make it simple, blockchain technology essentially allows a person to make a trade with anyone without the need for a physical store (or any middleman) and without the need even to know the other person.
Blockchain is a distributed ledger that is shared among the nodes of a computer network. Distributed ledger technology (DLT) allows a blockchain to maintain a secure and decentralised record of every transaction that has historically occurred on the chain. This encourages peer-to-peer transactions directly without the need for an intermediary.
How does blockchain work?
Though blockchain technology has applications in virtually every industry today, the essence of how blockchain works remains constant for every use case. Here’s a list of the steps that occur when a blockchain executes a transaction:
- Step 1: Recording the trade or transaction
To indicate an exchange of digital or physical assets between parties on the blockchain network, a transaction must be recorded.
- Step 2: Validating the transaction or trade
Once a transaction has been recorded, validating it is the next step.
- Step 3: Adding and linking the blocks
Once a transaction is verified, the validated transaction is added to a block and the block is added to the chain.
- Step 4 – Sharing the ledger
After the block is linked to the chain, a copy of the central ledger is distributed to all participants.
Types of Blockchain
All types of blockchains can be characterised as permissionless, permissioned, or both.
As the name suggests, a permissioned blockchain requires ‘permission’ and is not publicly accessible. These blockchain networks have an additional layer of security where users are only granted to perform actions set by the ledger administrators, while also having to identify themselves digitally or through certificates.
Permissionless blockchains, though built on the same fabric of blockchain technology, are easier to access allowing anyone to participate in their network.
Based on structure, characteristics and usage mainly 4 types of blockchains exist:
- Public Blockchain
- Private Blockchain
- Hybrid Blockchain
- Consortium Blockchain
History of Blockchain
The evolution of blockchain began as a quest to build a decentralised system, particularly for money, but has had a spillover effect across other industries that it has transformed as well.
To get a brief overview of the history of blockchain technology, the timeline highlighted the major milestones that helped bring it to life.
Element of Blockchain
What has made blockchain a truly disruptive technology is the key elements that define it.
Here are the six main elements of blockchain that make it stand out:
- P2P Network
- Distributed Ledger
- Smart Contracts
Pros and Cons of Blockchain
Blockchain has been presented as a breakthrough technology that are associated with several benefits in different sectors such as financial services, real estate and healthcare.
However, this versatile technology is far from perfect and has certain limitations and challenges to its applications.
Advantages of blockchain includes:
- Free from Censorship
- Reduced Transaction Fees
Challenges that can be overcome are:
- High Cost of Implementation
- Modification of Data
- High Energy Consumption
- Private Keys
- Prone to Illegal Activity
Leverage Blockchain Technology for Your Business
Don’t limit your understanding of blockchain to just crypto assets. There’s a vast world of possibilities to explore! The idea of blockchain technology as a platform on which an endless possibility of applications can be built is still rapidly developing and has not reached its full potential yet.
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If you are interested in discovering how blockchain is implemented in the industry, these are some of the best resources that can help you out!