Anyone with a passing interest in cryptocurrencies has probably heard the word “blockchain” spoken about. Undoubtedly, many who know the term also know that blockchain technology underpins Bitcoin and many other cryptocurrencies. But what else do you know about blockchain? How does it work? What’s it for, and what about blockchain’s future prospects? Can this technology only be used in the crypto world? All will be revealed in this article.
Understanding Blockchain Technology
Blockchain technology is best defined as a decentralized digital public ledger system that stores transactions. The information about all these transactions is stored in the block chain — hence the name “blockchain.” The term refers to the workings of the blockchain system, which stores data from all transactions occurring on the network in interconnected and locked blocks. In practice, the blockchain network consists of interconnected computerized systems worldwide — computers in this network share this information through cryptographic technology.
Blockchain has an immutable nature which also means it cannot be changed. This indicates that any transactions occurring in it are unalterable, thus minimizing data falsification. In addition, the technology, which is based on a peer-to-peer (P2P) system, makes it more effective because it does not require bank or government authorities, reducing the possibility of human error.
Although the blockchain system is closely related to cryptocurrency assets, it is also used for other functions. Besides cryptocurrencies, its use extends to healthcare, smart contracts, supply chains, and other electronic technologies. Below we will learn more about how the blockchain works.
How Do Blockchains Work?
All information on the blockchain is stored in digital files called blocks. No central entity owns these blocks, making them a decentralized system. Below are some of the elements that shape the way the technology behind blockchain works.
The whole foundation of blockchain focuses on its decentralized nature. It was this idea that gave birth to Bitcoin in 2009. Previously, on October 31, 2008, f the Bitcoin whitepaper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” by its pseudonymous creator, Satoshi Nakamoto, was published. This document outlined how Nakamoto envisioned blockchain technology working and his vision for a monetary system beyond the reach of banks: a people-to-people system.
Nakamoto proposed “a purely peer-to-peer version of electronic money that would allow online payments to be sent directly from one party to another without going through a financial institution.” On January 3, 2009, the Genesis Block, the first block on the Bitcoin blockchain, was created. This was the first step in revolutionizing the traditional bank-focused centralized financial system as we know it.
Nodes are a network of connected computers sharing information through a public ledger; this is a blockchain network. Each node keeps a copy of the transactions in the blockchain and verifies every transaction made on it.
These nodes play an important role in the Bitcoin mining process because, in the absence of a central entity, the job of these nodes is to align agreements to confirm the validity of transactions on the network. Only when this verification occurs is a block added to the blockchain, and miners get rewarded for them with coins. These nodes provide an “agree” flag to validate transactions through a consensus mechanism, generally Proof of Work (PoW) or Proof of Stake (PoS). Bitcoin uses the PoW consensus, as do many other cryptocurrencies, such as Litecoin, a spin-off of Bitcoin.
PoW and PoS are the two main consensus mechanisms in the crypto world. The following is a brief explanation of how the two mechanisms work:
- PoW: Miners compete with each other to solve complex math problems known as hashes. By doing so, miners validate new blocks on the blockchain and receive rewards in the form of new crypto coins.
- PoS: In contrast to PoW, PoS randomly selects eligible miners to become validators and earn coin rewards. However, the higher the miner’s stake, the better chance that miner has of being selected.
WithDelegated Proof of Stake (DPoS), the system differs from PoS because delegates are effectively elected to mine new blocks and ensure consensus rules are maintained. If they fail to do their job properly, they can be eliminated, just like politicians.
The process of cryptographic hashing is essential to ensure blockchain security. This involves encrypting data from one direction to a unique piece of text and is a process that cannot be undone or replaced. On the Bitcoin blockchain, the result of the hashing process is a text 64 characters long, called a hash.
Is Blockchain Hackable?
Since each unique piece of digital text cannot be reversed to decipher the original data, the blockchain is considered highly secure from hackers. However, on cryptocurrency blockchains, hackers can launch a 51% attack in an attempt to gain more than half the hash rate (computer power) of the blockchain network. If they manage to do this, they can block the transaction — or reverse a previously confirmed transaction, meaning they can “double” the coins (spending one coin twice).
Although the Bitcoin network has never experienced a successful 51% attack up to the time of writing this article, other cryptocurrencies have fallen prey. One such example occurred in May 2018, when the Bitcoin Gold network could not survive a 51% attack,
losing $18 million worth of its currency. Fortunately, such occurrences are rare, due to the large amount of hash power required to carry out an attack. While blockchain hacking is not impossible, it is highly unlikely to happen.
How Is Blockchain Used?
We all know cryptocurrencies use the blockchain, but are there any other areas in the world that could benefit from the magic of blockchain technology?
As we have seen, blockchain forms the fundamental foundation of what defines cryptocurrency: a decentralized asset free from the shackles of a central entity such as a bank or government agency. Bitcoin may be the most popular cryptocurrency, but it’s really just the tip of the iceberg. Many coins, from altcoins to stablecoins to DeFi tokens, that exist today are successful thanks to the blockchain technology invented by Satoshi Nakamoto.
Sensitive medical data from patient electronic health records (EHR) have been the target of hacking, used to steal or impersonate, or sold to third parties. Through advanced cryptography, blockchain technology can end this problem. A person’s health records can be added to a trusted and secure blockchain, so that data can be stored longer over time. A consensus is required when a new record is added, making the chain very difficult to hack or break. Health Wizz is one company using blockchain to give patients complete control over their medical data. The decentralized mobile platform enables patients to manage their health information and sell it to third parties, if desired, in exchange for tokens.
There is also a shortage of EHRs for doctors to access patient information from other institutions. This is because in other countries, different manufacturers often provide incompatible EHR software to different institutions, and there is no intercommunication between them. While one comprehensive system would benefit physicians and patients, it would reduce companies’ ability to charge exorbitant fees.
Attempts have been made to unify EHR in many countries under one system but have failed. In the UK, efforts to create a linked patient data system for the entire National Health Service were abandoned in 2011 at the cost of nearly £10 billion. Blockchain can enable a single patient’s EHR system where patient information is transmitted safely and securely to different financial institutions, becoming accessible as soon as new data is added. It should be noted that the blockchain will not replace the EHR itself: it executes seven transactions per second, compared to the EHR’s capacity of up to 12,000.
Smart contracts work the same way as any contract but via the blockchain, eliminating the need for third-party intermediaries. Only when pre-defined conditions (which have been set in the computer code of the blockchain) are fulfilled can the contract transactions take place. Smart Contracts were first created on the Ethereum blockchain in 2015. Today, they have many uses, some of which are listed below.
Smart contracts can make insurance claims faster and cheaper by helping to determine when objective criteria have been met. It may not be the case when the decision is left up to an attorney, as this could make the process more subjective, leading to a longer and more expensive claims process.
Supply chains can become more manageable through the use of smart contracts. Like insurance claims, smart contracts can remove any subjectivity, making it easy to verify if set targets are met in the blockchain. In healthcare, smart contracts have the potential to revolutionize the complicated prescription drug supply market in the US by cutting out the middleman, thereby cutting costs significantly for consumers.
Smart contracts can make buying and selling homes much less stressful. By eliminating the need for intermediaries, such as real estate agents, buyers can handle transactions with potential sellers themselves. After meeting the conditions for selling the house, property purchases can be completed through the use of smart contracts.
Believe it or not, the magic of blockchain technology has even infiltrated the video game industry. In 2017, a game was released called CryptoKitties. In this game, you can breed, buy and sell virtual cats. Since then, blockchain technology has been increasingly adopted in the video game industry, although it is still in its infancy.
Future Uses of Blockchain
The interesting reality is that blockchain technology’s potential is only beginning to be harnessed. This is just the start of this journey. Let’s take a look at how blockchain technology could evolve and impact our lives in the near future.
Improving Living Standards Globally
Blockchain technology can help eradicate poverty and corruption by providing financial inclusion to the unbanked. In addition, blockchain technology also offers tremendous growth potential for small businesses in developing countries. The decentralized nature of cryptocurrencies allows many of them to operate on a truly global scale for the first time.
Blockchain technology is something that has started to be implemented. However, in the future, the step of maintaining online identity through blockchain technology will be increasingly superior. The risk of identity fraud is greatly reduced by storing private database information on distributed public ledgers. As already mentioned, blockchain has great potential to change the way healthcare records are organized. This capability will probably extend to government records, jobs, taxes, and voters.
In the 2020 US Presidential Election, allegations of vote rigging were made. Blockchain may stop such claims in the future. Binance CEO Changpeng Zhao argued on Twitter that using a blockchain-based voting system would not only remove doubts about fraud but also improve voter privacy.
As we have mentioned, the essence of blockchain technology is its decentralised and transparent nature. As technology is adopted more widely, this may be reflected in how companies operate. It will become increasingly difficult to hide information, which can only be good news for consumers and society.
The internet has changed the way we listen to music. From an artist’s point of view, this may not necessarily be a factor for the betterment of their well-being. Since Napster came out in the late ’90s, music piracy has been rife. Even with the rise of legit streaming services like Spotify, artist revenues had paled significantly compared to the days when fans bought CDs (and, farther back, LPs and cassettes) in droves. But can blockchain shift the pendulum’s swing?
The transparent nature of the blockchain can reveal, for all to see and enjoy, the royalties owed to artists. Streaming services can no longer reduce these artists’ revenue. Additionally, blockchain technology can help clarify any intellectual property rights issues that artists may have by clearly indicating who owns the rights to a particular song.
Simply put, blockchain is a revolution that has only just begun. It changed the traditional way we live and has revolutionized how we think about money as a digital asset. In the coming years, it will revolutionize the way we think and act in many other areas of our lives.
Blockchain anonymity not only offers an extra level of protection for information, but also offers unprecedented ease of access to information.