What is Blockchain and How Does It Work?

Blockchain is closely related to Bitcoin. This is because they are created simultaneously. Bitcoin is the first product of the blockchain technology created by someone under the pseudonym Satoshi Nakamoto. The creation of Blockchain and Bitcoin marks the very first existence of a digital currency which was created to overcome several problems in the banking world such as double-spending in transactions and also become an independent system that does not require authorization from banks or governments.

What is blockchain technology?

For non-experts, understanding blockchain technology can be complicated. To put it simply, a blockchain technology is a data storage system (database) or often also referred to as a digital ledger that records all crypto transactions that occur on it. The term blockchain itself consists of two words, namely block and chain, which means a collection of blocks that are connected to each other like a chain. This refers to how blockchain works, which can store data from all transactions that occur on the network into interconnected and locked. In practice, the blockchain network consists of a computerized system that is interconnected throughout the world.

Systemically, blockchain has several characteristics that distinguish it from other technologies. One of them is being immutable or in other words cannot be changed. This means that any transactions that occur on it cannot be changed so that data falsification is not possible. In addition, its peer-to-peer (P2P) nature makes it more independent because it does not require bank or government authority so as to minimize human error. All of these characteristics define blockchain and make it a sophisticated technology with strong security to secure all transactions that occur in it.

How does blockchain technology work

As explained above, blockchain technology consists of a series of blocks that are interconnected like a chain. All data related to transactions that occur in the blockchain network will be recorded in the block permanently. With a decentralized server network, this system can run without requiring validation of data authenticity through certain authorities. Instead, data validation occurs between network nodes to ensure the authenticity of the data. After the authenticity of the data has been validated, the existing data will then be added into a new block containing a hash or unique code that is different from the others.

Utilization of blockchain technology

Blockchain technology is currently applied to the field of digital commodity trading, or cryptocurrencies trading. As an easily accessible digital ledger, this technology has enabled easy transactions, which can be done anytime and anywhere without requiring the authority of other parties. Indirectly, this system has facilitated the entire process of financial transactions that we are familiar with. In 2018 McKinsey Digital, an international digital innovation company noted that blockchain technology can also be used in telecommunications, media, health, mining, and agriculture fields.

The advantages of blockchain technology

So far, we have already touched on some of the advantages of blockchain technology. To add on, blockchain also has many advantages over the conventional banking financial system. Some of these advantages are:

  • Transparent transaction recording system: blockchain technology is very effective in keeping track of information and transactions that occur in it and can be accessed by anyone. The reason is because, when transactions take place, all data and the formation of new blocks can be seen by everyone through the block explorer in real-time. When compared to conventional banking systems, blockchain systems are very different in terms of data transparency.
  • Guaranteed security: the data storage system in the blockchain is append-only, that is, it can only add data and cannot be changed. With this system, hackers will not be able to infiltrate its security.
  • Avoiding additional third-party fees: the existence of a blockchain system that does not require the authority of another party indirectly eliminates the existence of intermediaries or additional services that increase transaction fees. With blockchain, all recording and verification activities are directed and immutable.

What do you think about blockchain technology? With its advantages and potential, blockchain technology will be increasingly applied in various sectors over the next few years.

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