Blockchain Technology: A Step-by-Step Guide to the Revolutionary Platform.
Blockchain technology is perhaps the biggest phenomenon in the financial technology industry at present. Everyone has heard about blockchain technology and everyone knows about blockchain technology, but the main question is how many people precisely “understand” it? This guide will aim to give a concise overview of the concept of the ingenious invention called blockchain technology.
What is blockchain technology?
Blockchain is an immutable digital ledger of transactions which can neither be deleted nor modified retrospectively. The blockchain is commonly used in reference to cryptocurrencies and a lot of people know about the technology based on its connection with bitcoin and other digital currencies. This attribution is undoubtedly deserving considering the fact that bitcoin was the blockchain’s foremost application and till date, cryptocurrencies remain the most popular implementation of the technology. As a matter of fact, being the technology that underpins the mechanism of virtual currencies, without the blockchain technology, digital assets would not exist in their current form.
Moreover, the idea of a decentralized public ledger was conceptualized by the same pseudonymous entity behind bitcoin – Satoshi Nakamoto in 2008, a year before the bitcoin whitepaper was officially released. While the blockchain garnered popularity from its capacity as an incorruptible digital ledger for cryptocurrency based transactions, the blockchain database can be configured to record everything of value and not just financial transactions.
How does blockchain technology work?
Think of a spreadsheet with a record of every bit of information related to financial transactions. Now assume once a piece of information has been entered on this spreadsheet, it cannot be tampered with – edited nor deleted. Every new bit of information is added to the chain of records without altering any previously recorded data. This spreadsheet is the blockchain. For a more technical step by step overview of how the blockchain works;
- First of, every cryptocurrency holder is assigned two unique set of keys- the public key and the private key, these two keys form a digital signature unique to a particular user. The public key or address is publicly known by other users on the blockchain and it is how others identify a particular user. The private keys on the other hand must be kept secured and protected at all times as it is what authorizes a user to execute a transaction.
- Now, when a user initiates a transaction, let’s assume John sends 5 BTC to Jane, the details of this financial transaction will include Jane’s public key. The transaction is signed off with John’s unique digital signature – the public key which is displayed for everyone to see and a private key, hidden from the blockchain.
- The transaction is broadcast on the blockchain and every computer connected to the system is notified of the transaction. These computers are called nodes and every node on the network will have to verify the transaction via distributed system which uses a peer-to-peer network of nodes to verify transactions
- Once a transaction has been verified by the community, it is called a block and added in a chronological order to the ledger of previous transactions. This ledger is essentially a chain of blocks hence the name blockchain.
- Every transaction recorded on the database generates a hash which is a unique string of alphanumeric characters. This hash is specific to transactions and should any details of a transaction be altered, the hash will change automatically. Additionally, each transaction also has a unique location and time stamp.
- Once a block has been recorded on the database, it cannot be altered thus creating a transparent and secure digital ledge
Benefits of blockchain technology?
The blockchain has an open source transparent structure which enables other users to view and verify information before it is updated on the database. This way, no new block can be entered into the database unless it is authenticated by every node on the blockchain.
The blockchain operates a decentralized public ledger- in other words there is no single centralized entity responsible for verifying the data on the blockchain. Information is distributed across all users on the platform eliminating the need for a central data hub. The blockchain is a user controlled network devoid of meddling third parties and intermediaries.
- Enhanced security
Operating a decentralized and distributed system, the blockchain eliminates the financial risks associated with a central data hub. This enhances security as it is practically impossible for a hacker to track down and change the information on every single node on the network as opposed to just hacking the information on the central data centre.
Blockchain technology allows its users to anonymously execute transactions. The transaction details contained in a block only records the address – a public key which is essentially a random string of numbers and digits. Basically, the original identity of users in a transaction is unknown neither can a transaction be traced back to a particular user.
- Lower transaction fees
The absence of intermediaries in the blockchain means users execute p2p transactions. The blockchain charges a transaction fee which is charged to the initiator of the transaction, this fee goes to the miner responsible for validating the transaction. Transaction fee on the blockchain is relatively lower compared to the charges in the traditional banking system.
From healthcare to real estate, government, education and even the legal sector, there is no limitation to the applications of blockchain technology. The disruptive technology has an extensive list of potential implementation which is bound to improve the quality of service in every sector it is introduced into. The full functionalities of this technology extend beyond cryptocurrencies and when fully adopted, experts believe that the technology will play a major role in the future of our digital world.