Our world runs on record-keeping, but currently, the records are centralized. Our banks keep records of our every financial transaction, but if I go to the bank one day, and say to them that I did not spend $20 on ice cream like they say then there is a problem. How can the bank verify if I am telling the truth? Can they trust that I’m showing them all my receipts?
Imagine if both the bank and I have records that are linked and cannot be modified. Every time there is a transaction, both my and the bank’s records are updated automatically. Now if there are any discrepancies between the two records, the other party can quickly find where their records diverge and find what went wrong and where. This is the kind of solution a blockchain provides.
A blockchain is a digital ledger made up of records called blocks which records transactions between parties. Five basic principles govern blockchain.
- Distributed database – The entire database and its complete history is available to each party on a blockchain. As no single party controls the data and everyone can independently verify the records.
- Peer-to-peer transmission – As the data is distributed, there is no central source through which information is communicated. Instead, all communications occur directly between peers, with nodes storing and forwarding information to all other nodes.
- Transparency with Pseudonymity – Each node on a blockchain has a unique alphanumeric address which is 30+ characters long. Every activity on the blockchain is visible across the system, but the users can choose to remain anonymous and just be identifiable using their blockchain address.
- Irreversibility of Records – As every transaction in the record is linked to every previous transaction using, usually, a one-way cryptographic hash function, the records are permanent. This means altering one transaction would mean every other transaction on the chain will also be altered. This means if one party tries to alter a record, it will be very obvious.
- Computational Logic – Blockchain’s digital nature means users can create algorithms to check and trigger transitions between nodes automatically.
Types of Blockchain
With the increase in blockchain’s interest and its applications, a few different types of blockchain networks have popped up.
- Public – as the name suggests, this network has no restrictions on its access, and anyone with an internet connection can add to its records or become a validator. The role of the validator is to execute the consensus protocol and make sure the records are accurate. These networks are used by governmental organizations or open-source ventures.
- Private – private networks are invite-only networks where both participant and validator access is restricted. These networks are commonly used by private organizations such as banks and supermarkets.
- Hybrid – these networks contain a combination of public and private blockchains where exact workings of who gets access to which data can be customized by the organizations.
Disadvantages of Blockchain
With the use of blockchain in bitcoin, it has become clear that the system consumes vast amounts of energy when it comes to verifying the validity of the blockchain. The bitcoin network alone consumes the same amount of energy as Denmark, and with more people becoming interested in bitcoin this energy cost will only increase. This demand has also led to an increase in the cost of Graphics cards (GPU), with miners using bots to buy Nvidia and AMD GPUs, causing shortages in the market.
The amount of time taken to create a new block in the blockchain is about 10 minutes. This means that only seven transactions can occur per second. Unless new blockchain creation methods emerge, this might cause problems for applications in high-frequency transaction sectors such as the stock market.
Due to blockchain’s anonymity, it has been widely used in illegal activities since its inception. With Governments and international regulatory bodies struggling with creating regulation, there is still a long way to go to stop illegal activities.
Blockchains can be implemented in a variety of different fields where record-keeping is important. The most famous implementation of the blockchain currently in use is in cryptocurrencies, such as bitcoin. Both the bitcoin and Ethereum networks are based on blockchain and record all transactions which are then verified by the nodes. Financial institutions can see a huge benefit from using blockchain as transactions can be processed securely and quickly, even outside business hours. The French consultancy, Capgemini has estimated consumers can save $16 billion in fees each year.
Blockchain can keep track of supply chains to trace products and make sure they are not tampered with. Companies like Walmart have trailed supply chain monitoring using blockchain. Using this system also means that if any food is contaminated, the source can be quickly found by cross-referencing the different parties’ records. The Diamond Trading Company (DTC) has been tracking diamonds using blockchain to ensure they are ethically sourced.
As blockchain records cannot be altered, they are effective tools for detecting counterfeit products. The Dutch Standardizations organization NEN has been using blockchain along with QR Codes to authenticate certificates for products. It can also be used as records for property, smart contracts, peer-to-peer energy trading, and insurance sectors. Voting is another area to use blockchain to ensure elections are safe from fraud and transparent.
With blockchain still in its infancy, there is a long way to go to see its full potential. Blockchain’s implementation outside cryptocurrencies has just begun, so there is still a lot to learn about how it can be adapted to different situations and sectors. With the need for trust in today’s world and given Blockchain ability to provide accurate and secure records with transparency and ease of use, the future looks very bright.